Recently, my three-year-old son asked me to buy him a toy, and when I told him we didn’t have money, he said, “Go to the bank; they’ll give you money.” That was the moment I realized it was time to explain to him where money actually comes from. After all, “it’s up to the parents whether children develop good financial habits,” as Jane Pearl, co-author of Kids, Wealth, and Influence, says. Not sure where to start? Read these tips from Pearl, who outlines the most important money lessons for kids and helps parents teach these lessons effectively.
Money Lesson #1: Money Doesn’t Grow on Trees
When children see cash flying out of an ATM, it doesn’t occur to them that money is a limited resource. Explain to them that you work to earn money, and the bank is just a place where your earnings are kept (try to avoid cynical comments about economic crises!). To help them understand earning and responsible spending, you might consider tying their allowance to completing household chores.
Money Lesson #2: Budgeting Is Essential
The best way to teach your child about money is to give them a small amount to manage. If they spend it all on a new Star Wars figure and have nothing left for the movie ticket they’ve been eagerly waiting to buy, that’s an excellent lesson in itself. “Kids will learn firsthand the consequences of spending frivolously,” says Pearl.
Money Lesson #3: Patience Pays Off
Teaching your child patience reduces the risk of them facing debt in the future. Explain that patience is far better than the “buy now, pay later” mentality. For example, make a homemade pizza with the ingredients your child loves, and then reheat a store-bought pizza. It may take more time to prepare the homemade version, but it tastes much better.
Money Lesson #4: Avoid Impulsive Buying
Resisting impulsive purchases ties in naturally with the previous lesson on patience. Often, kids spend money on fleeting whims. Set a good example for your child. Before going to the mall, create a clear budget. Write down exactly what you plan to buy, which stores you’ll visit, and estimate the cost of each item. Then, with your child, compare prices online to find the best deal (and let them know that any money saved will go to their allowance). This helps children understand the importance of planning purchases in advance.
Money Lesson #5: Saving Is a Smart Idea
Your daughter wants a new doll but doesn’t have the money? Encourage her to start saving! Children typically save money only when they really want something. Once she’s saved up enough, take her to the store and let her pay for the doll herself. She’ll never forget how rewarding it is to work towards a goal and achieve it.
Money Lesson #6: Keep Track of Your Spending
Not sure how to teach your child to spend money wisely? The foundation of financial literacy is simply knowing where their money is going. Buy them a notebook or create a separate document on the computer where your child can record their expenses. Give them a folder (or an old wallet) to store all their receipts. Encourage them to review their spending once a week and think about how sensible their purchases were.
Money Lesson #7: Make a Wishlist
It’s hard for kids to set priorities, so work with your child to create a list of things they want to buy in the future. Then, discuss which items are most important to determine the order of purchases.
Money Lesson #8: Savings Can Grow
Teach your child about types of savings that earn interest, like savings bonds and certificates of deposit. Find an online calculator that shows how investments grow with interest, and show your child how a mere 100 rubles can grow over time (and don’t forget to check out the ThreeJars calculator, which converts the allowance you received as a child into today’s dollars). Your child will be amazed!
Money Lesson #9: Be a Little Skeptical
While you don’t want to make your child overly suspicious of companies, it’s important to explain some common tricks used to attract customers. “Healthy skepticism is important not only because it helps kids avoid falling for advertising gimmicks, but also because it helps them ignore the hidden messages in ads—like the idea that if you have trendy clothes and expensive toys, you’ll be popular,” says Pearl.
Money Lesson #10: Share with Those in Need
Agree with your child that they will donate a portion of their allowance to charity. This will show them that money can be used not just to buy things, but also to help others. Emphasize that it’s not the amount of the donation that matters, but the good intentions behind it.
There’s a popular system called ThreeJars, which teaches kids to divide all their allowance into three parts: spending, saving, and donating.
We hope these 10 money lessons give you a general idea of how to teach your child about finances. By following these simple rules, your child will quickly learn to manage their allowance wisely. Moreover, these 10 money lessons will help parents instill good financial habits in their children, so you won’t have to worry about how sensibly your child spends money in the future.