If you’re reading this article, you probably want your kid to be smart about money. Unfortunately, it’s not always clear how you should teach them. While you obviously don’t want to start by explaining the intricacies of your 401(k) and mortgage, it can be hard to gauge what’s appropriate for your child.
Starting when they’re as young as 3 or 4, you can teach your kids the fundamental basics of budgeting through spare change.
The method that we outline below will grow and expand naturally along with your kid. After a few years learning how to budget with spare change, your child will have a savings account with a good chunk of change and a basic knowledge of budgeting, saving, and interest.
Show them money
This might seem obvious, but in a world where so many of our transactions occur online or with cards, it can be hard to remember that money is an actual, physical thing.
While you might be able to understand the abstract nature of online banking and credit cards, your kids need something to ground them. That’s why it’s best to show them real money, starting with your spare change.
The U.S. coin system (and the coins of many other countries) is awesome for visual learners because the coins are all different sizes and colors. Focus on helping them remember which coins are which, what they’re called, and how much they’re worth.
Save your spare change
If you don’t already, set up a big jar in a central location in your home and put all of your spare change in there. As the change accumulates, you can use it as a talking point with your child. Show them the coins you’re dropping in and, depending on where they are in their understanding of addition, ask them to add up the change.
This is a great chance to start explaining to your kids where money comes from. Explain the entire lifecycle of this money–that it started as a paycheck, which you got for doing work, and ended up as spare change after you made a purchase, like groceries.
If you don’t regularly make cash purchases, take a few bucks out of the bank in various types of coins. You can create the illusion of spare change until your kids are old enough to understand that money can exist in bank accounts.
Have them sort and count spare change
Once it comes time to dumping out the spare change jar and taking the coins to the bank, your kids can help sort and count the coins.
Assuming that your earlier explanation of the coins has stuck in your child’s mind, they’ll be able to sort the coins visually while also remembering what kind of coins they are.
Once your kids start learning math, they’ll be able to add up their coins and figure out how much money they’re bringing to the bank on their own.
Most banks provide free coin wrappers that you can use to organize your change. Coin wrappers can be a useful tool to help kids add up coins–instead of having to keep track of each individual coin, they can add up the numbers on the side of the coin wrappers.
Take it to the bank
Your kid can have a real bank account, just like mommy and daddy! Most banks have free savings accounts for kids under 18, and they’re usually connected to your account so that you can control deposits and withdrawals if needed.
While your children may not understand the bank account at first, with your guidance they’ll come to understand it as the key to their money. Use monthly statements to help them understand that every time they add coins to the account, the amount of money in the account grows. You can also start explaining the idea of interest.
All of this will help teach kids the value of putting money aside. Once they start making their own money, either from an allowance or money for chores, you could decide to take away the spare change and have them save only from their own money. Without the spare change to fall back on, this will help children realize that if they want that big ticket item, they’re going to have rely on their own income and savings.
Sidenote: some younger kids may be wary of banks, since just about every LEGO toy and cartoon has a bank robbery in it at some point. While it might be a little early to explain FDIC insurance, most bank tellers will be happy to explain to children why their money is safe.
Advanced technique: the Three Jars method
The Three Jars method isn’t new–you may have grown up with the Three Jars method, which would explain why you’re so money-savvy now–but people still use it because it’s a powerful way to teach kids about money!
Each of the three jars represents a different purpose: the first jar is for spending ("For Me"), the second jar is for saving ("For Later"), and the third jar is for charity ("For Others"). And if you want your kids to get really pumped about the jars, just show them this short video with everyone’s favorite monster, Elmo:
Some parents use a Four Jar Method, splitting the savings jar into a long-term savings goal and a medium-term savings goal. For younger kids, three jars is probably enough, but as kids get older, they tend to gravitate towards more expensive toys ("Why the heck do you need an Apple Watch!?"), so a long-term savings jar might be helpful.
Better yet: turn that long-term savings jar into a savings account. That way, they can earn and learn about interest.
The Three Jar Method allows parents to introduce the idea of budgeting early, as well as stressing the importance of giving to others. It also lets kids have fun spending money while still learning the importance of saving.
How do you teach your children about money?
We’re always interested in hearing unique stories about ways that parents teach their kids about important money habits. Leave us a comment below with your story.