As parents, we often worry that our kids might become overspenders. And to curb splurging, we limit their access to money. Many personal finance experts suggest that allowing your child to experiment with money may be a better approach if you keep the amounts age-appropriate.
By the time they’re three, most children have a good grasp on what money is and how you can use it to buy things. That’s when parents can teach kids the other side of the coin: that spending really begins with earning money (psst, make sure to read our guide on how to teach your kids about making money too).
If you want to get the money conversation started with your little ones, this guide will help you approach the subject in a kid-friendly way. It also offers tips to let your child practice spending and create healthy financial habits that can last a lifetime.
How to Explain Spending and Budgeting to Your Kids
When young kids buy a toy at the store, they don’t realize that money’s not infinite. They think that their parents’ debit card is a magical piece of plastic that can pay for anything. If only that were the case!
To teach your kids about spending and budgeting, you have to start by bursting their bubble: parents aren’t made of money. Remember how much you hated hearing that as a kid? And now, here you are, about to repeat the very words that made you roll your eyes.
Don’t worry; there’s a better way to teach the same lesson! You see, kids don’t always learn by listening. They need to engage all their senses and experiment. This engagement applies to science, crafts, and also money!
Learning the Value of a Dollar
To teach your child how much money is worth, try giving them $1 and taking them to the store. Before you know it, they’ll ask for another buck because $1 doesn’t buy you much these days.
But you can’t just keep handing your child money, right? Instead, use this as an opportunity to sign them up to do chores at home. Chances are, you could use a hand with setting the dinner table or taking out the trash. Why not let your kiddo do it and give them an age-appropriate allowance at the end of the week?
The rule of thumb for kids’ allowances is $1 or $2 per week for each year of age. You’d give your 5-year-old $5-10 and your 8-year-old $8-16 per week, depending on the cost of living in your area.
But before you institutionalize the allowance, be sure to outline exactly what chores your child is supposed to do and when. That way, you set expectations and make sure the whole family’s on the same page.
How to Introduce Smart Spending Habits
Now that your kids have money coming in, it becomes easier to introduce them to some basic personal finance concepts. Here are a few that will come up as your child begins earning and spending money.
Wants vs. Needs
In today’s world, it’s harder for kids to understand the difference between a want and a need. Items like food, water, and shelter are obvious needs. Diamond earrings or ice cream are wants. But what about a laptop computer, or a family car? That’s where it gets tricky.
Bringing up these topics gets your child thinking. So, next time you go to the store and they ask for another toy, remind them of the concept of wants vs. needs. If they insist on buying the toy, let them know that since toys are wants and it’s not their birthday or a holiday, this is something they can buy with their own money.
Before you and your little one get to the register, it’s very possible that another item will catch their eye. Maybe the Lego set they’re holding isn’t as cool as a robot. These dilemmas are called opportunity costs and they can make financial decisions tough for kids or adults!
Even if it takes them a little bit, this is a decision that kids should make on their own. You can help them analyze the pros and cons of each or decide which of the two will bring them the most happiness. But, at the end of the day, this is a big financial lesson that helps your child understand the real value of money.
Savings, Goal Setting, and Budgeting
Don’t be surprised if your kid’s sad to leave one of the toys behind. If you want to cheer them up, you can encourage them to save for the toy they couldn’t buy.
To keep them inspired, you can print and use this chart to track their progress. Start by figuring out how much your child needs to save every week and how long it’ll take to reach their goal. As they reach each milestone, you can celebrate their effort with a sticker on the chart or the treat of your choice. This tracking system motivates kids while teaching them to set goals and budget their money.
For more savings tips, read our guide on how to teach your kids to save money.
What Not To Do
Money matters should be a positive experience for kids, and healthy spending habits are not the exception. To reinforce positive spending choices, avoid the following behaviors:
- Don’t buy expensive items without reviewing your budget
- Don’t spend on things that your family can’t afford
- Don’t skip goal setting
- Don’t forget to celebrate your financial wins with budget-friendly rewards
- Don’t hesitate to adjust your budget as needed
- Don’t avoid talking about money management with your child
How to Set a Good Example for Your Kids
Teaching your kids good spending habits doesn’t mean that you’re perfect. Many parents enjoy having honest money conversations with their kids and sharing their own mistakes. This honesty strengthens your communication and shows children that there’s always room to grow in your financial journey.
Here are other ways to set a good financial example for your kids:
- Be conscious of your budget
- Live within your means
- Set a realistic goal and work toward it together
- Share your achievements with your child
- Review your budget on a regular basis
- Talk about money matters as much as you can
Financial words build your child’s vocabulary and help them feel confident about money. These are some helpful definitions for you to share with your kids:
- Budget: A spending plan
- Income: Money earned from work or investments
- Limited Resources: Supplies, like money or land, that are not endless
- Opportunity Cost: What you are giving up to get something that you want even more
- Spend: When you use money to pay for a product or service
Books to Help You Teach Your Kids About Spending
Parenting is easier when you can count on expert advice. That’s why we researched the best books to help you teach your kids how to budget and spend their money wisely. These are some of our favorites. Check out our full list of kids’ money books for parents for more recommendations!
Raising Financially Confident Kids is a life goal for most parents. This handy guide offers parents a creative method to teach kids the reality of money management. If you want to show your children how much you believe in them, this plan can help them grow into financially aware individuals.
Best Everyday Lessons
You don’t have to be rich to teach your kids how to be great with money. The Financially Intelligent Parent offers insight and strategies to help your child develop a positive approach toward money.
To Go Beyond Budgeting
At the heart of it, The Self-Driven Child is a book that teaches parents how to trust kids to make the right choices without giving up authority. This powerful lesson applies to financial education, as well as other aspects of life.
For Bedtime With the Kids
If you’re already teaching your child about money matters, A Boy, A Budget, and a Dream is sure to drive the message home. It’s a great introduction to savings, budgeting, and supporting siblings to achieve their goals. A great pick for kids 5 – 8 years old to share with parents.
Related Reading For You and Your Kids
- How to teach kids about money
- What to do when your kid always wants to buy something
- Give, save, spend – all about the 3-jar method
- How to teach your kids about paying bills
- How to spend money responsibly for kids
- How to spend money responsibly for teens
- How to spend money responsibly for college students