An understanding of spending, including the ability to budget for and track it, is perhaps the most essential money skill you can teach to a child. Children need to recognize that purchases cost money and that money is in limited supply—they can’t just buy everything they want. They must plan ahead so that they can afford everything they need, and this is why a budget is a necessity. It’s important to acknowledge that budgeting always involves making adjustments. They shouldn’t expect to get it right the first time.
Spending Simulation: For younger kids, you can simulate the experience of spending to teach them about tradeoffs. Give your child some money (maybe $5) and set up a small, at-home store. The store could include one item that will cost the whole $5, a few between $2 and $3, and multiple small things for $1 or less. These items can be small toys, treats, or even “coupons” for extra time playing games or a movie night. The point isn’t what they’re buying, but that the child recognizes that they can’t get everything—they’ll have to prioritize what they want most. Repeat the store every so often, perhaps with money they earn instead, to see how their understanding grows.
Expense Tracking: For older kids, help them track all of their spending for a week or month. They can do it on a piece of paper, a spreadsheet, or even an app. At the end of the tracking period, have them evaluate all of their choices. Did they spend more than they expected? Less? What would they like to change? Help them create a target for the next period and suggest ways they can improve. Repeat the process to see what changes. You may even offer a reward if your child is able to meet a goal you agree on.
It’s important for children to understand that saving is the secret to getting what they want. In order to do that, they need to recognize the difference between dumping money into an abstract savings fund and saving with a purpose. When it comes to the actual act of saving, teach that creating (and sticking to) goals is key. They may choose to save a regular percentage of their income or a certain amount each month. As an incentive to focus on saving, consider making a matching contribution by adding 50 cents for every dollar your child saves.
Create a Savings Goal: Help your child set a saving goal. Children’s goals vary a ton based on their age, but might include toys, sports equipment, electronic devices, special clothes, or other big-ticket items. Let them discover for themselves that not all goals are worth the time and effort it takes to reach them. Once they’ve set a goal, create a clear way for them to track their progress. The more visible, the better. For example, a jar in the living room or a paper chain that you cut pieces off of for each milestone. This will remind them of their goal and give you both the chance to celebrate progress.
Open a Savings Account: Take a trip to your bank or credit union and help your child open their first savings account. You can even ask an expert at the financial institution to explain how interest works and why it’s wise to store your money in an account. Encourage your child to ask other questions about how financial institutions work. You may even choose to contribute a little to help get their fund started. But remember, the child needs to learn how important it is to regularly add money to the account. Interest won’t be enough on its own to reach their goals.
Investing is a powerful financial tool that everyone should understand. The sooner you start teaching your kids the basics, the better! Help your children understand that the goal is to buy when things are inexpensive and sell when they’re worth more. Investing is often done by buying stocks (very small parts of a company). The stocks are worth more when the company is doing well and less when the company is struggling. Since you own part of the company, you may also get payments when that company earns a lot of money. As the child gets older, you can touch on more complex aspects of investing.
Track the Stock Market: Have your child pick a few brands that they like such as their favorite cereal, sports equipment, soft drink, or gaming company. Once they’ve picked two or three, go to the company websites or a general financial site and show them how to track the stocks. You can also point out news articles about the company and have them predict how that will affect their stocks. For example, if a sports drink company decides to stop producing a popular flavor, you can discuss how that may lead to a drop in their stocks. Track how the stocks change to see if your child’s guesses were right or wrong.
Start Investing: Get your child actively involved in investing by “selling” some of your shares to them. For example, if you’re planning to buy 200 shares of a particular company and you have two children, buy 202. Sell the extra shares to each child either at the price you paid or a discounted price if it’s too high. You can keep track of the children’s shares in a separate register so they can follow what happens and earn some money if the stocks do well. (Be willing to buy the shares back if they prove disappointing.)