Teaching Children to Save

October 3, 2012
by Ryan Guina
Founder and editor of the personal finance sites CashMoneyLife and TheMilitaryWallet

My three year old daughter was recently introduced to the concept of money. At a basic level, she understands that “daddy works so we can have money to buy things.” She also understands that we have to pay before we can leave the store with our goods. But that is the extent of her understanding of money.

At its core, money is an abstract concept that can be difficult for children to grasp. That is why it is important to start teaching children about money when they are young. It’s also a good idea to lead by example.

My wife and I already took the important step of starting a savings account for her, and we also opened a 529 college savings plan in her name. These will be important when she reaches college age. But what we teach her between now and then will be even more important than the amount of money we are able to set aside. If we can teach her how to better understand and manage money, then we are giving her a life skill she will take with her when she leaves our home and enters the real world where she will have to rely on her own decision making to get by.

Take Baby Steps

I admit that teaching a three year old about money is a tough task, and at this age, I honestly don’t expect her to understand how money works. But it is important to speak openly and honestly about money in her presence. The sooner she can understand that we need to work to earn money and that it is a finite resource, the better.

Use Tools to Teach

The next thing I want to teach her is that money can and should be used for goals. One of my favorite methods for teaching children about money is the three jars method. To teach this to children, you mark three jars with a label for spend, save, and give. Each time the child receives money, he or she should put an equal amount in each jar.

This teaches your children to save for their personal goals, spend on items that bring them joy, and give freely to others. Children who master these three concepts are well ahead of many adults.

Give Children the Opportunity of Choice – Even if it Means Making Mistakes

Part of learning is making decisions, even if some of them are mistakes. As parents, we can make suggestions and we can try to guide our children, but in the end, we have to let them learn on their own. And with a topic as important as money, the sooner we can give them this opportunity, the better.

Make Your Own Rules

There are no hard and fast rules to teaching children about money. The “experts” all have differing opinions on whether you should give an allowance, pay children for working, reward good behavior or grades, etc. But I think those debates often miss the point, which is teaching children how to handle money. Expose children to the concept of money, show them how to use it, and allow them to make their own decisions. They won’t always make the perfect decision. But like any skill, the more they practice, the better they will get at saving, spending, and making good financial decisions.