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Teaching Kids About Money and How Money Works

May 17th, 2010 - Category: Money

My senior year of college I took a finance class where I learned about money and how it works. It wasn’t until after this class that I realized how much I wish I had been able to take a class like this in High School. Teaching kids about money and how money works is so important.

Knowing the value of a dollar can empower kids to do great things and helps them appreciate what they have now and prepare for what they must do in order to have it still in the future when Mom and Dad are not around to provide for them anymore. So what is the best way to teach kids about money? How do we help them understand that money does not grow on trees and that all they enjoy now is a result of hard work and smart financing?

What is a Bank Account?

One of the first things children should know is how a bank account works. It’s easy to think that a plastic card is a ticket to ice cream and toys, but it’s important to properly educate your children on how a debit card works. They need to know that it is linked to an actual bank account that gets depleted and has to be continually added to through working and receiving pay. They also need to clearly understand the difference between a credit card and a debit card.

There are some good bank account board games out there to help teach children how bank accounts work.

Another good way to help children understand this is to set up a mock bank account for them where they keep track of incoming and outgoing money. You can use your chore chart to assign a weekly/monthly allowance. They get a “check” to deposit into “your” bank account and they receive a statement. When they want to purchase something, they can write a check to you for money or for a trip to the store. This way, they learn to balance a checkbook and they also learn the process of working for what they desire.

The Importance of Saving

After you have set up a virtual bank account for your kids, stress to them the importance of saving. One of the biggest problems in society is that we do not save money for a rainy day. When hard times come (and they always do) it’s important to have some sort of nest tucked away in order to maintain the essentials like food, clothing and any permanent bills you may have.

A good rule of thumb is to save 10% of all you earn. Teach children that as they save a small portion of each pay check (allowance) it will continue to grow and grow. Consider offering them a percentage increase on saved funds. Make it a sizable percent to re-enforce that saving money actually makes your money grow exponentially.

The Power of Investing

Once they’ve caught the vision of saving and letting their money work FOR them, introduce to them the concept of investing money in things that can help their money grow even faster. You should make the decision on what age to introduce your child to the stock market and the idea of investing as each child’s understanding is different. However, the sooner they understand this the better.

There are a ton of online “mock” stock markets where you can invest funds in certain stocks and see how well you do with investing in certain companies. You could encourage your children to try these out. Also, talk to them about investing in material assets and businesses.

If they love reading comics, encourage them to invest in buying books in bulk so they can rent them out to their friends. They’re friends can rent them from you for a cheaper price than buying them new and once you’ve read it once you don’t need it anymore anyway so they wont have a problem returning it so that you can rent it to the next person. teach them that investing in a business can help them earn recurring revenue.

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4 Comments

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  2. Carolyn says:

    I believe the most important thing is to teach our children that it is not just about money but about choices having to do with wants and needs. The idea of choosing one thing over another. My husband and I have struggled with finances for a while now. We are now mending our finances and teaching our children at the same time.

    We used to tell our children that we cannot afford the item. In this healing process now we say would you like this or that.

    Do you want to eat at McDonald? or save for a family vacation?

    We have found it helpful to all work together and enlist our children’s help in overcoming this. We hope and pray that they learn the importance of this and not make the same mistakes we did.

  3. Calculate Credit Card Interest says:

    I had similar thoughts to you regarding how I wished I was better educated as a kid about money management. I agree with your overall thoughts on what we should teach our kids. I actually came up with a series of articles of how to teach kids about money. When you get the chance, please take a look and give me your thoughts. I think teaching kids about money is only recently getting recognized and we need to keep promoting it. Good article!

  4. Kiddy Money Mentor says:

    I could not agree more on the post as well as the above comments. I too only realized the importance of early education on money when I get to college. I felt strongly that if only I got educated about money, I would have done alot better financially. However, we could take this as a valuable lesson and try to do better with our children. Teaching kids to save , budget money and beyond can very rewarding for both parents and kids. Those kids who get taught about money will appreciate their parents for life.

    Like the comment above, we need to keep promoting on teaching kids aboue money as this area of education is somewhat undervalued and not recognized enough.

    Happy teaching!

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