Teaching Children About Money Management

Money.  It’s a topic that is often difficult to discuss because we tend to not want to talk about our income and expenses with people.  Children are people too, but this is not an area where you want to open up the household books to them right away.

Photo of money in envelope courtesy Viktor HanacekWith the emphasis on STEM (Science, Technology, Engineering and Math) subjects in schools, money management and financial awareness is a topic that may not be taught to students.  Instead, children learn by watching their parents or other adults.  They see you spending money, but perhaps are not seeing the earnings side of it and think that an ATM is a “money tree” that gives you money whenever you want.  Rather than being a daunting subject, this is one that you can teach the children in your life over time as they grow up.

Money Management For Younger Children

There are a few basic areas that children need to learn about. 

First is to understand the concept of money and how it is earned and used.   Another concept is that of budgeting, which can be taught at a fairly early age.  This can be in the form of getting a real cash allowance and dividing it up into the categories of saving, giving, and spending (and for older children, add the fourth category of investing). 

When you go out, use cash rather than credit cards to pay for things so that children can see that goods and services cost money.  Tell them why you leave a tip.  By having a savings category, you can teach children the concept of delayed gratification.  The concept of giving will also help teach philanthropy at an early age.

Elementary and Middle School Students

The next phase is money management for elementary and middle school students.  This can involve an allowance plus the opportunity to earn additional funds by doing optional things around the house.  These aren’t the household chores that everyone needs to do because they live at home (cleaning their room, taking out the trash). Instead, these are optional opportunities to help increase their income so they have more available to put into those categories learned earlier.  This may also be a phase where you identify additional spending budget categories such as clothing or other items that children are taking an interest in. 

Provide additional allowance to cover these areas they are interested in, but allow the child to spend and learn from their mistakes if they choose not to spend strictly by category. 

As an example, they might take their allowance that includes a clothing portion and spend it all on the latest trendy clothes.  They later find that they don’t have money for basic clothes and have to wear the old stuff longer.  This is the time for children to make mistakes with their money and for you to be there to help them understand what happened and why.  Since the amounts involved will be smaller, the impact is much less than an adult who ends up deep in debt or in bankruptcy.

High School and Young Adult Money Management

The last phase of money management is more toward those in high school, and can involve teaching about credit cards and how they are a form of borrowing debt.  Teach them how to consider a credit card as short-term borrowing and to pay it off with already-saved money each month.  Help them open a checking account and learn how to balance the checkbook to account for money spent but not yet cleared. 

This is also a good time to start teaching about investing.  That can be a whole other topic, so we’ll leave that for another blog post.  Suffice to say that investing teaches patience with money.

Although it may be uncomfortable to discuss, parents who are more open with children about money will often go on to become good stewards of money themselves.  With the struggles that many people have in making ends meet, that’s a gift that can really make a powerful difference in the life of children over the long-term.