Managing money is arguably the most practical skill that parents can impart to their children. Only through experience and much patience and diligence on your part will they learn the skills that will eventually lead them to financial responsibility and independence. Implementing the following strategies will not only result in teaching your children how to effectively manage money but will bring about a positive and fundamental change in their behavior.
1) Be committed
Being committed to a solid plan is the root of success. Consistency is important but not everything will necessarily work for you just as you had hoped it would. Along the way, adjustments will need to be made, so be flexible. Most parents will admit the wisdom of teaching money management and may even be ambitious enough to start on a plan but all too often when the path gets difficult or a little too inconvenient will default back on the way they have always done things. I would encourage you to be in this for the long haul - you will need every one of those 18 years to train your kids so that they leave the nest with an upper hand on their finances, ready to make good choices and able to recognize and avoid the pitfalls that are so common in our society today.
2) Use cash
To a young child, the concept of money can be very confusing. The problem is exacerbated by the fact that many people no longer regularly use cash in their everyday transactions. It takes time for a child to gain an understanding of how things are paid for without the presence of real money. Just as in other areas of life, we want to model for our kids how to handle money and it's hard to model something they don't understand and have no experience in. So, use cash. Go ahead and electronically pay your regular monthly bills but then get to the bank, make a withdrawal and use actual cash for your discretionary spending. You may want to split it into spending categories such as "Home", "Dining and Entertainment", "groceries", "Personal Care", "Clothes", "Miscellaneous", etc. The point is to use your cash on hand for spending and when the cash runs out, you stop spending. This is also known as living within your means and is simply modeling what we are going to ask our children to do.
3) Give an allowance
There can be no learning if your children do not have their own source of real money to use to begin to make their own choices with. You can start giving them a small allowance at about the age of three. Your child's allowance will need to grow along with their age and maturity. Have a plan to give them regular cost of living raises. For example, if you start your child off with a $3.00 per week allowance, perhaps plan to give a fifty-cent increase on each successive birthday. An allowance gives your child the element of consistency and, therefore, should not be conditional - i.e., dependent on the completion of household chores or on their behavior. That doesn't mean they don't have responsibilities in the house or that they can get away with poor behavior, but the allowance is your leverage, so to remove it is to remove the most effective tool that you have in your arsenal to teach them. There are more effective ways of dealing with irresponsibility.
4) Save some and give some
The only requirement that should come along with an allowance is that the child should save a portion and give away a portion of their income. Generosity is an important virtue to teach and the very act of giving breeds a generous heart and I believe blessings fall on the generous. So, whether you give it to your church or some other worthy cause or organization, consider having your child set aside a small portion of their income to give each week. To keep the math easy, have them save 10% and give 10%. Have them drop the savings money into their piggy bank which, in our house, is their contribution to their college fund. Never have our children objected to saving for this purpose. Just as we save for retirement, they are saving for their future. Saving for college invests the kids personally in their future and serves to clarify the expectations of some type of higher education. If they want to save for something specific, keep a separate savings envelope with their money in it and, eventually, when they have enough cash saved, help them open a savings account at your bank.
5) Charge for maid service
Household chores are necessary for kids to grow in responsibility and a child needs to help around the house just because they are a part of the family. So then, how do you motivate your child to complete their chores without holding back the allowance? The answer is, charge for "maid service." Assign a value to his responsibilities or chores and be willing to complete the task for him with a smile, or better yet have him pay a sibling do the chore for him. It won't be long before you begin to see compliance. Every time you pick up a stray sock or pair of underwear, that's ten cents (more as the allowance increases) out of next week's allowance. The money that is collected gets put in the piggy bank along with a pleasant "thank you for contributing you your college fund."
6) Create opportunities for earning
Find ways, in addition to the allowance, to fill your little one's wallet. Perhaps you can offer to pay your child for a job around the house - something not on his regular regimen of chores and responsibilities or we have found success in offering compensation for grades. Another way we have found effective is to reward our kids for any sincere behavioral complements they receive. An extra dollar here and there not only helps to fill their wallet but at the same time it provides motivation for them to think about how they act when we are not around.
In an effort to help the kids save for something special, during the summer months, we use a game that rewards good behavior. First, we give them each a treasure chest full of "treasure" (100 marbles worth a quarter each). Then, each night at bedtime, we would either take some of the treasure away or add to it based on their attitudes and actions during the day. This worked well to help them fill their wallets with the duel benefit of generally better behavior. You get the idea - find fun or challenging ways to help your children acquire their own money. The side benefits, like improved behavior or good grades will often be their own reward.
7) Stop buying things for them
Take them shopping with you and let them walk down the toy isle or the sports isle. Encourage them make a list of the things they would like for their birthday or Christmas. If they want an item sooner than later let them save their own money for it. It is gratifying for them when they finally save enough to be able to pay out of their own pocket and they learn the valuable lesson that there is no money tree in the backyard. Along the way, there will be many occasions when you will see that your child is about to make an unwise buying choice and it is helpful to present them with all angles as they may not realize the consequences of spending all their money on this useless toy (as you see it), when what they really want is this more expensive toy over here. But alas, should they decide to spend on the thing they are eyeing now to get that immediate gratification, let them, that is in fact how they learn. At some point you will see discernment come in to play and you will be impressed at the wise choices your little one is beginning to make.
8) Share cost of living
Share with your kids what your monthly bills are. As the ability to comprehend the value of a dollar increases so will the understanding of why it is you get impatient every time he leaves the door open when the air-conditioner is on, or when he opens the refrigerator just to gaze inside for seemingly no particular reason. If you child is like most kids all the exasperation and or yelling on your part might make him more aware that his negligence is costing you, but until you make it personal, behavioral change won't be the result. So, if there is a recurring habit that you want to rein in, get his attention by charging him an age appropriate fee for his bad habits. For instance, you may calmly let Junior know that since "water costs me $25 per month the next time you forget and leave the water running in the sink, you are going to have to contribute .25 cents to the water bill." Let him know how much gas cost so when he forgets his project and you have to make an extra trip to the school he won't complain when you charge him for the gas. It will hit home when he hands over the cash and then doesn't have the money to get that toy he wants the next time you are at the store.
Kids have a tendency to take things for granted. If they know they have no "skin in the game", so to speak, and you will provide everything with no strings attached then that fosters a sense of entitlement that will work itself out in irresponsible behavior. In order to prepare your children for the "real world" it is your job to let them know that in only a few short years they are going to be incurring these types of expenses themselves and with the cost of living today there is no substitute for hard work and no room for wasting one's resources.
9) Model good financial behavior
Part of our financial goals should be to live debt free, particularly in the area of consumer debt, and to have our kids learn to live within their means also. Make sure you are modeling the behavior you want to teach. If you don't have the money for something you want, think twice before charging it on a credit card, especially if you know the card carries a balance. Many of us have made mistakes in the past, but don't use that as an excuse for not teaching your kids the right way to do things. If you wait until you have everything perfectly under control you may never get to it. Be honest with your kids about your mistakes and let them know that you desire better for them. It is okay to learn together as long as they see your heart is right and that you are moving in a positive direction yourself, willing to use the same sound money management principles that you are trying to teach them. Past mistakes are one thing, but hypocrisy will be sniffed out quickly and all your efforts will be in vain.