We all want our children to be able to manage their money well and make good decisions with it.
But when we should teach them about money isn’t exactly clear.
If most adults struggle to manage their money, is it too complicated for a child to understand?
Even if we knew when to start, how would we begin?
Money has gone from something concrete that we hold in our hands to an abstract concept.
Most children never see their parents use cash so it is easy for them to think that there is an endless amount of money on that plastic rectangle that their parents use to buy everything with.
This last Christmas, when our oldest was exactly four-and-a-half, we knew it was time to be more intentional about the conversations we had with her about money.
We were sitting at the dinner table one evening and she began explaining to us that when you run out of money, you just get more… Whoops!
That’s not how any of this works!
Ross and I started trying to explain how money works and the responsibility that money requires.
After the kids were in bed, we continued to talk about how she was at the age where we needed to start teaching her good money habits.
About a week later, one of her grandparents texted and said that they wanted to give the girls money for Christmas. They wanted to know if we just wanted it as an Amazon gift card, or if we wanted cash.
My first instinct was the gift card to Amazon, because it would be easy to use and I wouldn’t have to take the girls shopping…
But I quickly remembered that this would be a great opportunity to begin her monetary education! I changed my answer and received the money via a cash app.
In this post I’m going to show you how to teach your kids about budgeting in a way that they will understand, and how to teach them the value of money.
How to Teach Your Kids About Budgeting
1) Let Them Choose 3 Jars
The first thing you need to do when teaching your children about money is to get three containers.
Since children are extremely literal and visual in how they understand and learn, I like to use mason jars. That way they can see the money even when the lid is closed.
It helps make the process more concrete since they can see that their money is still in the container even when they aren’t touching it. This will come in handy once the money is transferred to a bank later!
You don’t have to use mason jars though. I used three small boxes for my younger daughter’s money because she is still a little young to care and the exercise with her money was more for my older daughter’s benefit than hers.
Since most of my mason jars are in use, I took the girls to Goodwill and let my oldest pick out three fun jars for her money. (The younger one will get to do this too when she is a little older.)
We couldn’t pass up this awesome “Girls Just Wanna Have Funds” jar that we found there!
2) Determine How to Divide the Money
When I was determining how I wanted to teach my girls to divide their money, I decided that I wanted to use the same basic structure for their budgeting system that Ross and I use for our budget.
(Check out How to Start Budgeting if you’d like a step-by-step guide for creating your budget.)
I suggest dividing the money among three categories for young kids and older kids who are new to budgeting.
The categories we use for our girls are:
Giving
Savings
Spending
Now choose a percentage of the total that will go into each category.
While kids could afford to save a higher percentage of their money than adults can, they will have a hard time staying motivated to save if it takes too long to build up their spending money.
Teaching your kids to save 50% of their income is great, but it isn’t sustainable once they have to pay for rent, groceries, and their vehicle when they are living on their own.
Teaching them to save 20-30% of their income is much more sustainable throughout life… and it will be more motivating for them to keep saving instead of wanting to dive into their savings account all the time.
The habits we start in our childhood are incredibly powerful in shaping our lives, so start your kids with successful and realistic money habits now.
So what percentages should you use?
I highly recommend keeping the spending money to 70% or less of the total.
Why do we use 70 percent?
You can read all about my 70/20/10 rule that we use for our budget in this post if you want more details. But for now, just know that it is a good goal to live off 70% of your net income for your entire life. Teaching kids to only use 70% of their income sets them up for financial success later.
Whatever you decide, just make the percentages realistic. If you only teach them to spend 10% of their income, they will get tired of trying to budget!
There are two basic ways to divide up the money that will be sustainable throughout the teen years and adulthood. I recommend choosing one of these options for your children:
Option 1: Easy Math
The first way is to keep things super simple. This option will be easy for even young children to wrap their heads around.
Giving: 10%
Savings: 20%
Spending: 70%
You can read more about this method and why it works well for budgeting here.
