Money is one of those big concept topics like love or time that aren’t always easy to explain to kids. This post will show you how to explain money to a child in a way they will actually understand. You want to teach your kids to be good with money, and there is no time like the present! Start teaching your child financial responsibility now, and set them up for a lifetime of good money habits. Let’s go!
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How to Explain Money to Kids
Have you ever noticed how some kids hoard their money, and others never have a dime?
Why will one child diligently save up for a toy they want, while another will fritter away their allowance and wonder where it all went?
Of course, we all know adults like this, but how can you influence your child’s money management habits early, helping them become responsible money managers at an early age?
This post will show you how to teach your child financial responsibility.
And nope, it isn’t too early to start teaching your kids about money. There are ways to even teach preschoolers about money in a way that is age-appropriate and will make sense to them.
Related reading: Creating a Monthly Budget: Easy Steps to Get Control of Your Money
How to Teach Your Child Financial Responsibility
One of the ways for how to explain money to a child is by using an allowance.
There are LOTS of different opinions when it comes to giving kids an allowance (or not!).
To read more about the advantages of a weekly allowance for kids, check out this post.
Giving an Allowance without Guidance
Some adults give their kids an allowance each week and let them just spend it as they want. “They’ll learn…” the parents say. The kids will learn – at least they’ll learn to spend their money!
But without any guidance, they may never learn to spend it responsibly and balance short-term with long-term money goals.
Related reading: Personal Budgeting: 3 powerful tips to get control of your money
What can happen with the No-Allowance Method
Other parents choose not to provide an allowance at all.
In this case they provide the child’s income and have more control over what the child spends it on. While this does greatly reduce frivolous expenditures, it also doesn’t give the child any sense of ownership for their money decisions.
Also young kids might not understand a parent’s decisions on what to spend – or not spend – money on.
“I want the blue ball, Mommy…” your child may plead.
“No, you have four balls at home already….” You say firmly.
“But I want the Bluuuuuueeeee one….” The child whines, creating a major scene in the store.
The temptation might be to buy the blue ball, just to stop the scene.
But that only reinforces to the child that Mommy will buy them anything they want, and if resistance is encountered, always whining works!
When you’re a child, and you’re drawing from a seemingly bottomless money pit, it is hard to understand why one purchase is approved and another denied.
Related reading: Best Personal Finance Apps to Manage Your Money In These Crazy Times
How to Explain Money to a Child Using an Allowance
One effective way to teach children about money management is to give them a regular, consistent allowance.
Children can plan ahead for their allowance, budget for bigger items they want to save for, and choose between smaller impulse buys based on their available funds.
Compare the situation above with this one.
“I want the blue ball, Mommy….” Your child may whine.
“Okay, did you bring your wallet?” you ask the child.
“Yes, I have it right here.” The child replies, holding up their wallet.
“The ball is two dollars. How many dollars do you have?” you ask.
“I have eight dollars.” Your child says, counting their money.
“Okay, you have enough dollars to buy the ball. But if you buy the ball, you won’t have enough dollars to buy the airplane you’re saving for. Do you want to buy the ball or save for the airplane? You already have four balls at home….” You remind your child.
“How much is the airplane again?” He asks.
“The airplane is ten dollars. You’ll have enough to buy it on Friday if you don’t buy this ball.” You remind him.
“Um, I’ll save for the airplane…” your child says, putting the ball back.
Related reading: How Much Money Should You Save for an Emergency Fund
Explaining Money to a Child Involves Letting Kids Make Money Decisions
Think the above example sounds impossible?
This very discussion was overheard in the grocery store with a four-year-old boy and his mother.
Remember that it’s important to be firm – if your child buys the ball and then later wants to get the airplane, you will have to remind him that he made his decision. You can remind him that he’ll get his next allowance on Friday (or whenever) and that then he’ll have enough money left for the airplane.
As a parent, one of the best parts about this is that it takes the weight off of our shoulders.
If you don’t want to spend your money on yet another ball, you give the decision to the child.
Of course, there are times when it’s nice to provide special toys and gifts for your children – but teaching your child to manage their own money will help you more easily say “No” to impulse purchases!
Related reading: Coronavirus Impulse Buys that were Totally Worth It
How to Explain Money to a Child: Simple Strategies for Kids of All Ages
Some tips for teaching children about money include:
1. Give your children a pre-set amount each week.
For children three and under, $0.25 should be plenty. We gave our kids $1 a week starting at age four and added $1 per year thereafter, with their “raise” occurring on their birthdays.
Related reading: 6 Easy Ways to Save Money Every Month Without Feeling Deprived
2. Try to pay your children dollar bills when possible.
This allows them to easily count up their money, especially when they’re young. It also makes setting some of their money aside for savings easier!
3. Set aside money for savings.
Try to set aside at least 1/3 of their money in a separate piggy bank for long-term savings. You’ll both be amazed at how fast this adds up! This helps teach them about savings.
The Moonjar is my favorite piggy bank for kids. It has three parts: save, spend, and share, a tangible way to explain money to a child.
4. Save a portion of money gifts.
Gifts from grandparents, etc., in the form of cash, should be treated as an allowance as well, with at least 1/3 put into savings. If you start this early, they’ll never challenge it (at least not for many years!)
Related reading: 50 Gifts for kids $10 and under (that they will love!)
5. Give your child a wallet for their own money.
Have your child carry their wallet with them when you go on outings to the store. You might want to carry it in your purse for very young children, so it is always available, and they don’t lose it.
6. Let your child actually pay the cashier for the item.
The mental impact of actually handing over their hard-earned dollars for an item is far more powerful than if you take their money or if they pay you back later.
7. Don’t extend credit to your kids, except in extreme situations.
If you are on a vacation and your child desperately wants something that is unique and clearly unavailable back home, you might “loan” them money. Otherwise, require that they save their money until they have enough to buy it.
Don’t make excuses or apologize – just help them count up how much they have and how many they’ll need to buy their desired item.
8. Keep a record of what your kids spent money on.
For younger kids, you will have to help them with this. Keeping the receipts in their wallet is one good way to help them remember (or you to remind them) what they spent their money on.
This can help serve as a track record of how easy it is to fritter away your money without realizing it for older children.
9. Guide them but don’t condemn them.
Your child may spend all of his money on Silly Putty, plastic balls that he doesn’t need, or CDs that he throws under the bed.
Talk to them about making wise decisions, and go through the list of items they’ve bought with their money (especially for younger kids; older kids may find this extremely invasive!).
In the example above, the mother did a nice job of reminding her child of his savings goal and how much money he needed to save to meet it.
10. Explain money to a child using a money planner for kids.
Help children keep track of how close they are to their goals and help them plan ahead. This planner gives kids a simple visual for their money-saving efforts, and it’s fun to use too!
Why Is Learning About Money Important
As your child learns financial responsibility, you will watch them start to weigh purchases much as we do as adults.
With your guidance, even three and four year olds can start to make decisions about toys and candy!
Realize that they may make very odd decisions. (My friend’s son was enamored of yarn for a while and saved up for bright and colorful yarn, which he then cut into little pieces.)
Respect these decisions and focus on the fact that your child is learning money management.
Remember that the skills you teach your child today can pay off for them for years to come.
Your child isn’t just learning to budget his allowance; she’s learning to plan ahead and how decisions impact each other. These are incredibly valuable skills that can be learned as early as three or four and honed over years of use.
The little boy in the supermarket is probably well on his way to financial responsibility. Why not start your child learning about money now?