Four Practical Ways to Lay the Foundation for Fiscal Responsibility at a Young Age
Financial Planning for Kids – Ages 5-8
September 21, 2023
8-year-old: "Dad, I really want the new baby Yoda toy, but would I need to buy that with my own money?"
Dad: "Yes, that's what we agreed on. Your allowance is for toys you want to buy when it's not your birthday or a holiday."
8-year-old: Thinks about it for a moment, then, "eh, never mind. I don't want it that bad. But you know what Dad? I can't wait until I can make my kids buy their toys with their own money."
This conversation was shared with us about a year ago, and it still makes us laugh. It's one thing for a young child to grasp needs versus wants, but this little girl took it to a whole new level sticking it to her future kids!
While kids may put their own unique and comical spin on money concepts, it is clear through our work with clients that when intentional money conversations happen consistently, children can exhibit fiscal responsibility at an early age. Naturally, everyone wants to see that in their older children when the stakes become higher, but to achieve that by the teenage years, ideally, we should start teaching those lessons at a much younger age. The likelihood of raising teenage stewards is significantly higher if we lay the foundation early on. Remember the Marshmallow Experiment's longitudinal results from our last article? Plus, according to a study conducted by the University of Cambridge, most kids can grasp concepts related to the value of money by the age of 7.
So how can you start? We have four practical ideas that you can easily implement today specifically for children in that 5-8-years-old range.
Play with Money Math
Elementary age children will be learning basic addition and subtraction at school, so why not teach it at home using coins and dollar bills? You can set up problems such as:
- How can you make one dollar using only coins?
- Ask them to use coins to get to a specific sum, for example: $0.65, $1.12, $1.40, etc.
Then, create a store within your home, and give them money to make purchases, but not enough to purchase everything. This leads to the second idea: wants versus needs.
Teach Them About Wants Versus Needs
In your household store, include items that fall into both categories of “wants” and “needs.” See what your kids gravitate toward. Have a conversation afterwards and explain that money is not just for buying things we want. We also have things we need, like food, clothes, or gas for our cars.
Start the shopping activity over, but this time, give parameters around items that are needs that must be purchased. This time, they will have less money for their wants and will have to make some tough decisions. This also sets a foundation for budgeting skills which we will dive deeper into on a future article for 9–13-year-olds.
After the activity, help them understand the needs that you cover as the parent(s) of the household, without creating a guilt complex in your children. For example, this is something you gladly cover because they are your children, but in time, you will transition these responsibilities as they begin working and earning income.
Next, lay the ground rules for when you will buy "want" items for them and when they will be responsible for doing so. The story at the beginning is one way you can go about this, but this is a personal decision. If you want them to be responsible for some purchases, this will require some form of allowance so that they have personal money they can save and spend. This leads to our next exercise…
Help Them Understand the Value of a Dollar
If you want your kids to learn how to save for things they want, they will need to have income. That could come from a lemonade stand, allowance, or something else. Regardless of the source, you can teach them a connection between some form of input on their end and the time required to earn a certain amount.
Once you know how they are going to earn some income, have your children set savings and major purchase goals, then help them lay out a game plan for how to accomplish them. Be a source of encouragement, model hard work, and show them that it pays off. Celebrate their success when they hit a goal.
Challenge them to set the next goal, but balance the hard work with contentment, enjoyment, and gratitude. We don't need 7-year-old workaholics!
Show Them How to Balance Saving, Spending, and Giving
One way to promote a healthy balance with money is the jar method – give them three jars, one for saving, one for spending, one for giving, and help them decide how to divide their allowance or other income based on their goals.
Savings Jar: it is important to teach your kids that they should not only save for short-term purchases, but instead, that we all need to save for longer-term goals too. Maybe that’s a car purchase, maybe it's college – give them examples of larger expense items you personally chose to save money for. The little they save in their jar at this point for long-term goals is somewhat irrelevant, but it's building a great long-term habit that will set them up for success when they start making real money. Shoot for 10-20% as a target for this jar.
Spending Jar: This is where kids can save for the “wants” in life. Show them that some wants cost more than others and to save for the more expensive wants it is important to delay gratification and not buy all the little toys along the way.
Giving Jar: We hear often from clients that they do not want their kids to become entitled. One of the best ways to avoid this is by helping them think outside of themselves and develop a giver's mindset. Help them decide how much of their money they would like to set aside for helping others and come up with specific ways they can use their resources to benefit others in need – perhaps they spend the money in the giving jar on a toy to donate during the holidays, or maybe they purchase one of the pre-packed bags of food at the grocery store to give to a local food shelf. Let them choose something that is meaningful to them and make sure they participate in the actual process of “giving” the money from the jar.
Additionally, you can even get your children involved in bigger family charitable giving conversations. Pick out organizations you want to support financially, share with your kids the impact your giving will have, and as much as possible, get out and volunteer so they can see the tangible impact giving back has on less fortunate groups. Hopefully, gratitude will follow.
At this age, it is not about being perfect, but it is important to know that kids are old enough to understand money concepts and that there are many teachable moments you can lean into and incorporate in everyday life. When done right, your children will even find these teachable moments to be fun, and when lessons are fun, knowledge tends to stick. If you’re interested in having a discussion around crafting a custom plan for your kids, schedule time with us today. After all, every child is unique, and much like your planning requires customization, so does theirs.
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