How Finances Work

Kids & Finance: Starting the Money Conversation

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Four educational financial activities for children younger than age five.

Kids are smart! And the lessons they learn at a young age stay with them into adulthood. Experts believe that the sooner children begin to understand essential financial concepts, the more financially responsible they’ll be later in life.

According to the Money as You Grow website, created by the President’s Advisory Council on Financial Capability, there are four primary tenants that help children age five and younger build a basic understanding of how money works:

  1. Buying: Help your child understand that some things in life are free, and others – lots of others – have a financial value. CBS News’ Kathy Kristof suggests that getting familiar with coins a good place to help children understand the quantifiable qualities of money. She suggests a simple addition game to help kids grasp the concept of how coins work – that pennies add up to nickels, nickels add up to dimes, and that different combinations can make quarters and dollars.To help children understand the value of those coins and dollars, the Money as You Grow site recommends that parents ask their children to help count out how much specific items cost, like ice cream, clothes, or even gas for the car. The site also points out the importance of explain to children that some things don’t cost money: playing with friends, taking a walk in the park, or spending time with loved ones is free.
  2. Earning: If a child understands how money works the natural next step is explaining where money comes from. Setting aside the abstract philosophical discussion, the Money as You Grow website suggests that parents explain their job and the concept of employment to their children.If parents use familiar faces, it may be easier for a young one to comprehend the concept. Pointing out easily visible occupations, like teachers, police officers, or retail workers, can help show children that people everywhere work to earn money. Investopia’s article by Jean Folger, Teaching Financial Literacy to Kids: Earning Money, suggests that a conversation about entrepreneurship could also be a good idea at this stage. If kids realize that some people start businesses on their own, it may motivate them to think about earning money themselves.Folger adds that parents can further this concept by helping their children open up a lemonade stand. Alternatively, she suggests introducing their children to earning an allowance in exchange for help with chores around the house. Participation in the money-for-work concept may help reinforce positive earning habits that may pay off in the future.
  3. Saving: Once a young child comprehends what money is and how it’s earned, Money as You Grow suggests introducing the concept of saving. The site points out that kids below the age of five already understand what it means to wait for what we want. After all, they can stand in line for the swings or wait their turn for the slide (however reluctantly). Establishing the idea of saving is a matter of showing them that concept applies to money as well.A simple activity, like setting up a three-jar system for organizing money into saving, spending, and sharing funds, can help kids learn to make decisions about how to manage their money in both the short and long term. Money as You Grow recommends parents explain to their child that by not spending the money they add to the saving jar, it will accumulate. They’ll have enough to pay for a toy or a favorite treat.
  4. Wants vs. Needs: The final concept, prioritizing spending based on things one wants versus things one needs, can be a tricky one. Asking kids a few key questions about their daily activities can help them come to their own conclusions about what they really need versus what they want.Money as You Grow suggests a brief activity for helping kids understand the need vs. want concept: Create a basic pie chart that divides up a set amount of money. If kids can see an illustration – or, better yet, make their own – of how a budget works, it may help them grasp the concept of spending money on necessities before spending it on optional items.Understanding how money works is an essential life skill. Starting early with basic, practical conversations and simple, tangible activities can help kids establish a firm foundation for their future financial education.
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