Option 2: Teaching Net Income
The second option is a little bit more complicated to do the math, but it teaches kids an important lesson about Net Income vs. Gross Income (or Salary vs. Take-home pay).
(You can see more detailed information about Gross Income and Net Income in this post.)
This is the way that we are teaching our girls to allocate their funds.
Why?
For a couple of reasons:
1. My husband and I base our giving off of our gross income (the total salary before taxes).
2. I want them to start to understand that we don’t get to keep every bit of money that we earn in life (even if they are mainly earning it by having birthdays at this point.)
This gives you a tangible way to teach them about gross and net income before they have to deal with taxes later on.
Here’s How It Works:
First, give based on the Gross Income: Take 10% of the Gross Income.
Net Income (=) Gross Income (-) Giving
Save 30% of your Net Income: Multiply Your Net Income by .3 and Put that amount into the Savings Jar.
Then set aside the other 70% of the Net Income for spending money.
Notice that in the easy math option, I recommend saving 20% of the income… that is for the sake of easy math. For teaching net income, they can save 30% of their net income and the math will work out nicely.
Here’s an Example:
3) Do The Math
Next, figure out the dollar amount that is going into each category.
If it’s been a little while since 5th grade and you aren’t super comfortable with percentages anymore, here’s how it works:
Whatever percentage you want to use, just move the decimal over two places to the left, then multiply that new number by the total.
(Also if math isn’t your thing, stick with the Easy Math Option at first.)
Example:
10.% = .10
70.% = .70
10% of $25 = .10 x 25 = $2.50
20% of $25 = .20 x 25 = $5.00
70% of $25 = .70 x 25 = $17.50
Depending on the age of your child, you can do this step by yourself or have them help you.
When we did this the first time, my oldest daughter, at four and a half, was too young to understand percentages so I just did the math by myself.
4) Get Small Bills and Exact Change
Once you know exactly how much money you will be putting into each jar, figure out exactly how many dollar bills and quarters, dimes, nickels, and/or pennies you need.
Since my oldest was too young to understand that a $5 bill is equal to 5 $1 bills, I wanted to get the money in $1 bills to help her learn the concept.
If your child is older, they may like having larger bills. But sometimes counting out 15 $1 bills and putting them all into your spending jar can be more motivating than putting one $10 bill and one $5 bill into the jar.
When the girls each received $25 for Christmas, I went to the bank and got 46 one-dollar bills and $4 in quarters. Yeah, it was a little weird to ask for, but it worked well for teaching!
The teller didn’t seem phased about getting such a strange request, she just asked if I was doing a fundraiser and needed to have change on hand.
I know that my younger daughter is way to young to understand the concept, but I separated out her money, too.
This way my oldest daughter could have extra practice with counting and she could see that this is what we do with money for everyone in the family.
5) Explain As You Go
When you are counting out the money to put it in the proper jars (or containers), have them do everything with you.
As we went down the list, I had her count out the correct number of bills and quarters for each amount.
Then I had her do the same thing with her sister’s money.
It was good practice to have her do everything twice!
As you do this, be sure to explain is the right order of budgeting.
Each time we go through the process I ask, “What jar do we fill first? Which jar do we fill next? What jar do we fill last?”
6) Give First: 10%
We are teaching our daughters to put their giving money aside first.
Why?
Because people are generally selfish and if we wait until we have leftovers to share with others, then there won’t be anything left.
Putting the money into the giving jar helps us think of others before ourselves.
(If you aren’t into giving, just bump savings up to be your top priority!)
I go into more detail about the order for allocating your money in my Budget Percentage post.
7) Save Second- 20-30%
After giving, savings should be the top priority.
Talk to your children about how they need to prioritize their savings.
People are naturally impulsive and have unlimited wants, so if we wait until we are done spending to save, there won’t be anything left!
Which Percentage Should I Use for Savings?
In our Budget, Ross and I save 20% of our Net Income, but for the girls, I am teaching them to save 30% of their “Net Income” using the Teaching Net Income Option I showed above.
