How to Teach Your Child the Importance of Budgeting Money

Great financial habits start young

Two jars marked save and spend.
••• Andrew TB Tan

It's important to teach children to budget and save, but how can you convince your child to budget his money for a rainy day when he's throwing a temper tantrum because he wants a toy?

It's not easy, but with discipline and planning, it can be done.

The Relationship Between Work and Money

Do your children think money comes from an ATM? Or do you know someone with children who think that's where money comes from? It's not an unreasonable assumption for a young child to make if he has never had to work or if he has not witnessed firsthand the work his parents must do to earn the money they get from the ATM.

To motivate a child to save, he needs to understand that the money he receives is directly tied to the work he does.

One way to accomplish this is to create a chart that lists chores plus the pay rate for each age-appropriate chore. Sweeping the floor might be worth 50 cents. Loading the dishwasher might be worth 75 cents. Mowing the lawn might be worth $2, etc.

Paying for chores is somewhat controversial. Some families believe children should be required to do chores for no additional compensation so they can contribute to their overall household.

If this is your philosophy, then you might consider requiring your child to do a baseline level of chores—such as putting away their toys, setting the table, wiping down the table after dinner, etc.—as part of their contribution to the household. Anything the child does that goes above and beyond their normal household duties might then be a means of earning money.

The Three Money Jars

When your child asks for a toy, let him know that he must buy the toy with his own hard-earned money. Your child soon will figure out that the $1.50 he's earned this week means he'll have to do more work to buy a toy that costs $12.

This is the moment when the "three jars" lesson comes into play. Set up three jars for your child: one for saving money, one for spending money, and one for sharing.

Each time your child gets paid, help him budget his money between the three jars. Some of it goes into the jar for immediate, short-term spending: a candy bar or an ice-cream cone, perhaps.

Some of the money goes to the jar for "savings." Your child should choose his savings goal. Perhaps he wants a new PlayStation game or a cell phone. Each time he gets paid, he can watch his balance grow.

The third jar should be for "sharing." Your child should choose a cause and contribute money. Perhaps your child might elect to put that money in the collection basket at church, give it to an animal shelter, donate to a group that helps disabled veterans, or preserve an acre of rainforest.

This lesson was popularized by the Muppet, Elmo, on the popular children's television show Sesame Street. The episode features Elmo finding a toy he wants and working to earn money to buy it. Along the way, he makes decisions to avoid impulse purchases and to use some of the money he has saved to help a friend.