I grew up in a bank.
Okay, that's not entirely true; but my dad was a banker, and as a kid, I did spend most of my weekends under my dad's desk trying to decide if I should push the "don't touch" button and set off the alarm — just to see what would happen.
While the memories of weekends spent running wildly through my father's bank make for some great stories, it's the lessons he taught my brothers and me about money that left a lasting impression.
The best way parents can help their children develop good financial habits is to lead by example. Growing up the daughter of a banker, my entire life was about teachable moments when it came to money. My brothers and I couldn't go to the grocery store without some kind of lesson on spending. And many nights at home were spent learning how to save our pennies in hopes that we could turn them into a dime.
Justin Sinnott, CFP®, says parents are the biggest influence on their children's financial success. He believes the more open and exposed kids are to the topic of finances and money management, the more likely they are to engage and participate in the process.
One of the best ways to introduce this topic to younger kids, Sinnott says, is to include them in everyday conversations about money. For example, try playing a game on your next trip to the store and ask your kids to compare prices of food and guess how much the groceries will cost. At the checkout line, see whose guess is the closest. This can help develop a more tangible sense of money and give your kids a reality check on how much things cost.
When planning vacations, show your kids how to budget and make decisions on what to spend on. For example, should you stay in the more expensive hotel and have less money for eating out, or choose the more affordable accommodations and eat out more? Sinnott also tells parents of teenagers to start involving them in the process of paying bills. "They will begin to see how much money goes into expenses such as electricity, gas, cable, phone, car payments, and insurance," he explains.
But there's another way to help kids understand the value of a dollar. It involves a few props, and a little bit of parental patience.
The "four jar method" utilizes money jars, or specially designed piggy banks, that have compartments or separate jars labeled "save," "spend," "give" (donate), and for older kids, "invest."
Start by determining the dollar amount for a weekly allowance — let's say it's $2 — and then once a week, give your child this amount. They get to choose the jar to put the money in. However, there are certain perks that come with each category. For example, if your child puts the money in the "invest" section, you can add to this amount as you see fit — almost like a "matching" program. Or if they deposit money in the "save" section, you can pay them the current interest rate on a bank savings account.
It's important to note that giving your child complete freedom to distribute the money any way they like is a wonderful "real-world" experience, however, some parents start with a more conservative approach, and require their child to distribute the money equally among the four jars. Here's a bit more guidance on the four jars method:
The "save" jar: Have your kids start saving portions of their allowances or gifts of money they receive from family, the tooth fairy, or from doing basic chores. Once this jar is full, they can deposit part of the amount in the "invest" jar, and the rest can be used for spending or donating (consider alternating this choice if they are not depositing much in the donate jar).
The "spend" jar: This is the hardest jar for parents not to micromanage. In order to teach kids about budgeting, they have to feel empowered to make decisions about how they want to spend their money. If there is $5 in the jar and they want a toy that costs the same amount, ask them to take the money out and look at the empty jar. Talk with them about how using the money to purchase this one toy leaves them with no money left in their spending account. If they choose to buy the toy, remind them they have to wait until the next week's allowance to put more money in this jar.
The "give" jar: There's something about a child using their own money to give back to others that creates a sense of joy like no other. It's easy for mom or dad to hand their child some money and tell them to put it in the food bank donation box, but it's a completely different experience when they reach into the "give" jar and pull out their own money to donate.
Beyond volunteering, your children have an opportunity to make a real difference in another person's life. By first requiring — and then encouraging — your kids to allocate money to the "give" jar, you are teaching them the valuable lesson of compassion.
The "invest" jar: This jar is mostly for older kids, but can really help them understand the concept of long-term savings. Once the money reaches the top of the jar, have your child deposit the cash into their own savings account. As your kids get older, you can slowly introduce the idea of actual investing. For example, if you have an established 529 savings plan for college, encourage them to invest the money in their education fund.