When kids have money - whether it’s a small pile of coins or a stack of bills - their inclination may be to spend it all on toys and candy and whatever else looks interesting at the moment. This is supported by the many parents who enthusiastically (and innocently) ask, "What are you going to buy?" when their children receive gifts and other money. While there is nothing wrong with finding out how your child wants to spend his or her money, it’s only one part of the equation. Rather than focusing solely on spending, we can help our kids now and in the long-term by giving attention to saving and sharing as well (attention to investing will come at a later age - discussed in our Teaching Financial Literacy To Teens guide).
If asked how they are going to spend their money, some kids will get the wrong idea and believe they have to spend the money: they may think it’s the only option. It’s like putting a pile of jellybeans in front of a kid: many will eat the whole pile in one sitting rather than risk losing them (i.e., other people in the family will eat them). It is critical that your child understands there are more options for money than spending.
An excellent idea to introduce is spending, saving and sharing predetermined percentages of their money. The spend, save, share system helps kids figure out what to do with their money and can go a long way toward setting up financially responsible habits. Remind your child that we all have to make choices with our money and three broad choices are to:
- Spend - purchase goods and services to satisfy needs and wants
- Save - set aside money for future needs and wants
- Share - donate money to help people, animals and the environment
The percentage allocated to each category is up to you and your child, and may depend on what expenses you expect your child to cover out of his or her money. For example, if your child is expected to pay for all of his toys and treats except at birthdays and holidays, you may aim for a higher spending percentage. If your child pays for very few things, a higher percentage for saving may be appropriate. You might want to discuss and demonstrate how you spend, save and share. While you don’t have to give dollar amounts, you might say something like, "Out of each paycheck, I spend 50% on our family’s needs and wants, put away 40% for savings, and share 10% to help other people (or animals, the environment, your house of worship, etc).
Appropriate percentages for kids might be different than yours since your financial obligations and budget are very different. Kids might aim for something like:
- 40% for spending
- 50% for saving
- 10% for sharing
If your child receives $10 each week for allowance, for example, $4 would go toward spending, $5 for saving and $1 for sharing. There are a number of systems your child can use to keep track of his or her money:
- Three jars - labeled "Spend", "Save" and "Share"
- Three envelopes - labeled "Spend", "Save" and "Share" and all kept in one larger envelope
- Piggy banks that are divided into three sections (search for "spend save share bank" on Amazon.com for ideas)
Remember, older kids and teenagers will be ready to add a fourth category - invest - to their money choice system (so it would be Spend, Save, Share and Invest). If your child is ready for this, allocate the percentages accordingly (for example 40% spending; 40% saving; 10% sharing; 10% investing) and make sure he or she has four jars or envelopes to use instead of three. Some of the divided piggy banks are available with four sections instead of three to include investing. Kids and parents can also track money online using Web sites such as www.threejars.com.
Ideally, over time, your child will automatically think of every dollar her or she earns in terms of spending, saving and sharing (and eventually investing). The percentages may have to be adjusted periodically to reflect your child’s current earnings, financial obligations and short-term and long-term goals.
Saving for a Rainy Day
Financial experts urge adults to build emergency funds that will cover living expenses during a break in employment or to pay for unexpected expenses, such as car repairs or medical bills. While many experts recommend putting aside three months' worth of living expenses, this amount would fall far below what many people would need in case of an emergency. It is a good idea to save more if you are able to do so.
Your child might also benefit from a fund, though theirs will more accurately be a rainy day fund rather than an emergency fund. Explain to your child that unexpected opportunities come up - such as their favorite musician giving a performance in town, or a school event they would like to attend - and the only way to afford these "sudden" expenses is to have money set aside to begin with. It's another great reason to save a portion of every dollar that comes in.
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