How to Teach Your Child the Importance of Budgeting Money

Great Financial Habits Start Young

How to teach your child to budget money

It's important to teach kids to budget and save. Great money habits start young.

But how can you convince your kid to budget his money for a rainy day when he's throwing a temper-tantrum because he wants a toy?

Here are a few tips for teaching kids to budget and save.

Step One: Let Your Kid Experience the Relationship Between Work and Money

I know a married couple with two sons, ages 8 and 6. Both sons think that money "comes from" an ATM.

The sons ask for a new game. The mom replies that it costs too much money. And the sons retort: "Just go to that machine and get more money."

These little boys have never worked a day in their lives, so they don't understand that money is a result of your efforts.

A child won't be motivated to save unless he understands that the money you have is directly tied to the work you do.

Example: Create a chart that lists chores plus the pay rate for each chore. Sweeping the floor might be worth 50 cents. Loading the dishwasher might be worth 75 cents. Mowing the lawn might be worth two dollars. (The chores, of course, must be age-appropriate.)

This suggestion - paying for chores - is actually somewhat controversial. Some families believe that children should be required to do chores for no additional compensation so that they can contribute to their overall household.

If this is your philosophy, then you might consider requiring the child to do a baseline level of chores -- such as putting their toys away, setting the table, wiping down the table after dinner - as part of their contribution to the household.

Anything the child does that goes "above and beyond" their normal household duties is rewarded with pay.

Step Two: Establish Three Money Jars: Saving, Spending and Sharing

When you child asks for a toy, let him know that he must buy the toy with his own hard-earned money.

Your child will soon figure out that he's only earned $1.50 this week, but the toy he wants costs $12.

How can he save for it? What should he do with his money in the meantime?

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, an ice-cream cone.

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 the cause with which he shares his money. 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 rain forest.

Where Did the Three Jars Method Come From?

The three jars method - saving, spending and sharing - was popularized by the Muppet Elmo on the popular children's television show Sesame Street.

As he strolls down Sesame Street, Elmo spots a colorful ball that he loves - the "Stupendous Ball!" - but he doesn't have $5 to buy it.

Elmo only has $1, which means all he can afford is a Stinky Ball.

So Elmo begins doing tasks around Sesame Street. He earns $1 for repairing an ice-cream machine. He earns another $1 recycling bottles, and $1 more folding laundry.

As Elmo earns, he's tempted to spend. At one point, some Muppets in the background sing:

"On Wednesday Elmo wanted to buy ice cream that he craved. But Elmo didn't spend it all -- No, that day, Elmo saved!"

Eventually Elmo saves $5 and goes back to the store to buy a Stupendous Ball. But on the way there, he encounters a distraught Cookie Monster who is upset because he doesn't have enough money to buy a cookie.

Elmo shares $1 with Cookie Monster, and settles for buying a $4 Fantastic Ball instead of the $5 Stupendous Ball.