Ages 7-13 — Earning and saving
Here are 6 ways to teach the next level of money lessons as children become more aware of money. These lessons are important because they help form money values before the high-pressure and more expensive teen years. Each link brings up a short paragraph or two.
Allowances can start as early as age 4, when a child becomes aware of money. How much? The size of the allowance depends on two factors:
Money and work
Children should be assigned everyday chores: like clearing the dinner table and taking out the garbage. Such small chores help run the household, and therefore should not normally be considered paid work.
However, you should pay for larger projects, like reorganizing the garage or weeding the garden or waxing the car. Paying for larger "jobs" teaches your child about taking initiative and earning. You may find that when your child needs money, he or she will come to you looking for work, rather than a handout. Such action is the beginning of a work ethic. You are helping kids make the connection between work and earning.
Money is limited
Bad habits are tough to break. Let life teach financial lessons. Don't give in when your child has run out of money and wants an "advance" or a "loan" to buy a shirt or go out with friends. If you fork over the money, you encourage overspending and spoil the financial lesson your child has created for him/herself.
Unhappy consequences are great teachers, and a child's sense of deprivation lingers, reminding kids to keep money on hand for the unexpected. Let a night at home or foregoing the shirt teach the lesson, not you.
Put earnings to work
Depending on your child's age, encourage doing odd jobs for friends and neighbors or taking on a part-time summer job. Your youngster will enjoy using part of the earnings to buy something on his or her wish list. Promote putting part of the earnings in short-term savings as well as in a CD or other investment. It's important to teach children to save for the future as well as live in the moment. It's a habit that will serve them all their lives. Start early by building a four-bank system.
Try a 401(kids) account
"Matching" programs modeled after employee-benefits programs offer strong incentives for saving. Consider matching every dollar your child puts in savings. His or her balance will grow faster, adding to the thrill, and your contributions will emphasize the importance of saving.
Later, if your child is fortunate enough to work for an employer who offers a matching program, your child will understand the value of taking full advantage of this opportunity to grow savings. Huge numbers of employees these days miss out on this "free" money because they spend their salary rather than put money away for the future.
Money's for more than spending
Too many kids regard an allowance as a sum of money that they can just spend on fun things: pizza, movies, video games, entertainments of all kinds. When they have spent their allowance, they wait for the next pay day. In adult parlance, kids are treating allowances as 100% discretionary income. They won't be able to use their paychecks like that. Children must learn that they can do more with money than spend it.
The idea of an allowance is to learn how to use money. Build a four-bank system. This bank will teach your child that money has four uses -saving, spending, investing, and donating – the basics of asset allocation. Children should learn this lesson at an early age and build on it as they grow. It forms a solid platform for managing money.