When you teach your child how to manage money, you give him or her a priceless gift. While some kids are “intuitive” money managers, there are many who completely lack natural talent in this area. For instance, some kids just spend every cent they get their hands on, never setting anything aside for future purchases, savings or charity. In this way, they are exactly like many adults in our culture! Of course, lack of money-know-how can cause lots of pain in adulthood. Running out of funds, falling into debt, gambling away hard-earned dollars and so on, lead not only to personal distress but also to marital stress and family problems. For this reason, it is the job of every parent to prepare children for the economic side of life.
If you want to impart basic budgeting skills to your child, consider the following tips:
Necessity vs. Luxury
Kids learn by example and by direct instruction. You can teach them to prioritize necessities and budget for luxuries by letting them see how you yourself do this. For instance, if your child needs a new pair of proper-fitting shoes (a necessity), you won’t want to have to say to her, “I’m sorry we can’t afford shoes for you right now. We just spent all our money buying that boat you kids wanted.” In fact, poor budgeting is something that children can see for themselves, without you pointing anything out. If, for instance, the child finds out that there is no money for shoes but sees that your spouse – the child’s other parent – just bought you a pure gold bracelet for your anniversary present, the youngster will learn that people buy what they like and don’t worry too much about what they NEED! It will be necessary for you to model the principle: “necessities before luxuries” before you can ask your child to live by it.
Assuming that you are modeling the correct attitude, you can help your child learn about it through explicit instruction. Tell your child something like this: “You’ll want to have money for the things you NEED as well as the things you WANT. Make sure you have what you need first, but always set aside a little of your earnings to buy things that you just want. You can set aside 10% of your income for charity, 10% for savings for big and special things you want to buy (like cell phones, computers and/or cars for older kids and special toys for younger kids), 10% for weekly treats (drinks, food, magazines or whatever) and 70% for your necessities.” Give your child lots of examples that are relevant for his or her age. If draw it out on paper – use a pie chart with different colored sections for clarity. Remember, a picture is worth a thousand words! The older your child is, the more information you can give, including a detailed breakdown of living expenses (rent, transportation, clothes, toiletries, etc). Younger kids and any child who is still living at home and not paying you room and board don’t necessarily have real “necessities.” However, as they get older, you can help them have experience of managing a budget for necessities by making them responsible for paying for car expenses (their own license, gas, lease or whatever applies to their situation) or their own phone bill and so on. It doesn’t matter whether the money they are paying with is money that they earned themselves or received as an allowance from you – what you are teaching them at this point is how to MANAGE income. You can teach them how to earn it another time!
Planning and Saving
It’s important that your child has some real money to learn with. It’s safer for kids and teens to make mistakes on small budgets than to start the learning process in adulthood. Even a very young child can begin learning basic budgetting concepts using his or her small allowance. For instance, take the child shopping and let him or her pick out a treat either with allowance money or even “treat” money that you provide. The child must figure out what purchase is affordable. The chocolate bar may be over budget, the potato chips may work, perhaps a soda and a pack of gum might be affordable, the fancy candy is definitely out of reach. Instead of YOU doing all the calculations, allow the child to do it if the arithmetic is within the child’s easy grasp. Teens can use a combination of allowance and earnings to manage their budget. Make them responsible for paying their cell phone bill or some other regular financial responsibility and help them to figure out how to set aside savings to purchase big ticket items they are longing for. You can provide incentive programs if you like: offer to match them dollar for dollar in order to help them purchase some important product.
Once your child has a source of income – whether that is an allowance or a part-time job, another source of income or some mixture of things – help him or her to open a bank account. This is all part of the money-learning experience. Especially if signicant funds are involved, you might encourage more than one bank account: a savings account for big purchases down the road, a checking account for readily accessible cash and an accountfor charity funds. Later on, if the child is ever self-employed or running a small business, make sure that there is a savings account specifically for required tax payments. This way of organizing money can help the budget work smoothly and automatically.
In teaching kids to manage a budget, it is essential that you do not bail them out when they make errors. O.K. – maybe just once. But you want them to learn through experience that when you run out of money, you run out of money. There is no more. Discourage borrowing from you or friends – this is really just a debt mentality. You want your kids to thrive within their budget. If there isn’t enough money for what they want, they should be encouraged to earn more money, instead of going into debt.
For instance, suppose your 15 year-old daughter bought herself a sweater with her savings. At the end of the purchase, she has only twenty dollars left in her account. However, she sees some boots she just MUST have right away and begs you to loan her the ninety dollars she’ll need, promising to pay you back over a three month period. DO NOT COOPERATE! She should have been looking ahead when she bought the overpriced sweater! If you don’t bail her out now, she’ll become a better money-manager for life. On the other hand, if you do allow her to go into debt because of her own bad planning, you are helping her to have a life of credit-card angst and suffering.