Take this experience shared with me by a reader: She was giving her 5- and 6-year-old children a fake dollar every time they were good and created a store at home where her children could use the fake dollars to buy toys. She explained in her e-mail to me that she felt this would be a good way to teach them how much things cost.
But the whole plan fell apart when the kids became so money hungry that they started to hunt for real money all over the house and take it for themselves. Frustrated, she dropped the whole idea and asked for help.
This is one of those times when a good idea—teaching kids about the value of money—isn’t enough. I told her she needed to broaden the idea and teach her kids that you can do more with money than simply buy things.
I suggested she begin to teach them about the four choices for money—spend, save, donate and invest. By giving them more than one option for how to use the fake dollars they accumulated, she would be teaching them how to take personal responsibility for the choices they have for money.
Money is not a toy
That reader had the first step right: She was teaching her children that money has value.
To help kids see the value of money can be measured by something other than the number of toys it will buy, ask them to deposit money into a savings bank at home (it can be a fancy piggy bank or a simple jar with a lid). Then help them open and transfer that money to a savings account at a real bank. Ask whether your bank offers a junior savers account. These kids’ accounts require smaller deposits and sometimes pay higher interest rates.
Once you set up an account, commit to taking your child to the bank at least once a month to make deposits. After a few months, point out how the account has grown. Explain that growth is called interest, which is extra money the bank pays you for keeping your money in their bank. Demonstrate this growth by taking the change out of your own pocket and laying on the table the amount of interest your child has earned. This visual aid helps your child see the interest as real money.
Consider offering to match their savings to help their savings grow faster. Your child will begin to understand that money deposited in a savings account will make more money and that taking personal responsibility for making that deposit pays off in the interest they receive.
Give allowance to cover needs
Even young children can be responsible for an expense or two in their lives. Let’s say your child likes to get a small toy, gum or candy when you are out shopping together. Instead of always shelling out for what he wants, tell him that from now on you will give him $1 a week, or $1 a month, depending on your budget—just keep it small—and that he is now responsible for satisfying that expense. Explain that this money is now his allowance, which is meant to cover this expense in his life.
Stand back and watch what happens when he has to spend his own money rather than yours. Gently remind him when he asks you to buy something that you have already given him the money to cover that expense. The first couple of times this money may get spent quickly or even lost—but don’t bail your child out. Let him know that he needs to take personal responsibility for the money and the expense. He will get it sooner than you might think.
Helping children see they have choices for money—they can spend it, but they can also save it, donate it or invest it—is the key to teaching them personal responsibility about money. As I told the mom who e-mailed me, introducing other money choices to her kids and asking them to set goals for each of those choices would help her kids think about what they wanted to do with the money they were earning for being good.
Teaching choice teaches kids to take personal responsibility for more than just choosing to spend. Choosing to save teaches your child to pay themselves first, choosing to donate teaches them to take care of others and choosing to invest teaches them to think long term and take care of their future.
Teaching kids to take personal responsibility for money is part of the foundation we as parents lay to make sure they continue to be responsible as young adults when they are besieged with credit opportunities.
Susan Beacham is the founder and CEO of Money Savvy Generation, a financial education company that provides innovative products and services to help parents and educators teach children the basic skills of personal finance, www.MoneySavvy Generation.com. E-mail her at susan@MSGEN.com.