It is well documented that children’s early environment and relationships are essential in setting the stage for their development later in life. This core developmental stage occurs between birth and age seven. It is the beginning of everything. These are the years in which the foundation of a child’s personality and habits develop. It is for these reasons that we need to start early and train our children on money management.
Money management is not just about the numbers. It is a mindset. A basic understanding of what is required, when it’s required, and why it is required are essential in learning how to manage money. Early exposure to these ideas will foster a deeper understanding and appreciation of money, which builds children’s confidence in handling financial matters later on.
Like any other parent, my priority is my children. I am heavily invested in their well-being and future success. As an economist and a financial professional, I hold the view that life planning is financial planning. Let’s face it, there is very little we can do without having money today. Yes, we could go into the wild and grow our own food and live off the land. For most of us, however, this is not a pleasant thought, much less a viable option. It is quite natural, then, that I combine my roles as a parent and an economist. The result is economic and financial education for young children. Teaching children these concepts does not take away from the innocence of childhood. Learning fiscal responsibility is often not discussed in families, pushed aside because it seems too daunting and complex.
If we start embedding in our children practical skills that will serve them in all aspects of their lives, not just in the area of money management, it will not deprive them of their childhood but rather, enrich it. Children under the age of seven are prime candidates for becoming “mini-money managers” in the making. By arming our children with basic decision-making skills, we will be able to establish in them a behavioral pattern that is conducive to thinking twice and making more informed decisions when it comes to handling money.
How do we do this? How do we teach young children who are literally just out of diapers basic economic and financial skills? We can start with the fundamentals. The skills needed to manage their financial life are the same ones they need in every other aspect of their lives. To be effective money managers, there are some essential concepts that children need to know.
Money Management for Children Skill: Understanding Needs vs. Wants
The first concept that children have to learn very early on (and some adults too) is the difference between a want and a need. A need is something you must have; something you cannot live without. A want is something you would like to have, but if you don’t get it, you will be okay. When we expose our children to this concept early on, we are laying the building blocks necessary for financial astuteness and acumen later on. Parents can encourage and build this understanding of wants versus needs in the following ways:
- When you go shopping, let your child categorize the items you pick up at the supermarket into needs and wants.
- At the dinner table, talk about the main course as being something you can’t live without and dessert being a “want,” which if you don’t get it, you would still be okay.
- When you watch TV together and the advertisements come on, bring up the topic for some of the items being advertised. Do you need laundry detergent? Yes. Do you need one that works well? Yes! Do you need one with a pretty box? Not necessarily. The most intense discussion might occur after you ask your child if he needs that toy featured in the commercial. Most children would say yes, they NEED it. If, however, you have been practicing with them the differences between the concepts,you may find more understanding and less insisting. With children,you have to get literal and ask the obvious question to get your point across. You have to show them that even if they don’t get that toy, their life will still be okay. They will survive. There is no grey area at this stage of the game.
Money Management for Children Skill: Practicing Decision Making
The second concept that we need to train our children in is how to make a choice. What is the basis of making a decision? If we have a yardstick to work with, then it makes our task of making a decision easier. How do we decide what to get when faced with several options? This can sometimes be a mammoth task even for us grownups. The general yardstick is satisfaction. We want to get the maximum enjoyment or satisfaction from the things we choose. So for children to understand this concept, we say to them “choose the one that you think you will enjoy the most.” To develop the child’s decision making muscle we can start by:
- Initially give the children two options to choose from. Encourage them to choose the one that they would most enjoy. You have to be careful with the little ones and not overwhelm them with too many alternatives at the outset. Parents can start with everyday items. For instance, let your children choose between an apple or banana, juice or water, cheese or yogurt. When they have had enough practice selecting between two alternatives, you can slowly introduce more options.
- When children make their choice be sure to praise them on how well they chose. You can never praise them enough for making good choices.
- Emphasize that people choose the things that would make them the happiest. This is the easiest way to tell children to pick the item that would meet more of their needs and wants. For instance, when they do make a selection, encourage them to talk about why they chose the item they did. This way you can further reinforce the reason(s) they made the decision.
Money Management for Children Skill: Delaying Gratification
So far, we have built one concept on another. Once children know the difference between needs and wants and can make a decision based on maximizing their satisfaction, they will then be ready to understand the third concept of delayed gratification.
It is common for parents to give their child a piggy bank and ask them to save. Children who save for a specific purpose are more committed and determined to reach the goal. Kids who don’t have a goal and are just told to save are not as committed to the action. When teaching children the concept of delayed gratification, we have to make it practical and relevant to them. This builds the neural circuits in their brain that allow them to understand that to reach a goal usually something has to be given up now for something better in the future.
The concept of delayed gratification applies more to children ages four years and up. If you start early with the previous concepts, then when you get to this stage of teaching delayed gratification, it will be easier to facilitate. Children learn best by having to go through the process of making these difficult decisions. Some suggestions are:
- If your child is old enough (usually 5-7 years), you can start giving them a small allowance.
- Have them do chores to earn money. For instance, they can help you fold towels to earn a few coins. This activity also develops their gross motor skills and you’re getting help. It’s a win-win situation!
- Let them choose their piggy bank – doing so gives them practice making decisions and develops confidence.
- Set a goal. Let them start saving to purchase a new toy, a new game, or a movie.
- As situations arise, they can get experience in giving up something now so that they can have something even better later.
For instance if you go shopping with them and they want some candy or a small toy, let’s say it costs a dollar. Show them what a dollar is and let them know that this item costs that much. If they want to get the item now, they can. But it will mean that they will have one dollar less to buy the item they really want and are saving to purchase. So now they have to make a choice: “Should I get this now? Or wait for something better later?” All their brain circuits are firing! At this stage, it’s an indication of how much they have absorbed of the previous concepts. If they are able to logically think about it and wait, then we are safe to assume that the concepts are taking root. If they fuss only slightly but wait, again progress has been made. If, however, they break down and get the item, then we may have to do some more work.
Money Management for Children Skill: Making Wise Purchases
The fourth concept can be introduced when the third concept has been really understood. When children have understood the idea of delaying gratification, they will be in a better position to budget and spend wisely. After they have done the work of saving, they now need to know how to spend wisely and get the maximum benefit from their hard-earned savings. It is one thing to save; it’s another to use it wisely. Here the concept of ordering preferences comes into play. Again we are building on the previous concepts. The children at this point should be able to rank the items they want to get in order of importance. Also at this stage, the basic concept of price is introduced. Basic math skills of addition and subtraction can be practiced. For instance, if they have saved $50 and want to buy four items which vary in price from $15 to $20, they will need to decide which item is most important and get that first. With your help, they can go down the list until they have spent the $50.
These concepts are the building blocks for raising financially astute children. To ensure that we build strong neural connections, we have to repeat this process early and often. With repetition and integration into daily living, the lessons will be learned, remembered, and internalized. As I mentioned before, managing money goes beyond the physical dollars and cents. It is a mindset. The training for being an effective money manager starts way before they ever touch a dime! It is our job as parents to set the groundwork and to set the wheels in motion so that our children grow up with the necessary skills that will ultimately lead to success in dealing with money and life.
Dr. M holds a PhD in Economics and has spent over a decade teaching Economics and Finance. In addition to lecturing at University of Toronto and being a fulltime financial consultant, Dr. M keeps busy with her two daughters. They were the inspiration for The Kidonomics Series which teaches children the fundamental economic skills for establishing a strong financial base.
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