Financial Education for Young Kids

it's what you give the ice cream man to get a cone, or the coins you put in the slot to ride the rocket ship at the grocery store.

But children aren’t born knowing how to use money—financial skills must be taught. It’s never too early to start sharing financial education lessons. In fact, studies show that many money habits are set by age 7.

Of course, the lessons you teach a five-year-old are going to be different from what you teach a sixteen-year-old who wants to save for their first car. This article will look at several ideas to help young children learn the basics of financial education.

Financial Education for Young Children

As soon as your children are aware of money, it’s important to start teaching them how to handle it.

1. Teach the basics of money by giving an allowance.

An allowance is one way to begin teaching kids how to earn money and save for the things they want.

There are three typical strategies:

1. Children can earn their allowance by doing household chores
2. The allowance is just given every week
3. Small base allowances are paired with opportunities to earn extra money by doing chores beyond their normal household responsibilities

How much you give them depends on what you expect them to buy with it, how much you want them to save, and how much your budget allows for. Here are some basic guidelines beyond amounts:

• Set parameters. Discuss with your children what they may use the money for and how much should be saved.
• Make allowance day a routine, like payday. Give the same amount on the same day each week or month.
• Consider "raises" for children who manage money well. This can encourage children to make the right decisions.

Children should learn that their money can be used to purchase the things that they want— but there isn’t an unlimited supply. Use this concept to build the idea that not buying a small item now means that they will be able to save and buy a bigger thing later. Allowing your child to buy or pitch in for toys and fun activities teaches them to prioritize their wants and needs.

2. Encourage creative ideas to earn money.

Undoubtedly, your child will want to know if there are ways that they can make extra money. Encourage your child to think out of the box for ways to earn more cash. You might be surprised by the entrepreneurial ideas they come up with!

If they need some inspiration, some kid-friendly ways to earn money include:

• Creating a lemonade stand
• Hosting a bake sale
• Walking a neighbor’s dog
• Helping mom and dad with a garage sale and selling their own toys that they no longer play with
• Selling crafts or craft kits

There are even more lessons to be learned from some of these ideas. For example, if your child wants to operate a lemonade stand, they will first need to purchase ingredients. You may loan them the money to do so with the expectation that they will pay you back first from their profits. They learn that, sometimes, you must spend a little money to make even more.

3. Lay the foundation of budgeting with the envelope method.

Once your child understands the basics of saving and spending, you can start to build the foundation of budgeting with the envelope method. This popular budgeting technique is used by adults, but it’s simple enough for children to participate in too!

This specific method is also called “The Three Jar Method”. Start by giving your child three containers. Each will be labeled for the following:

• Spending: Teach your child that their spending envelope is for small things that they want, like candy or a small toy.
• Saving: This is money set aside for the big purchases that your child wants, like a new bike or video game console. The money from the savings envelope shouldn’t be taken out very often.
• Giving: Your child’s money can be used to help others as well. Encourage them to donate a portion of their money to charity or to spend on others, like gifts for friends and family.

Help your child determine how much money will go into each envelope. For instance, if your child earns $5, they may decide to put $2 into savings, $2 into spending, and $1 into the giving envelope. Every kid has a different reaction—some like watching their Savings grow, and others like dreaming up ideas on how to use their Giving jar. Whatever their main motivation or reaction, keep using the method—their feelings and ideas around how to use their jars might change pretty regularly.

4. Impart common shopping sense.

Television commercials and peer pressure constantly tempt kids (and adults, for that matter) to spend money, so kids might need extra guidance when it comes to making good buying decisions.

Teach them how to compare items by price and quality. When you're at the grocery store, for example, explain why you might buy a generic cereal instead of a name brand. You might be surprised on what they pick up on, whether it’s a 20% off tag or a “Buy One, Get One” sale.

Explain that you don’t have to buy something every time you go to a store. This can prevent some of the expectation to just “buy something” every time you go out. You can pair this with setting aside one day a month when they get to go shopping just for themselves. This encourages them to save for something they really want, rather than buying on impulse.

Don't be afraid to let children make mistakes. If a toy breaks right after they buy it, or doesn't turn out to be as much fun as seen on TV, eventually kids will learn to make good choices—even when you're not there to give them advice.

Start Now for a Healthy Financial Future

Understanding money and its place in the world from an early age is important for a child to develop healthy financial habits. They don’t need to be exposed to your adult stress or worry over money—but by giving them experience with budgeting and saving, you can introduce complicated concepts slowly, without the very real stakes that adults face over finances. By having financial education conversations early, you’ll set your child up for financial success later in life.