How to Teach Your Child About Responsible Spending

by Jamie Simmerman · 17 comments

For kids, money really does grow on trees. If you’re familiar with basic psychology, you’ve read about a child’s magical thinking stage, their advances to concrete operational thinking, and their propensity for egocentrism until age seven or eight. If you want to learn more about how children think differently than adults, you may want to read up on Jean Piaget’s research about how a child develops. His contributions to developmental psychology are used by advertisers and marketers, pediatricians, psychologists, teachers, and even parents. Here are a few basics that will help you effectively teach your child about responsible spending.

  • Kids really do think money grows on trees. They believe in Santa Claus, monsters under the bed, and the invincibility of Superman and Barbie. The line between fantasy and reality is blurry at best for most young children. They often have dreams they swear really happened, and have no problem swallowing a campfire story about humanoid creatures chained in the woods who break free after months of starvation and haunt campground bathrooms to prey on small children (my mother called this the Super Duper Pooper Eater). Magical thinking is a way of life for kids, and therefore trying to teach them concrete, rational skills like money management and investing can be a real challenge. They simply can’t grasp many of the personal finance concepts you want them to learn – unless you adapt the lessons to fit their magical thinking world. Make spending and saving a game. Make it fun. You’ll have to provide extrinsic rewards for young kids to motivate them to spend and save responsibly. This means you’ll need to promise cookies, trips to the park, or time spent doing a favorite activity rather than depend on them to spend wisely for the self-satisfaction of a job well done.
  • Enter your child’s world by thinking like a kid and explaining spending and saving in terms they understand. Have a conversation with your child about money, and take note of the words he or she uses when talking about spending and saving. When it comes time to guide your child in a money lesson, use your child’s own words and phrases about money to help your concepts resonate with him or her. Parroting language helps your message resonate deeply with your children – and it shows you listen when they speak.
  • Understand your child’s inability to consider others. Until the age of seven or eight, children are mostly unable to think from another person’s point of view. The world revolves around them and anything that doesn’t serve their purposes is irrelevant. Don’t let personal finance fall into the great abyss of your child’s life. Adapt your money lessons according to your child’s developmental level. If they are still in the egotistical stage of development, teaching them about giving may be difficult. You may have to provide small rewards to motivate them to give of their time and money at this stage. Later on, children develop a sense of intrinsic motivation, meaning they are motivated by the positive feelings experienced when giving to others rather than direct rewards.

So now that you know “how” to teach the kiddos, here are five lessons you should teach them about.

  1. Losing money is a part of life. Everyone loses money, perhaps children more often than adults, but financial losses happen. Your child may drop twenty dollars from a pocket at the mall, misplace a school fundraiser envelope, or have their lunch money stolen. How you react to the situation will affect how your child views money for the rest of his or her life. If your child acted irresponsibly and contributed to the loss, it’s important to help him or her take responsibility for their actions. However, you should talk with your child and explain that mistakes are part of the learning process, and formulate ideas to help prevent losses in the future. Punishment for losing money is usually not necessary, but the child may be given extra responsibilities to help recover the lost funds. Extra chores, after-school jobs, and community services may all be viable options for helping your child take responsibility for the loss.
  2. You don’t have to keep all money that comes your way. One of the best ways to foster a healthy attitude toward money is to encourage your child to give to others. Whether you set up a structured system, such as tithing, or if you keep a special find for giving to others in need when the opportunity arises, it’s important to teach your child about giving early on.
  3. Spending is to be expected. Especially when children begin to be aware of money, you can expect a long list of wants and needs to ensue. Help your child learn to narrow their shopping list to include items that will enrich their life. You can set aside a very small fund for small toys and consumables (like candy, stickers, art supplies), but the majority of your child’s spending money should go towards items that are of higher quality and will be used and enjoyed for a long period of time.
  4. Saving is essential. You should stress that saving is not an option, but essential even if your child decides to save just one dollar a month. Your child doesn’t have to save a large portion of their money, but he or she should set back something from every monetary source. Birthday and Christmas gifts of money or allowances should be examined and a portion allocated for saving.
  5. Well-managed money is the goal. When learning about finances, your child may get caught up in the excitement of saving, spending, and investing, but your job as a parent is to help him or her stay focused on the main goal – to manage their money well. Even if investments don’t perform well, wise money management is a rewarding process for children when a parent supports them.

