Teaching Financial Literacy To Kids: Earning Money
Little kids know you get money from your wallet and the ATM machine, but they may not understand that money has to first be earned. Explain that most adults get a job so they can earn money, called income. Sometimes people get paid a certain amount of money for each hour they work (a wage), and other times they earn a set amount of money (a salary) no matter how many hours they work. Different skills are needed for each job, and often people choose a job (short-term employment) or a career (long-term employment) based on their interests and skills. Some people go to extra school when they are older to learn certain skills (e.g., doctors, engineers, teachers); other people learn skills through experience.
Explain what your job is and how you are paid (you do not need to give money details). You might say, for example, "I work at the dentist’s office. I get paid for each hour I work, and I work about 40 hours every week. At the end of each week, I get a paycheck. Our family uses the money to buy the things we need and some of the things we want. We also save some money each week so we can use it later."
Explain that sometimes adults (and even teenagers) use their special talents to start their own businesses. People who start their own businesses are called entrepreneurs. When you are an entrepreneur, you are your own boss and have to make lots of important decisions, and you may not earn the same amount of money each week. There are lots of different types of entrepreneurs, from people who open up a candy store to those who explore space.
Once kids understand that people have to earn money, they might be interested in learning how they, too, can earn money - right now and in the future. For now, you can discuss an allowance, or doing specific jobs around the house and yard to earn a little bit of money. Often, kids get money for birthdays and other holidays. It is exciting for children to discover all the ways they can make money. You can support your child’s entrepreneurial spirit by discussing any ideas he or she may have for a small business and encouraging creativity. If your child wants to open a lemonade stand, for example, help him or her - don’t do all the work, but provide direction and suggestions along the way to make it a valuable learning experience.
Not surprisingly, most children have a lot more respect for their own money than they have for yours. In other words, that toy might be something they have to have if it’s your money - but they might be able to live without it if it involves their money. Even if kids are expected to contribute a small amount of money towards a purchase, they may be able to decide they don’t really need the item.
Most kids like to talk about what job they would like when they grow up. Point out that they don’t have to make a decision just yet, and get them thinking by asking questions such as:
- What are your favorite subjects in school?
- Why do you like those subjects?
- Can you think of any jobs that might relate to those subjects?
- What are your favorite hobbies?
- Can you think of any ways to turn a hobby into a job?
While many parents would be excited to hear their child wants to become a doctor or an engineer, it’s important to maintain interest and enthusiasm for any idea they have - even if their dream job sounds terrible or ridiculous to you. Keep in mind, a lot will change between now and when the time comes to settle on a career path. It is helpful at this point to allow kids to freely explore different ideas for careers, and rather than make any judgments about a particular interest, you can discuss what it would be like to have that job. A careless, "You don’t want to do that. Do you know how many years of school that would take?" or "That’s a bad idea. You’ll never make any money" can be enough to crush a child’s confidence and creativity. Listen, discuss and allow them to draw their own conclusions. Your reaction can have a lasting impression.
A weekly allowance can be an excellent tool to help kids learn money management skills. Since small kids have little opportunity to "earn" money, and an allowance provides the money they need to practice saving and making good spending choices. The amount of money you give your child will depend on things such as your financial situation and how much money you think your child can manage, but a general guideline is to give 50 cents to $1.00 for each year of age.
Regardless of how much you decide to give your child, make a habit of "paying" him or her on a regular basis - for example, every Friday - and increase the amount of money as he or she gets older. Birthdays are a great time to do this since your child will have graduated to the next allowance level.
There are a couple schools of thought when it comes to allowance and chores. Some people believe it’s appropriate to pay an allowance based on the completion of certain chores, since it allows kids to see the relationship between working and getting paid. Other people believe that kids should be expected to help out with household chores, and paying them to do something they should automatically be doing sets a bad precedence.
If you choose to give your child an allowance, you will have to decide if you want the money tied to any housework or chores. The important thing is to be consistent; if allowance is not tied to chores, don’t withhold payment because they didn’t make their bed. If your child is expected to "earn" his or her allowance by doing chores, don’t pay them - or pay them a pro-rated amount - if they do not complete all their jobs on time.
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