Wednesday, May 9, 2007

How to Teach a Child to Manage Money and Save

The easiest way to build wealth is to start early and save often. A child who learns basic money management skills will spend sensibly and save as soon as he or she enters the adult work force. A person in his or her 20's that has the habit of saving and investing will benefit from a lifetime of good money habits. How do you teach a child to manage money?

1. Give the child an allowance and a piggy bank. After the child has learned to count (at least up to 100), and is familiar with cash (coins and bills), give the child two things simultaneously.

First is an allowance appropriate to the child's age. At age 7, 8 or thereabouts, something like $2 a week might be a good place to start. That's enough to buy a few little things, but not enough for the little one to get into trouble. This allows the child to become familiar with money.

Second is a piggy bank. It is important for the child to understand from the outset that money can be saved for future use and that saving some or all of the allowance will build up money for more expensive things. The child will learn very quickly to think about money as a resource that can be conserved and made to grow over time.

It's important to give the child the allowance and the piggy bank at the same time. Receiving money and saving it should be associated in his or her mind from an early age.

2. Hold the Line on the Allowance. If the child spends all of his or her allowance and then wants a supplement before next week's allowance, don't give in. The child should learn that money is a limited resource and must be spent wisely. Increasing the allowance as the child grows older makes sense. But whatever the amount, don't supplement it. It's important for the young one to learn how to control the impulse to spend.

3. Encourage Math Skills. All aspects of handling money--spending, saving and investing--require an understanding of math. Basic elementary school arithmetic--addition, subtraction, multiplication and division--is sufficient to handle most daily money problems. A middle school level understanding of decimals, exponents and how to read charts and graphs is helpful to understanding investments. Financial markets enthusiasts and Wall Street professionals often use more advanced math, such as statistics and differential equations. The more easily a child grasps mathematical concepts, the better prepared he or she will be to deal with money and investments. It helps if the child can do simple arithmetic in his or her head, without the need for a calculator. Make a game or contest of memorizing multiplication tables; your child will reap a lifetime of rewards from this bit of knowledge.

4. Have the Child Open a Savings Account During High School. Many parents give their kids credit cards (usually with a very small limit) at some point during high school. This isn't a bad idea, since it helps the child to learn about the modern financial system. But don't just give the young one the means to spend. Teach the child how to use the financial system to save and build wealth. Many banks offer special interest bearing accounts for children that allow very small balances without any fees or charges. These accounts can sometimes be opened for as little as $25 or $50. Make sure your child has one, preferably during high school. Watching the balance grow and accrue interest will teach your child about the process of building wealth. This is something a young person should understand before going off into adulthood.

5. Set a Good Example. Kids take after their parents. We all know that. Set a good example for your kids and be sensible about money. You'll not only be rewarded with financially skillful children, but may boost your own retirement portfolio in the process.

For more ideas about kids and money, check out Kids & Money at

For more ideas about money and personal development, check out the Personal Development Carnival:

More on Kids: Children conceived in the summer tend to do less well on a standardized test. See Hmmmmm. Well, summer's not a bad time to take cold showers anyway. But health care workers beware. There could be seasonal layoffs in the maternity wards from March through May.

Strange News: For all you fashion plates, read the latest about antibacterial ties: Is someone getting a little too obsessive?

No comments: