You want to do all you can to launch your kids into adulthood with every advantage you can provide them. That’s only natural. There are numerous investment tools that we’re going to be exploring in the next several articles – but before you get to investing for their future, the most valuable tool you can give your kids now is an understanding of how to budget.
Let’s say your kids are 5-8 years old and they are getting birthday and Christmas money. You want to introduce them to good money habits. This is a great time to teach kids the value of a budget. The temptation might be to help them run out and find the latest toy or gadget they’ve been wanting—and with budgeting, you can show them how to manage those wants along with other money concepts, just like mom and dad do.
Consistency and Practice
There are two important concepts to keep in mind when it comes to teaching your kids about money. The first is to be consistent. Whether you provide an allowance with no strings attached, they do chores to earn an allowance, you have a monetary incentive for grades, or all of the above, whatever it is, you have to be consistent. Bouncing around and not sticking with something is teaching your kids that it’s okay to be inconsistent financially.
The other key concept is practice: allowing your children to make financial decisions early and often. Here’s one example. When I take my kids shopping, I always ask, “Do you have your wallets?” Whether it’s groceries or clothes or whatever, my wife and I make a list. I let the kids know, if they see something that’s not on the list, and they decide that’s what they want, I have them check out separately with their own money, count the bills and get the change. We get some strange looks, and I’m sure people get annoyed at having to wait behind some kid but I want my children to understand money, where it comes from, how to handle it, and how to make good money decisions.
Just like perfecting that jump shot and shooting free throws in the driveway, when it comes to budgeting, practice makes permanent.
A Budget for Kids
A good simple budget for younger kids contains four main categories:
So, if they are getting $5 for allowance, maybe they save $1, give $1, invest $1 and spend $2. You can set up a system for keeping track of all of these areas. Maybe it’s an envelope system with savings going into a bank account. You’re showing them how to track their money in simple ways and follow through. You’re teaching them how to drop the $1 in the collection basket at church, or how to go to the bank and deposit the dollar. Showing, telling, and allowing them to practice these concepts are the keys to helping them understand budgeting.
As they get older, you can start to show them their college funds, talk to them about money, and maybe choose stocks together in a UGMA/UTMA account. Stay tuned as we’ll be looking at these types of accounts in more detail in a future article.