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Tuesday, December 12, 2017

How to Cultivate Budgeting Skills in Children Early On

Photo by Carissa Rogers (Flickr)

A University of Cambridge study found that kids know how money works and form the basis of their future money habits by age seven. I find this fact fascinating. While I did know that kids must learn about money and budgeting, I didn't realize that we can and should start teaching them when they're young. As parents, caregivers, or teachers, these six tips can help us cultivate budgeting skills in our young kids.

Identify the Purpose of Money

We found a few pretend money bills and coins last week as we cleaned out the toy box. My girls spent hours playing with this money when they were little as they "purchased" toys from each other and learned the names of the coins and how many coins make up a dollar. More importantly, they learned that we use money to buy stuff, a fact that forms the foundation for all of their financial transactions, habits, and values.

Discuss How Much Stuff Costs

Kids sometimes think that food, clothing, and housing are free, but it's important for them to understand that everything around them costs money and that we have to work to make money. From the time my girls were little, I've tried to explain how many hours of work it takes for me to pay for things like their swim lessons, electricity, and ice cream cones. Now that they're older, they help me compare prices of different cereal brands at the grocery store and browse different stores online to find the best deal on their favorite jeans. They understand that certain items cost more than others, which equips them to use their money more wisely.

Explain the Importance of Savings and Show How Money Accumulates

Of course it's easier to spend money than save it, but I want my girls to spend less than they earn and create emergency funds, education accounts, and retirement accounts. To establish their savings habits early, we started a vacation fund. They drop spare change into a clear jar on our kitchen counter and watch their savings accumulate over time. Older kids can learn to save as they make their own deposits into a savings account and keep a ledger. Watching savings grow encourages kids to prioritize saving money instead of spending everything they get.

Distinguish Between Needs and Wants

Every time my younger daughter sees a toy commercial on TV, she asks me to buy her that toy. I know, though, that she doesn't need that particular toy right now. I help her distinguish the difference between needs and wants with a few questions:

  • Do you really need this toy right now?
  • How is it different than the other toys in your playroom?
  • Which two toys in your playroom will you donate to make room for this one?
  • Can we add it to your birthday wish list?
  • What else could we use that money to buy?

Distinguishing the difference between a need and a want is challenging, but we can start early as we help our kids learn this valuable budgeting skill.

Delay Gratification

In my home, we wait 48 hours before making purchases that exceed $25. Waiting gives us time to decide if we really need the item and research better prices online. Understanding the value of delayed gratification also improves a child's school performance and can lead to higher income later in life. Waiting in line for their favorite playground fixture, eating dessert after a healthy dinner, and saving for something they really want instead of buying with credit are all ways we teach our kids this valuable budgeting skill and help them become wise consumers.

Understand Invisible Money

Kids certainly need to understand how cash works, but most of my transactions involve credit or online transactions. Even though no cash changes hands, our kids need to understand how invisible money works. That's why I gave my girls a prepaid card that we load with their allowance each month. They decide what they want to buy and know that once the money's spent, they won't get more. They've learned the value of making a list, comparing prices, and choosing purchases carefully as they work with invisible money.

Budgeting skills help our kids spend money wisely now and into the future. What other strategies and tips have you used to teach kids budgeting skills?

Find more about the author: Kim Hart

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