Why? Well, kids don’t have any necessary expenses. At least mine don’t at this point.
They don’t pay rent, they don’t buy food, and we pay for their clothing and swimming lessons.
Everything in their spending jar is just for fun.
Even if they are saving for something practical, I think that it is better for them to save up their spending money to buy something.
It’s a great opportunity to get into the habit of spending less and saving more.
Even from a young age, they can get into the habit of living on 70% or less of their net income as I explain in this post.
Later, if they find that they can only afford to save 20% once they are on their own, it will be an easy adjustment to make.
It won’t hurt anything that they saved a larger percentage when they were younger, and they will probably be glad that they did.
How do I know that? Well…
I was kind of a miser as a little kid. I loved making and saving every bit of money that I could get my hands on.
After I was married, my dad called me and told me he had just found a mason jar in his closet that I had asked him to keep safe for me when I was about twelve years old.
It had over $700 in it, which was very helpful to a newly married couple living on a small income!
That wasn’t all the money I had saved as a child, I had some healthy bank accounts as well from birthdays and jobs anyone would give me… this was my *extra savings*.
I was glad that I had chosen to save more than 20% of my income as a kid when I didn’t have expenses.
8) Spend Third- 70%
This is the category everyone is most excited about, which is exactly why we need to save this jar until last (teaching children about self-control, anyone?)
This jar is for anything and everything that their little hearts desire. (Within reason, of course, Mom and Dad have veto power in our house.)
Anytime that our oldest decides that she wants something and a Birthday or Christmas is nowhere in sight, we tell her “You’re welcome to earn some money to buy that!” or “You can use the money you have in your spending jar if you’d like.”
Then she has a choice to make about how she wants to spend her money.
Often she decides she really didn’t need it in the first place, and other times she starts finding ways to make money.
7 Ways to Teach Children the Value of Money
Now that you know the process for teaching kids how to allocate money when they have it, here are Seven Additional Ways to teach them about the value of money.
1) Give Them Ways To Earn Money
In our house, chores are compulsory.
They aren’t optional, debatable, or up for discussion.
They are a way that we can all participate in making the house run smoothly.
However, once their daily chores are completed, they can earn money by doing extra, more involved chores.
When my oldest daughter told me that “her kids” (her dolls and stuffed animals) needed Christmas presents this last year, I told her she would have to earn some money if she wanted to buy them presents.
(I explained that I already had bought Christmas presents for my kids and I hadn’t planned on spending any money on hers.)
I was deep cleaning my kitchen at the time and told her I would pay her for helping me.
Pro Tip: Don’t overpay your children just because you love them and are proud of them for trying. Use this as an opportunity to teach them that they have to work hard for money and pay them for their skill level. If you overpay them, they will expect making money to be easy when they get a job and not be prepared to put in much effort.
Since she was only four and needed a lot of assistance, I paid for the effort and the principle of working for money more than actually paying for the help I received.
After she had her money, we went to the dollar store and she found her kids some cars and stickers.😂
She was so proud of the presents and wrapped them up and helped Little Jane (her favorite doll) open them on Christmas.
I don’t think she would have been as excited to give them the gifts if she hadn’t worked hard for the money herself.
2) Let Them Buy Things
Later she wanted a watch because most of her little friends had received them as gifts.
We told her how much money she had in her jar and let her do some shopping. (She ended up shopping with our help on Amazon because that seems to be the only place to find things that don’t have branding all over them…)
She picked one that she liked and was within her budget and waited anxiously for it to come!
The day that it came, we let her open the package, then told her to get her money. Ross had her count out the exact amount of money that she needed to pay for the watch.
After she counted out 14 dollars she said “But that’s all my money!”
We reminded her that we had told her that this would take all of her spending money as she was watch shopping. We told her if she wanted the watch, she had to trade the money for it.
After weighing for a minute if it was worth it or not, she decided that she wanted the watch.
