Teaching Young Children to Budget (Ages 3-9)

Aunt Jessica sends $10 to her nephew on his birthday.  Grandma sneaks him a $20 when she comes to visit.  He collects cans in the neighborhood and recycles them for a whopping $1.20.

In our culture, our children often acquire money through various means.  What should they do with it?  What should we do with it?  Should Timmy spend that $20 from Grandma on a new toy? Or should it go in the bank?  After all, Timmy is 7 and he really doesn’t need a new toy.

As soon as your children begin to acquire money, they should have a plan for what to do with it.  Which means you, mom and dad, need a plan for how to shepherd them in this endeavor of wise money handling.

You already have your jars set up, now what?

The answer to “Now what?” will depend somewhat on the age and understanding level of each child.  Children as young as 3 can begin to take an active role in money management.  Your 2-year-old may even get on board.  On the upper range, at around age 10 is a good time to tweak the procedure.  So in general, this is how you can walk your child through handling their money from ages 3-9.

As money comes to your child, whether birthday money from Grandma or payment for chores or earnings from other work they may do; however the money comes in, teach them to place a certain amount in each jar.  At this age, it isn’t about percentages, it’s about creating a habit.

So let’s say Sally receives $10 for her birthday; exchange that $10 bill for 10 x $1 bills.

Now have Sally take out her money jars and open each one.  Lay the bills in front of her and instruct her, “Sally, place one dollar in giving.  Great, now place one dollar in saving.  Wonderful, now place one dollar in spending.  Fantastic.  How many do you have left?  That’s right, you have seven left, let’s count them.  Okay, now with the rest of the money you can put each bill wherever you would like.  If you want to put all in spending, that is okay.  If you want to put one in giving and one in saving and then place the rest in spending, that is great. You can even save all of it if you prefer.”

You get the idea. She is first and foremost getting into the habit of allocating money for giving, saving and spending. but secondly and importantly, she has some freedom over her money.  This second aspect is so very important.  When your kids are young you can tell them what to do.  You can require them to put $2 here and $4 there, but unless they develop the habit for themselves and understand why they are going it this way, the behavior to give, save and spend will not stick.  Lacking the understanding and/or the discipline of allocating their money in a particular way, the 20-year-old version of your child may spend every cent and never have a reserve fund for the inevitable emergencies that come.  Or, more rarely, my save obsessively, and never enjoy the money they worked so hard to earn out of fear.

So during these younger years, focus on the habit they are forming.

Each time they sit down to allocate their dollars, go through the jars in the same order.  This will reinforce the priorities of giving first, then saving then spending.  While you may flip the first two, spending should always come last, as it is done with the remaining money after the first two priorities are taken care of.

As they get used to this process and as they go from age 3-years-old to 5 to 7, this process will become second nature and you will not need to walk them through it.  But regardless of age, if this is a new concept, it is important to walk them through the process at least the first few times so that they understand not only WHAT they are doing but WHY they are doing it.

This is a great age and stage to open a savings account for your child as well.  When their saving jar gets full, it’s time to head to the bank and make a deposit.  Help them to understand that the bank will keep their money safe.  You can show them their bank statement or passbook (if your bank does that) and let them see their money increase as the interest gets added to the balance.  They will soon grow excited over that number and watching it increase.