Jan. 19, 2018
When kids have money – whether it’s a small pile of coins or a fat stack of bills – their inclination may be to spend it all on toys and candy and whatever else looks interesting right now. This is supported by the many parents who enthusiastically (and innocently) ask, "What are you going to buy?" when their children receive gifts and other money. While there’s nothing wrong with finding out how your child wants to spend his or her money, it’s only one part of the equation. Rather than focusing solely on spending, we can help our kids now and in the long-term by giving attention to saving and sharing as well (investing comes at a later age – discussed in our Teaching Financial Literacy to Teens guide).
If asked how they are going to spend their money, some kids will get the wrong idea and think they have to spend the money: they may think it’s the only option. It’s like putting a pile of jellybeans in front of a kid: Many will eat the whole pile in one sitting rather than risk losing them (i.e., other people in the family will eat them). It’s critical that your child understands there are more options for money than spending.
An excellent idea to introduce is spending, saving and sharing set percentages of their money. The spend, save, share system helps kids figure out what to do with their money, and it can go a long way toward setting up financially responsible habits. Remind your child that we all have to make choices with our money and three broad choices are to:
- Spend. Buy things we need and want now.
- Save. Set aside money to buy things in the future.
- Share. Donate money to help people, animals and the environment.
The percentage allocated to each category is up to you and your child, and may depend on what expenses you expect your child to cover out of his or her money. For example, if your child is expected to pay for all his toys except at birthdays and holidays, you may aim for a higher spending percentage. If your child pays for very few things, a higher percentage for saving may be appropriate. You might want to discuss and demonstrate how you spend, save and share. While you don’t have to give dollar amounts, you might say something like, "Out of each paycheck, I spend 70% on our family’s needs and wants, put away 20% for savings, and share 10% to help others.”
Appropriate percentages for kids will be different than yours since your financial obligations and budget are very different. Kids might aim for something like:
- 50% for spending
- 40% for saving
- 10% for sharing
If your child receives $10 each week for allowance, for example, $5 would go toward spending, $4 for saving and $1 for sharing. There are a number of systems your child can use to keep track of his or her money:
- Three jars. Label them Spend, Save and Share.
- Three envelopes. Label them Spend, Save and Share, and keep them all in one larger envelope.
- Piggy banks that are divided into three sections (search for "spend save share bank" on Amazon.com for ideas)
- Apps. The free PiggyBot app lets you and your kids set up Spend, Share and Save accounts. Instead of cash, they have a virtual balance with you, which you can dole out as needed.
Older tweens and teens may be ready to add investing to their money system (so it would be Spend, Save, Share and Invest). If your child is ready for this, allocate the percentages accordingly (for example 40% spending; 40% saving; 10% sharing; 10% investing) and make sure he or she has four jars or envelopes to use instead of three. Some of the divided piggy banks are available with four sections instead of three to include investing. Kids and parents can also track money online using websites such as Threejars.com.
Ideally, over time, your child will automatically think of every dollar her or she earns in terms of spending, saving and sharing (and eventually investing). The percentages may have to be adjusted periodically to reflect your child’s current earnings, financial obligations and short-term and long-term goals – but they’ll be starting a lifelong habit that will help them grow into a financially capable adult.
Saving for a Rainy Day
Financial experts urge adults to build an emergency fund to cover living expenses during a break in employment or to pay for unexpected expenses, such as car repairs or medical bills. While many experts recommend putting aside three months' worth of living expenses, this amount falls far below what many people need in case of an emergency. It’s a good idea to save more if you can.
Your child might also benefit from a fund – although theirs will more accurately be a rainy-day fund rather than an emergency fund. Explain to your child that unexpected opportunities come up – such as their favorite musician giving a performance in town, or a school event they would like to attend – and the only way to afford these "sudden" expenses is to have money set aside to begin with. It's another great reason to save a portion of every dollar that comes in.