How Do I Teach My Child About Money?

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Is personal finance a subject parents should “teach” their children?

With Sara’s imminent arrival, her upbringing is naturally a very hot topic these days. I’m getting way ahead of myself, but I’m already thinking about how we are going to share our values and money habits with her. On the finance side, I know that our biggest gift to her:

  • is not a large inheritance but an environment that allows her to grow into a competent individual capable of generating her own income.
  • is not just to lead by example but show her the mistakes too and the consequences of those actions.
  • is not a bunch of parenting lectures but to show her the beauty of financial freedom.

This takes communication, care, the occasional embarrassment and most importantly, time. This is going to be a journey, but the effort required will most definitely be worth the troubles. I admit that I don’t have a completely comprehensive plan yet, but here are three approaches I will definitely pursue.

The Four Jars

The idea is to divide the kid’s allowance into four jars: Spending, Retirement, College, and Taxes. Once you have an empty jar, you weren’t allowed to spend any more until next month. It’s not perfect, and many details (such as what percentage to use) is left out, but it transfers nicely to a budget when they grow up and a system (or at least a variation of it) that’s worth trying.

I learned about it via Michelle’s post on the Four Jars Approach, which has more details on her own thoughts and experience with it.

The Parents Match

Without a doubt, the employer 401k contribution match is a huge incentive for everyone to save for retirement. This needs to wait until Sara is a bit older (when she can grasp percentages and fractions), but I’d like to implement something similar with my own children. The match will probably be generous too, given that the money is really coming from the same place as our inheritance for the children when the time comes.

Involving My Children in the Little Money Matters

A common concern amongst parents is that their children never know how expensive utilities add up until they have to pay their own bills. To rid ourselves of this problem, why not include Sara into our bill paying process? We can make it fun by giving her rewards whenever utility bills go down from a three month average, for example. I admit that I haven’t thought this reward out fully, but at least she can look forward to getting that bill instead of the whole discussion being ultra boring.

What Worked for You?

Let’s start with these three, but I’m sure there are a ton of others with amazingly simple and effective ways to teach their children about money. How have you taught your children about money matters, or have you? Are there any specific examples you can share that has worked, or failed? I’d love to hear from you, and I’m sure that many parents will thank your insight as well.

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{ read the comments below or add one }

  • Bill Dwight says:

    I think allowing your child to learn-by-doing (including mistakes.) vs learn by (eyeball-roll inducing) lecture is the most effective way to go. Some great tips here on approaches and tons of valid variations. One approach to consider when the physical jar approach runs out of gas (or if you want more flexibility) is the “virtual family bank route”.

    And a big “ditto” on the Giving jar – that’s a great habit to get into early on.

  • Alcoholic Millionaire says:

    I’m yet to have children but I tend to agree with Dan. Giving seems to be really easy to overlook and can be the absolute most valuable lesson that could be given to a young child. I’m pushing 30 and am slowly understanding the “Giving” jar myself 🙂

  • Financial Uproar says:

    I have a bit of a problem with how complicated the system is. An allowance is okay, but 4 jars? Retirement? Come on. Let kids just be kids, there will be plenty of time for them to learn about saving, taxes and the like. Your spending habits will have a great effect as well. My Dad is cheap; yet I’m cheap as well. I wonder why that is?

    Your attitude should be commended, I just think the methods are wrong.

    • MoneyNing says:

      Good point.

      Perhaps retirement and taxes should wait, but I think that the topics (especially retirement) should be introduced to them before they have to pay Uncle Sam on their own.

      The younger they are, the more difficult it will be for them to grasp, but it’s important enough to start early that they should be thinking about it as soon as they start earning income.

      Maybe not when they are kids, but I feel that there’s a place for this by the time they become young adults.

  • CD Phi says:

    I am all for teaching kids about money so why not teach them how hard it is to earn money which will ultimately curb their wild spending habits? Allow your kids to make a lemonade stand or even some schools offer fundraisers where you sell things to families and friends in order to generate a prize at the end of the term. Children will see how much it takes to earn even $1 and that will help them be more conscious about their spending habits next time they visit the toy store.

  • Prakash Dheeriya PhD says:

    Wow, this topic is so dear to me. I have written 20 children’s books on that precise subject.
    There are several ways you can teach them about money. The key thing is to start them very early, before their entitlement mentality sets in. Allowances are a good way to teach them too. But use everyday moments to teach them about money.

  • craig says:

    As a child growing up a lot had to just do with my parents mentality towards spending and the restrictions they had with me. Also I had an allowance with helped me on my own.

  • kenyantykoon says:

    idont have them but when i do i will instill entrepreneurship and a strict/healthy work ethic in their heads at a very early age. the world does not have enough of this type of people

  • Dan says:

    I have simplified it even more. I have three jars (including 1 category not in yours) of Spending, Saving, and Giving (I have a 4YO and a 1YO). I figure that we can introduce the retirement and taxes issues a few years down the road. This allows them to grasp the only three things that can be done with money, and still gives them the flexibility to be a kid. Then we sit down and make choices with each of the buckets. Giving goes first to church and then above that we choose to where the other money goes. Savings goes toward Car/retirement/college or a short term goal she has (like a bike) and sometimes I match these funds. And with spend we go over needs and wants.

    • MoneyNing says:

      Wow the “jars” approach really seems like a popular one. I think you’re right in that retirement is something that can wait because your kids are probably too young to understand this. It can also be grouped under savings too.

  • Gadjr says:

    cool idea about how to teach the children about money.. Kiyosaki said money is just an can be anything we want. so by teaching the children about money matter will gonna help their future later…;-)

  • Mrs. Frugal says:

    I whole-heartedly agree with putting sound financial principals into practice. I’ve been planning to divide up allowance into the areas of College, Investing and Spend, but I really like the visual aspect of the Four Jars system. Thanks for the tip.

    • MoneyNing says:

      I think the 3 jar system works just as well. The tax jar is more a way to let them know about where money comes from and how the real world works. (who pays for the roads, school system etc etc).

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