How to teach your kids how to budget effectively
It’s true that the earlier you teach children about money management, the more effective they’ll be at it when they reach adulthood. Many of us didn’t learn from our parents about managing finances and it certainly isn’t taught in most schools; instead, we had to learn the hard way by trial and, more often than not, error.
If you’d like to help your kids learn how to manage their money when they grow up, you’ll be glad to hear that it isn’t difficult. There are many ways to make it easier for them; here, we cover some of the best tips for helping your kids to learn how to budget.
Involve them early on
One of the simplest ways to teach the little ones how to finance is to involve them in your own financial planning. Often children receive confusing messages from their parents about finances; they hear them complaining that they don’t have enough money, then see them booking a holiday the next day.
Because they don’t understand the complex decision we often make, they don’t see the decision-making processes that are happening behind the scenes, so to speak. While it won’t be appropriate to involve them in the actual making of the decisions, it’s important to give them an understanding of how you make your choices and let them see that sometimes you’re sacrificing one thing for another.
The earlier they learn this, the quicker they come to understand the often complex balancing act that’s involved in making big financial decisions.
Pocket money can help
Pocket money is one of those divisive topics; some parents swear by it, while others prefer not to use it. However, with a little ingenuity, pocket money can become an effective way of teaching children the value of money from an early age.
Tying your kids’ pocket money might not be the best solution; it uses the complex act of punishment versus reward. Once you reward kids for chores that otherwise need to be done, they’ll expect that reward every time. Not only that but, over time, they may need more reward to carry out the same amount of work; think about your own job and how long you’re willing to carry out a certain amount of work without a pay raise.
Conversely, tying the pocket money to punishment usually means they don’t get the money if they don’t carry out the chores. During that period, they won’t be able to budget at all.
A simple way around this dilemma is to offer your kids a small amount of pocket money, the same rate on the same day each week. They can use it for treats, but you can start showing them the difference between spending it all at once, spreading the money over a week, or pocketing it for bigger, longer term purchases.
Get them saving early
Using the jar method of saving works really well for younger children because it’s so visual. It’s up to you how you want to do this, and make sure you involve the children in that discussion, but a simple way is to have three jars: spending, saving and sharing.
The first jar is the money they can use to spend on whatever they want. The second can be used for bigger purchases; they save for longer so they can by more expensive toys or video games. The third jar is optional, but is a good way to get your kids to learn how to be altruistic with money. They could use these savings to buy birthday presents for friends or donate to a charity. Help them to choose a charity that means something to them, ideally one that has a visual component, such as thank you cards or photos of the people they are helping.
Make it more complex as they get older
As your kids get more grown up, their finances will become a lot more complex. Prepare them for this by making the learning a bit more complex as they get older. Once they become teens, for instance, it might be time to start showing them the value of cutting unnecessary spending and how to properly start saving for the future.
There are different ways to save: now might be the time to talk about interest, for example, and why choosing the right savings account is important not in the short-term, but for when they get older. Investment can be a complex topic, but starting it early is always a good idea.
Investing in shares can teach them about the balance of risk and reward. Not only that, but, if it’s done carefully, a small investment in shares at the age of 14 could reap rewards for them when they are older.