Teaching kids about money, budgets, saving and investing can help them make better financial decisions throughout their lives. Young people who understand the relationship between work and money also have a greater appreciation for planning and setting goals.
Start by explaining what a budget is and what goes into it. We want to understand how much money we spend each month and whether we have enough money to pay our bills. Ask your child to keep track of everything he or she buys for one month and then compare that total to their income.
For kids, money comes from various sources: birthday and holiday gifts, parents, part-time jobs. Consider giving them a weekly or monthly allowance with options to earn more by helping with household tasks. Younger teens might earn extra money pet-sitting or babysitting, while older teens might earn an actual paycheck.
Help your kids categorize their spending. Food and entertainment are frequent purchases, including snacks, toys and books. As they get older, they’ll also pay for clothes, music, movie tickets, video games and gifts for friends or family. High school and college students might spend on hair care, transportation, utilities, car payments, insurance, gym memberships, hotels and airfare.
Be sure to include a line item for savings, which will help begin an important discussion about long-term goals. And consider a line item for sharing, which provides an opportunity to discuss philanthropy and your family values. One popular strategy is the ”Three Jars” approach, where kids divide cash into saving, spending and sharing categories.
If expenses are larger than income, or if your child runs out of money, you can discuss ways to reduce spending. This will help your child prioritize – is it better to buy a book or two ice cream cones? Could I save money by buying in bulk, or at another store? You could also discuss chores that need doing and what you would pay for them. Walking the dog might pay $5, for example, or helping with the dishes might pay $2.
If your child has a budget surplus, be sure to congratulate him and encourage him to save it for something special. Some parents even offer to match their child’s savings as an enticement. A bank account that earns interest is another incentive. While deposit rates are still near historic lows, some financial institutions pay higher rates on kids’ accounts. BECU offers an Early Saver account, for example. Getting a monthly statement showing how much interest they have earned can reinforce the benefit of savings.
For older kids, researching and buying shares of stock or mutual funds can help them understand the benefit of long-term investing. You can also sign up for a stock trading game or simulation to place virtual trades without risking actual money.
As they grow older, kids want bigger and more expensive things – jewelry or a new car, for example. This can be an opportunity to show them how to set a goal and work toward it. Buying big ticket items with their own money can develop your child’s confidence and independence. You can help them find a way to save or earn the money to pay for these items.
Your approach to money and budgeting can be a great example for your kids. Let them see you comparison shop and make decisions between what you want vs. what you need. Consider showing them your own budget, or bank statement. For teens starting to look at colleges, consider involving them in the financial planning. Estimating the cost of their education and developing a plan to pay for it can help them appreciate the opportunity ahead of them.
Budget Lessons and Activities
|Lesson:||Buying things requires money.|
|Activity:||Give your child $5 and ask her to choose which fruit or treat to buy at the grocery store.|
|Lesson:||It’s important to set goals and save for them.|
|Activity:||Plan how to earn $10 to buy a small toy.|
|Lesson:||Money is finite.|
|Activity:||Track income and expenses for a month. Are they in balance? What could we do with any surpluses? If we are short, how can we make up the difference?|
|Lesson:||Making good spending choices.|
|Activity:||Comparison shop. Review the savings of buying generic or buying in bulk, buying goods on sale. Compare “need versus want.” Should I buy a treat every day after school, or save for a new video game?|
|Activity:||Give your child a budget on your next vacation. Let them decide how to spend their money on snacks, souvenirs or gifts.|
|Lesson:||The value of saving and investing.|
|Activity:||Review your child’s bank statement and the interest income. How much will he earn this year?|
|Activity:||Establish an investment account and review its performance. Or sign up to play a free online stock market trading game.|
|Lesson:||The value of planning.|
|Activity:||Establish a formal budget and try to stick to it. Reward balances and surpluses with matching funds.|
|Activity:||Have your child participate in the college financing plan. Examine what each college will cost and how you would pay for it — savings, aid, loans, parents/family, jobs.|
|Lesson:||Credit purchases must eventually be paid with actual money.|
|Activity:||Review your credit card bill. Do you pay the bill in full or pay interest on your balance?|
College and beyond
|Lesson:||Becoming financially independent.|
|Activity:||Update the budget to include adult expenses: rent, utilities, food, entertainment, travel, loans, transportation. Map to sources of income: parents, savings, jobs. Plan ways to reduce or eliminate parental support, credit card debt and loans.|
|Activity:||Review credit scores. Explain the importance of a strong score. Plan to improve weak scores.|
|Activity:||Reinforce earlier lessons. Comparison shop for housing. Avoid credit card balances. Reward balanced budgets or surpluses.|