That’s exactly what we want to happen! We want our children to realize that everything that we buy has a cost.
3) Set Boundaries with Gifts
Setting boundaries with birthdays and Christmas and any other holiday presents is an important step in teaching children the value of money.
If every holiday they receive anything and everything on their wish list, they won’t see any need to be careful with their own money.
They also won’t learn how to weigh out different options and make a decision about which item they would like more. This is a valuable tool that many children are missing out on because of so many generous people in their lives.
If a child wants a bike and a scooter for his birthday and ends up with both because each set of grandparents got him one, he didn’t have to learn to save his money and decide which one he really wanted.
Sometimes it can feel uncomfortable to have a conversation about keeping gifts to a minimum.
While you certainly don’t want to hurt anyone’s feelings, we have had great success with having honest conversations with all the grandparents in our girls’ lives.
More often than not, family members will understand and appreciate the values you are trying to instill in their grandchildren.
We still get our girls’ birthday presents, and sometimes large ones, but we usually have all the grandparents go in on one gift if it is a large item instead of having every one of them get several individual smaller gifts.
This allows the girls to have the opportunity to save their money for things when they want them. (Plus this helps keep the clutter under control!)
4) Talk About Money
Money is something that we talk about in daily life.
When the girls ask to go out to eat, we explain to them that it costs a lot more money to go out than it does to eat at home.
When they ask for something new, we explain how many dollars it would cost them and ask if they would like to do some work for it.
When they ask why Daddy is at work all day, we talk about how everything in life costs money and he is making money so we can afford our house, food, and clothing.
As they get older, the conversations will change and get more specific. But I don’t think children are ever too young to start learning that money is something that has to be worked for.
5) Get More Jars
As soon as they are old enough to want some larger items like a bike or scooter, show them how they can separate out some of their spendings to save for a larger goal.
Grab an extra jar, label it with whatever their goal is and help them decide how much of their spending money they want to save for the big item. A good start is 50% toward the goal, 50% in their regular spending jar for smaller items along the way.
Note that this is 50% of their Spending Money. So separate out the 70% for spending, then split the 70% up among the spending jars.
Let them have a say in how they want to save for the larger item, if they want to put everything toward their bike, they will get there faster!
The older children get, the more items they will want. Let them use several jars to keep track of how much they have saved for each specific item.
It will be more motivating for them to be able to see the separate amounts and know where they are in relation to each goal than it would be to throw it all into one pot and guess how much they have.
6) Help Them Set Goals
Sometimes children get stuck on buying trinkets and have a hard time realizing how much more fun they could have if they used their money for larger items.
Try suggesting some larger items that you know that they would enjoy spending their money on.
Depending on their age, have them consider a watch, a fun dress, a new bike, getting a pedicure…the sky’s the limit!
7) Get Bank Accounts
Once the Savings and/or Spending jar is full, help them set up bank accounts.
Especially for savings, having a bank account will keep them from wanting to dip into their saved money and use it for spending.
It can also be a good idea, as they get older, to get them a checking account for their spending money, but I wouldn’t do this until they are old enough to understand more abstract concepts.
They need to be able to understand that the money is in their account at the bank and that they are still exchanging dollars for goods even though they are only using a card.
If they are saving for a large item and you want to keep the money safe until they are ready to purchase… but you don’t think they will understand the concept of a bank card yet; you could always open a checking account for them. Then before they are ready to buy, take them to the bank to get the cash. This will help them see the money in action.
You May Also Like to Read…
10 Reasons You Should Make Bread With Your Kiddos and 9 Practical Ways to Teach Your Children Self-Control.
If you want a more detailed explanation about the 70/20/10 rule, check out How to Use Budget Percentages to Build Your Budget: The Secret to Sticking With Your Budget from the Start.
And if you’d like to get started creating your budget, read How to Start Budgeting: a Beginner’s Guide to Creating a Budget, Cutting Costs, and Saving Money.
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