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7 Ways to Raise Kids with Money Management Skills

Kids these days are growing in tough financial times, and unless parents are proactive, their kids are not going to learn the mRaisingKidsMoneyManagementoney management skills needed to avoid making the same financial mistakes.  We’ve identified 7 ways to teach our children not to make the same mistakes we did:

  • Start teaching early
    Kids are ready to learn about the basics of money and saving at two or three years old.  It’s easy to start with small crackers (Goldfish or Teddy Grahams work well) to teach the idea of saving for a treat later.  Once this is established it’s a natural transition to move on to small coins, exchanging for those same treats later.
  • Let kids learn how to buy things for themselves
    Instead of buying children a treat or a small toy, try giving the child some money and then help them negotiate the purchase at the register.  This reinforces the idea that paper money – a rather strange and abstract idea – can be exchanged for real-world tangible goods.  As kids learn how to buy things on the shopping list (or treats they’ve earned) they’ll start to learn the relative value of denominations, and the relative values of the things for sale at the store.
  • Don’t tie kids’ allowance to chores
    Some parents “pay” their kids for doing their fair share of the work around the house.  This has the potential to negate an important strategy in teaching kids financial savvy: the concept that responsible behavior is rewarded with greater freedom.  To do this, make an allowance into tool used to teach kids how to manage and spend money.  This isn’t “extra” money, but represents money that the parents would have spent on the child regardless on mundane items – clothes, shoes, activities, and so on.  The privilege of managing and deciding how to spend that money is something that the child has earned through responsible behavior, and something that kids respond well to; they really enjoy having a say (or even feeling in complete control) in how their budget is spent.
  • Help kids learn how to make choices within a limited budget
    There’s not always enough money in the family budget for soccer, dance lessons, ski trips, and karate.  Every family has a reasonable budget for kids’ activities.  By discussing the realities of this budget with the kid, she can learn how much these activities cost, and decide for herself which are most important to her and also which fit into the overall budget.  These skills can be extended beyond activities, to shoes, clothing, and food using simple money worksheets or money management software to track allowance and spending each month.
  • Talk frankly and openly to kids about money and debt
    Kids aren’t learning about financial responsibility in school.  They’re learning how to count money, and maybe some accounting – but they’re not learning about debt, budgeting, and responsible saving.  Having frank discussions with kids about family finances – including income, taxes, insurance, auto and mortgage debt, helps kids understand the “big picture” of family finance.
  • Enforce kids’ long-term savings
    Even from a young age, kids should be saving a portion of every dollar they’re given as gifts, or receive as allowance, in a long-term savings account.  They should be able to see this money growing over time, and should have a goal in mind.  Saving for a computer, or for a ski trip, or for a used car can all be multi-year goals.  Left to their own devices, kids won’t save consistently, and they’ll spend savings early.  Parents can help by directly managing all deposits into and draws from the long-term savings account.
  • Don’t bail kids out when they’re about to make a mistake
    The best way to learn financial responsibility is to make a lot of mistakes — and learn from them.  Kids just don’t learn from the mistakes their parents stepped in and prevented.  That said, it’s best to make those mistakes while they’re still young – and the mistakes cost very little – rather than when you’re older, and the mistakes are very expensive.  There will be many times that a parent will see a child about to make an obvious mistake: spending too much on a pair of shoes, and using up the entire budget; or buying a new game for himself a week before his birthday.  When the kid realizes next week the mistake he’s made, it’s a much more powerful lesson than any words of wisdom the parent could have imparted.
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