One of the most important things you can teach a child is how to manage money and invest for the future.
The Three-Jar Allowance
To learn how to manage money, children need some money to manage. Typically, this money comes from an allowance or from doing small jobs for friends and neighbors. As a first step, you’ll have to decide how much the allowance should be and whether it should be linked to jobs they are required to do. Whatever you decide, remember the overall goal is to use the allowance as a way of teaching how to create a spending plan and live by it.
One popular suggestion, especially for younger children, is to illustrate the concept of budgeting by using three clear jars that represent current expenses, short-term savings, and long-term savings. Separating cash into jars makes it easy to compare the results of spending and saving.
You can even set up a savings account for their savings. Educators Credit Union offers student savings accounts. Children under 13 years old will need to open an account with an adult, but if the child is 13 years old or older, they can open an account on their own. For the accounts available to children under 18 years old, visit ecu.com/personal/youth/.
If you want to encourage charitable giving, you can use a fourth jar. Set a fixed percentage of the total, such as 10%, and encourage putting money in that jar as well.
Spending vs. Saving
To help children decide how much should go into spending and how much into saving, you can help them figure out how much they’ll need for regular weekly expenses, such as lunch money and anything else you agree on. You might suggest keeping careful track of a week’s worth of spending and use that amount as a starting point. Part of the conversation should focus on the fact that budgeting always involves adjustments. The goal isn’t to get it right the first time, but to come up with a workable allocation of money.
Next, talk about money for short-term savings goals. Children’s goals vary substantially, based on their age and concept of time, but might include toys, sports equipment, electronic devices, special clothes, or other big-ticket items. You may want to suggest saving for one item at a time and help them figure out how much they’ll need to save each week to reach their goal in a realistic amount of time.
Finally, be sure to encourage them to set aside a regular percentage for a long-term goal. For some children, saving for college means a lot. For others, the goal may be saving for a car. Here, 10% of the total might be a reasonable percentage to save. As an incentive to put money into long-term savings, you might consider making a matching contribution by adding 50 cents or a dollar for every dollar your child puts in.
If you want to teach your children more valuable lessons about finances, Educators Credit Union has a library of free resources to help you. Check it out at ecu.com/educational-resources/.