It’s never too early to begin saving for college, investing for future expenses, and learning to spend responsibly. Money earned and saved little by little fosters a healthy, responsible attitude for life.  What money lessons do you think are essential for children?

Also, how do you connect with your kids to help them learn about money? Share your tips with other parents who may be looking for new ways to get kids excited about personal finance.

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  • Jesse says:

    Love the five lessons. Very well explained. And it’s so important to understand how to actually teach young kids. Such an underrated skill set.

  • Jean says:

    Very important about explaining things to the child in a way that they understand and can relate to the best. Avoid complicated terms and instead use examples of things like saving candy for a rainy day.


  • Jaunita Bandy says:

    your child’s spending money should go towards items that are higher quality and will be used and enjoyed for a long period of time.

  • Marbella says:

    I often say that children must learn to work and save money for something they really want. When they have got together with enough money, they usually realize much more value in what they are buying in this way and sometimes abstain from the buying and save money instead to the future.

    • David @ says:

      That’s an important lesson to understand for sure. My kids are still young so but when they have more income I’ll definitely figure out how to give them some practice doing this.

  • Jean says:

    That is definitely some sound financial advice for kids to live by. They need to learn the value of managing their funds the best way. When to hold off temptation to save up for a better goal and when an expenditure is necessary.


  • Chris@SimpleFamilyFinance says:

    Thanks for the article!
    As the father of a 4 month old son, I’m looking forward to teaching him about money and how to deal with it. I think teaching the importance of priorities is an important part of financial education. Spending on the “right” things, giving to others, saving over wasting are all triggered by proper priorities. It also teaches that spending money on the fun stuff is important, but needs to take a backseat if your top priorities haven’t been fulfilled yet (debt, charity, family, etc) .

  • Sherry Vosburgh says:

    I never learned about money and am paying the price now! My parents spoiled me financially and were bohemian artists. I’m lucky to have had a good salary, but in retirement I have to budget.

  • Modest Money says:

    The earlier a child learns these kinds of money lessons, the better. It is much better that they establish responsible views about money instead of having to learn those lessons the hard way later in life. One that I feel is important is teaching them that you have to work hard to make money. If they want something, teach them the necessity of working towards it instead of just spoiling them and buying it right away.

  • Rika Susan says:

    Unfortunately, it seems that an entire generation has missed out on learning solid money management skills. If only these skills and lessons could be taught in schools.

    • Roberto says:

      Please remember, school is not meant to teach every kid every aspect of everyday life. That’s what parents are for. Besides, if teachers don’t (or won’t) teach, its up to us parents to fill in the gap. Who knows, in teaching our kids about finance, we might actually learn something ourselves!

  • Hector Castro says:

    Unfortunately, it seems that an entire generation has missed out on learning solid money management skills. If only these skills and lessons could be taught in schools.

  • Roberto says:

    One thing I did with my 8 year old is had him start a “money journal.” Now, to you and me, it’s a budget or cash book, but to my son, it’s like keeping track of the people who gave him Christmas and birthday money. He knows who to thank and who to send a reminder to.

    It also helps him be able to do math in his head. One unintended bonus is the pride he feels when he wants something and I say, “I’m short at the moment,” and he replys, “Don’t worry, Papi, I’ve got it.”

  • karen lee says:

    Kids need to start learning early, unfortunately it does not and is ignored by most families. My husband who is a financial analyst wanted to do a course for high school seniors but was refused.

    • Roberto says:

      I feel you, Karen. (Can I call you Karen?). When my kid’s school denied my offer to teach music and finance, all I did was start teaching and tutoring privately. True I may not reach all the kids at once, but the smaller classes of one to six that I do facilitate help the learning go down a little easier.

  • Jeff Crews says:

    Some great tips here that I was taught at a young age. I think “giving” is crucial! So many times I have chosen to “give”, and it has been one of the most rewarding things ever! Teach children to “give” at a young age, and I am pretty sure you will show them something that will make them standout when they are older!

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