Money Management For Kids — Budgeting

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Children are good imitators. If a parent wants to teach financial literacy for kids, parents should start from themselves. Give examples about financial habits, begin with simple things.

This post can be used as a reference for budgeting for kids age 8+.

1. Pay “fixed salary” to kids

Many adults earn fixed income from their salary. Naturally, adults made a budget for expenses not to exceed the salary. Parents can do the same behavior for kids. Introduce an allowance system so children could learn to live within a budget.

Instead of giving money piece by piece, every time the kid asks, give them a “salary”.

Pay their allowance in bulk and told them that the bulk amount is all the money they would get for a certain time, and that it was up to them to manage it. Be a responsible parent though, by giving them advice on how to manage their allowance, but don’t decide for them.

Give their bulk allowance in cash, as it is easier to learn and manage something visible like cash.

In the beginning, start with a shorter period. For example, if the kid monthly allowance is 400 / month, parent might use this schedule:

  • Month 1–2 : give bulk allowance once a week (100 / week)
  • Month 3–4 : give bulk allowance once every two weeks (200 / 2 weeks)
  • Month 5+ : give bulk allowance once month (400 / month)

So the kid got two months to be accustomed with the bulk allowance pattern, before continuing to the next level.

# 2. Budgeting

Give the kid three transparent, empty jars. Label them:

  • Saving
  • Spending
  • (Optional) Giving

The “Giving” jar is optional. Some religions or culture, or just family habits, might set aside a portion of income to those in need. In such a case, a “Giving” jar can be used.

Those jars are the budget posts, where kids can only take money from a certain jar to be spent. Use a transparent jar, as kids need to see how much money is left (or exists).

All three jars need to be treated differently.

When receiving the bulk allowance, ask the kid to put a portion into the “Saving” jar first. This is to build the money habit “Pay yourself first”, and not spend all the money the kid has at once. Tell kids that this “Saving” jar is not allowed to be used, unless he really needs it. For example, if the kid wants a toy, ask him to save a portion of his allowance to the “Saving” jar every time he receives an allowance, and purchase the toy later when the “Saving” jar has enough money. Give him an understanding that the “Saving” jar is used to accumulate money to be used later. I suggest at least 20% goes to the “Saving” jar.

If you use the “Giving” jar, ask the kid to put a portion into the “Giving” jar. Depending on your family habit, “Giving” jar can also come first, and “Saving” jar second. Tell the kid that the “Giving” jar is not for him. He will not receive anything tangible by putting money in the “Giving” jar, but he will help other people who need it. So he must give the money sincerely.

Last is the “Spending” jar. This must come last, to form a good money habit. Tell the kid that a “Spending” jar is money to buy items he’d like. But don’t spend anything at once. A simple explanation is using daily budgeting. If the kid has 70 weekly allowance for the “Spending” jar, tell him that spending all 70 upfront means he will not get any money until the next week, so if he receive allowance on Monday, and spent all “Spending” jar at Tuesday, he will have no money for the rest of the week. To help him, parents can keep the “Saving” and “Giving” jar, so the kid will not be able to take money from the other two jars. Another way to help the kid is by teaching him to use daily budget limits. If allowance 70 / week, means the kid can only spend at most 10 / day.

An older kid with a smartphone might be given spending tracker apps. There are a lot of free spending tracker apps for android / iPhone. Older kids can then track their expenses. This step is entirely optional.

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