A version of this article first appeared on US News and World Report Money.
My six year old daughter has a passion for LEGOs. She loves opening up a new LEGO kit, browsing through the instructions, laying out all of the pieces carefully on the table, and following the instructions step by step to build a model. Once that’s done, she’ll start remixing the model by adding pieces from other kits to her heart’s content, eventually creating intricate houses that look as though they were designed by an brilliantly crazy architect. She often spends entire afternoons doing this.
Naturally, when we go to the store, she wants a new LEGO kit. If we’re in a store that has a toy department, she’s quite passionate with her requests to look at the kits. If we look at those kits, she’ll quickly find one that she cannot live without.
This is a familiar story for anyone who has young children. When they’re little, children have a poor grasp on the concept of money. My daughter operated under the self-developed belief that people just go to the store, pick out their stuff, and show it to the cashier before leaving.
When the reality of how money really works comes crashing into their world, it can be rather traumatic. It can also be a powerful time for parents to teach their young children an important lesson about the world.
The first step is to recognize that children understand things best when they’re dealing with tangible things.
As adults, we often deal with money in a very abstract way. We pay for things using a credit or a debit card. We pay the bill for that card out of a checking account. At a third point, we deposit money in that account, and often, that money is directly deposited by our employer. That’s a pretty abstract way of dealing with money that only works for us because we’ve had many years to become familiar with it.
Children aren’t prepared to handle that level of abstractness. Instead, you should teach them about money in a very direct and physical way.
Our best success for teaching our children about money in such a direct way is through an allowance and a “multiple jar” system. In our china cabinet, we have four jars for each of our children, labeled with their name and with “spend,” “save,” “give,” and “invest.” So, our daughter has one of each of these jars and each of our sons does as well.
Once a week, our children each receive an allowance. We do this in a very physical fashion – they receive $0.50 per year of their age. So, a seven year old would receive $3.50. This money is given to them in quarters.
When they receive their allowance, each child puts an equal number of quarters in each jar. They start with the “spend” jar and put a quarter in that one, followed by the “save” jar, then the “give” jar, then the “invest” jar.
Money in the “spend” jar can be spent however they choose. Money in the “save” jar is money they’re saving for a specific item (though our children often add their “spend” money to the “save” jar by their own choice). Money in the “give” jar is given to a charity of their choosing, while money in the “invest” jar is building up for now (and it’ll be used to teach them about investing when they’re older).
This is a rudimentary budget. It’s done with tangible elements that they can see and hold in their hands and understand.
The next step is to learn about spending and self-control using the “spend” and “save” jars.
When we go to the store with our children, we allow them to bring along whatever amount they wish from their “spend” jar. If we stop by the toy section, we identify a few toys that they’re particularly interested in.
First, we point out the actual price of that item. We round it to the nearest dollar to make the conversation easy unless it’s a very low-cost item.
Then, we count the money they have to see if they have enough. We’ll literally sit down in the middle of the store and do this.
Almost always, they don’t have enough money for it. If that’s the case, we talk about figuring out which item they want the most, then they set that as a “save” goal. So, if my daughter wants a $20 LEGO kit, she would adopt that as her savings goal.
If they find a small item that they can afford, they are free to buy it. We do suggest to them that if they go home without buying anything, they’ll get the item they really want much faster.
None of our children have been upset or angry with this approach. If we stick to this type of tangible discussion about their money, they don’t have temper tantrums in the toy department. They understand why they can’t have the item they want and they see a route to acquiring it that makes sense to them.
At the same time, we often try to use cash to pay for other items. We’ll make sure that the children see us giving cash to the cashier and receiving change in return, and we’ll also explain that Mommy and Daddy work hard each day to earn that money, which we use for food and clothes and other things that our family needs. When the children see actual money changing hands, the lesson sticks around.
The real key to all of this is to make money lessons tangible. Don’t just talk about money. Show them how money is used in a very physical way. Children can’t handle money as an abstract idea, so make it as tangible as possible.