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Are you looking to teach your child about money management? The earlier you start this process, the easier it will be for your child to develop financial habits that will benefit him or her for a lifetime, and prevent them from moving home after college in serious debt. Statistically speaking, they may still come back to the nest, but debt free would be nice. Yet sadly, too many parents avoid talking finance for children as they think it is too advanced. Maybe as parents our finances are not the way they should be, too much debt, late bills, and collections so we chose not to talk money with our children? Don’t fall into this category, regardless of your circumstances. Your child can learn to budget wisely starting at the age of three, yes, starting at the age of three, and odds are as parents we’ll learn something along the way. By the time he or she is ready to head out on their own, these habits will be so deeply ingrained they won’t experience the financial difficulties many of us have had to, and better yet, if they fly back to the nest, they can treat us to dinner! Here are six steps you should follow when setting up an allowance that can teach finance for children in a fun way.
1. Start by determining how much money your child should be receiving and the frequency of payment. If they are old enough, let them be a part of the negotiation. Get creative, many parents will chose chores as the foundation for payment. This is a great opportunity to instill the entrepreneurial spirit in your children. Not just chores, maybe you would like the artwork on the fridge updated monthly, or fresh flowers on the table every few weeks. Give them opportunities to explore their passions, it’s a delicate balancing act, putting a value on what the enjoy, but this will encourage them to investigate ways to create income beyond a J.O.B. Which for many of us means “Just Over Broke”.
2. Once you and your child have determined what activities generate income, they can be compensated in the form of an allowance. How you choose to pay your children is up to you. Over 50 million people bank online, at our house, over 95% of our money management is virtual. With the advent of online banking, online bill pay, and banking apps it is vital that our children learn how to manage money without having cash in hand. Here you have a few choices, set up a bank account that your child can manage online, or use an online system where they can manage virtual money, like Three Jars, or create a spreadsheet. If they’re young enough, consider decorating 3 jars as a craft project, and set up some form of payment system.
3. When your child receives their allowance, you want to show her how to budget wisely. As many financial experts will tell you, the most important thing to remember in terms of finance for children and adults, is always pay yourself first. Before they enter the complex world of bills, investments, and life on their own it is important to build a strong foundation beyond take the money and run. As adults, we use a six jar system taught by T Harv Eker. While this may be complex for children, this is the perfect opportunity to teach them about saving or paying yourself first, spending, and giving. So make sure a portion of the paycheck goes into savings. While it may be a little early to teach saving to create passive income, it’s never too early to save.
4. Now for the next step, teach your child to give to charity or support a cause. Again the amount designated for charity will be up to you, but we recommend a minimum of 10%. As your child will learn, giving and receiving are closely intertwined. How often are they asked to raise money for a school event or project? Having a charity account within their allowance will give them a sense of pride knowing that they can make a direct impact. If school fundraisers aren’t their thing, let them chose where they want the money to go, there are endless charities that appreciate any support.
5. The remaining money will be the child’s spending money for the pay period until his or her next allowance. Whatever he or she has to spend, don’t supplement it if they run short. If they run short, this is the perfect opportunity to review budgets, as well as generate financial solutions that avoid debt.
6. The last step is to help your child track his or her spending during this period. This will help him or her to learn finance for children and how important it is. By tracking this information, your child can see where he or she is spending the most money and make changes if needed to ensure the allowance lasts longer. Or better yet, create ways in which they can use their money to create additional income. Work out a deal where he can rent the lawn mower to mow neighborhood yards for extra money. Or buy lemonade mix and run a lemonade stand to double their profits. You get the idea, we can learn just as much from our children when we help them learn to not only manage their finances but be creative in generating income.
By following these steps, you can teach finance for children by saving, spending, and giving. Remember, if we start early, and establish a strong foundation, when our nest is empty, a debt ridden birdie won’t be coming back. It will be your child whom you taught to bring home the worm.