Teaching Children About Money

Tips for teaching children about money. Younger children may believe that parents have an unlimited supply of money, unaware that checks and credit cards are not the same as cash and that bills must be paid.

Back in our own childhood days, we can all probably recall a time when our parents denied us a certain toy or a favorite treat while we were shopping. It may have been a very upsetting experience- after all, mommies and daddies have an unlimited supply of that green paper, right? They could always write one of those 'checks' or give the nice lady at the check-out a little plastic card. That was our perception of home finances at that particular age- Mommy or Daddy simply pulled out a magic piece of paper and we had a new toy or a pair of shoes.

As adults, we understand all too well the lack of magic behind a checking account and credit card. But to small children, you may still appear to be a combination of Santa Claus and a magic Genie who can make money appear out of thin air. How do you explain the realities of home finances to small children? Here are some ideas on explaining money issues to young children.

1. Checks are not the same as money. This is a very tricky situation to explain to a very young child with little experience with the adult world. If your child becomes upset because you won't write a 'magic check' when cash is tight, explain to them that Mommy would get in a lot of trouble if she wrote something that wasn't true. Children understand crime and punishment very well, so compare it to telling a lie or cheating. They may not understand what a bounced check or an overdraft is, but they will probably understand the problems with doing something that is untrue.

Another way to explain checks to a child is to take them with you on your next trip to the bank. Show them the check your boss gives you for going to work, then give it to the cashier. Explain to your child that it may look like a lot of money right now, but you have to pay for things with that money. If you receive some cash, show your child how much money something will cost, such as an electric bill or groceries. They might begin to understand that a check and a stack of money do the same thing. Never be afraid to explain to your child that you cannot write a check whenever you want to. A child may eventually make the connection.

2. Credit cards are not magic. Credit cards may seem miraculous to a young child, because parents tend to use them to buy much bigger items or an entire set of back-to-school clothes. Children will have a difficult time understanding credit limits, because the reality for them is a closetful of new clothes or an expensive video game system. Parents should be aware of how many credit card purchases they make in front of impressionable children. Children need to understand that a credit card is not always the best way to pay for something, and is not unlimited. One way to take the magic out of credit cards is to pay cash or write a check for as many purchases as possible, at least in front of the children. Save credit cards for large purchases and for private shopping trips. If this is impractical, at least explain to your child that it might seem like Mommy can buy everything with her little card, but she has to pay the people back for everything she buys. Show your child a billing statement and point out how much money Mommy will pay those people back each month for the clothes she bought.

3. From piggy banks to savings accounts. Piggy banks may be a child's first real introduction to the financial world, so use them as examples of other banking practices. Explain to your child that Mommy and Daddy save their own extra money in a different kind of 'piggy bank'. Whenever you have some extra money, you go to the bank and give it to the teller, who then puts it in your own banking account. It's the same thing that your child does when he or she puts a dime in their bank. You might explain that sometimes the bank is very full and sometimes it's almost empty. When the child's piggy bank is full, they can go to the store and buy a treat or go to the movies. That's the same reason Mommy and Daddy can take the whole family out to a nice restaurant to eat or go to a favorite amusement park. When the piggy bank is almost empty, however, you have to wait until you have it filled up again before you can spend more money. That's just like Mommy and Daddy's own bank account sometimes, so we just have to wait for the bank to get more money in it.

4. Allowances and salaries go hand in hand. If your child receives an allowance, you may be able to explain paychecks and salaries easily. Show your child what your paycheck looks like. Don't worry about explaining deductions right away- that is a different discussion altogether. This is the same as what we pay you as an allowance. Daddy gets an allowance, too. If you work hard and do all your chores at home, sometimes we give you a little more money. That's just like Daddy when he comes home a little later or goes to work on Saturday. He gets a little more money for working harder. Children can usually grasp the idea of working for an allowance if you do structure the payments like a regular job. Be consistent with the payment schedule, and have some incentives built into the system, such as bonuses for certain jobs or extra pay for doing a really good job on a chore. Young children may have a difficult time understanding why Mommy doesn't come home until late or why Daddy has to work on the weekend, so

explain the idea of hard work means more money through a real-world allowance example.

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