Kids & Money – How Money Works for Kids

Long before most children can add or subtract, they become aware of the concept of money. And up until the time where they start earning a living, kids are likely to spend money like it grows on trees. But how do our kids learn to manage money; at school, by watching TV, from watching their parents manage their money, or from their own mistakes?

Most kids learn from a combination of all these. But with the right information and a little commitment, parents can make a big difference in preparing kids to conquer the many financial challenges they will face as adults. There’s a scripture in proverbs that says, “Train a child in the way he should go, and when he is old he will not turn from it.” So when it comes to teaching your kids about money, the sooner you start the better. Here are some tips to help you put your children on the road to becoming smart money managers.

How Money Works

What a child needs is an early appreciation for the rudimentary concept of money accumulation. Saving money starts with understanding the and how it applies to money. The Rule of 72 is a basic mathematical principle which can help your child grasp how money grows exponentially. This may sound complicated, but any teen with a basic understanding of division and multiplication should find it quite simple.

Here’s how the Rule of 72 works: Simply take the number 72 and divide it by the interest rate you hope to earn. That final number (the sum) gives you the approximate number of years it will take for your savings to double. For instance, at a 3% interest rate it takes your money 24 years to double one time, because 72/3=24. Whereas your money doubles every 9 years at 8% interest rate, because 72/8=9. This is important to know because if you plan on accumulating money, you need to have some idea how fast your money will grow at a certain interest rate. Follow the for more detailed information about the Rule of 72.

Money market Account not Savings Account

You’ll find that once a child learns how money works, they’ll often display an instinctive conservatism towards money. Many children will want to save every dime they can get their hands on once they begin to see their money growing. That’s why I don’t like the idea of ceramic “piggy banks” or locked boxes as saving tools. The child needs to be able to see the savings grow in order to connect with the concept of money accumulation.

To aid in this, many parents will help their child open a savings account at the bank in order to introduce a pattern of saving. The great thing about a savings account is the child will get a statement from the bank showing them a growing balance as they continue to save. The bad thing about a savings account is it teaches your child the bad habit of accumulating money in an institution not designed for them to ever become wealthy. Checking accounts are great for paying bills, and can be handy in emergencies, but bank savings accounts are rarely worthwhile considering the other options available like money market accounts which are almost exactly the same as savings accounts...except they command much higher interest rates (some have minimum balance requirements as low as $1), “kiddie” IRA’s, etc.

Younger children of course will have trouble grasping the idea of saving in an “outside” account, so the best mechanism for them is often a clear piggy bank so they can watch it as it fills up. Count the money with them periodically to reinforce the money accumulation concept.

Allowances

One way to encourage your child to develop a smart money discipline is by making savings a condition of their receiving an allowance. Prior to giving them money to go off and do whatever they wish, make it clear to your child that they are expected to save a portion of it BEFORE they purchase anything. This will help them to understand the concept called, “.”

“Pay yourself first” simply means that you should save 10 to 15 percent of your income in some form of tax deferred or tax free retirement account, and because there are IRA’s available to children, this is something you may want to start training them to do early on. You must understand that the older a person gets and the more debt they accumulate, the more difficult it becomes to embrace the idea of saving 10-15 percent of every dime that they earn.

Prioritize Spending

Assist your child in developing a budget they can understand. Many children and young teenagers—especially before they get their first job—have difficulty with financial planning. If you want your child to be a smart money manager, you must help them create a budget that based on their importance. Necessary expenses such special projects, field trips, club memberships and dues must come first before shopping for clothes and toys, or buying the newest hi-tech gadget.

Ethics of Sharing and Giving

Part of a smart money education includes teaching your kids that, as a member of a community, as a responsible person, and as a world citizen, they have a responsibility to other people outside themselves and their family. That means sharing and giving. We all live on a small planet together, and we are all linked. Teaching your kids a sense of social ethics includes a sense of charity or giving.

Strive to Set a Good Example

Avoid saying things that would make your child worry about the family’s well-being, and instead talk about the ways you are trying to solve problems and improve your personal financial literacy. Talk with a financial adviser if you have a large amount of debt. Be honest with your child about any past financial decisions you regret and the wiser decisions you are making for the future. Help them to understand that it was probably lack of financial knowledge that contributed to you making those past bad decisions, but now that you know better, you’ll start doing better too.

Teaching kids about money management is crucial for helping them grow up successfully—and it requires work and a commitment from both the parent and the child. But there are also a lot of resources you can use to help you. Take advantage of financial literacy resources for kids, such as Disney’s The Great Piggy Bank Adventure, an online game that teaches children the basics of financial planning.