Money management skills for children – Part 1

By Carol Yip
Wednesday Dec 15, 2010

You can equip your children with money management skills to give them a head-start in life. Once they understand the importance and have mastered the skills of making ends meet, they can achieve financial independence at an early age. With that comes personal accountability for their actions. Your children’s financial independence would mean that you don’t have to watch over them so closely and you gain peace of mind. You can even help them to buy their own first house using their own money, to start being independent at an early age. Imagine what a great relief that would be!

You may think that your children are too young to learn money management skills, but the truth is that they're learning by watching how you deal with cash and credit cards, things that you buy and investments that you have. Take advantage of kids' built-in curiosity and advice them. After all, there is no difference between teaching your children money management skills and teaching them good manners, attitudes and values, reading and writing skills. It is all part of the daily communication with your children, and it takes you and your spouse to work as a team.

Remember that you and your spouse must adopt the right and effective teaching strategies and methods, with the same messages and intentions. Otherwise, your children will know who they can bully or take advantage of to get what they want without you realising it.

Toddlers − 2 to 3 years old
Toddlers may not be able to understand money, but they can certainly understand "stuff". By the age of two, the "gimmees" have probably already started. Instead of seeing these requests for toys and candy as a battle, see it as a chance to teach. Saying “No” to some of these requests shows toddlers that they can't always have what they want – a very valuable money lesson indeed because you are controlling the expectation of instant gratification at an early age. You introduce the concept of "later" by telling toddlers that they can't have what they want now, but wait and be patient to have it later or have it in the future. This sets the stage for lessons to manage instant gratification to avoid impulse spending and patience to save for big goals when your child is older.

Pre-school − 4 to 6 years old
By the time your children reach the pre-school age, you can be sure that they know what money is and recognise that it's worth having. This is a great age to teach your children about how money is earned and how it is spent.

1. Explain to your children that you have to work to earn money for all of the toys, clothes and other things that you buy. Children are generally very curious about a parent's job at this age, so seize upon this curiosity by explaining why you work.

2. Teach your children how to identify coins and dollar notes of different denominations. Your children aren't likely to comprehend the differences in the money's value at this age, but successful identification is a good first step and is a good way of teaching mathematics by way of counting money (plus, minuses, multiplication and divisions).

3. When your children pick out something to buy, let them handle the transaction. Handing over money will help your pre-schoolers understand the connection between money and goods. They learn to calculate the difference in price and change they get back.

4. Show them how to compare prices when you shop with your children.

Primary school − 7 to 12 years old
By the time children enter primary school, their understanding of money is fairly sophisticated. Children at this age can probably count money and understand how to add and subtract money as well. This is the time to teach your children just how hard money is to come by.

1. Give your children a weekly allowance and explain that this must cover certain expenses, such as food in school, story books and toys. Make it clear that there will be no more money once the allowance is used up.

2. When your children ask you for expensive things − handphone, computer games, notebooks or iPad, dresses and makeup − you can introduce the concept of savings. Tell your children to set part of the allowance aside each week until there's enough saved to purchase the items.

3. Encourage your children to save money by matching contributions with a certain percentage, and explain to your children that it is an interest earned from saving.

4. Introduce the concept of interest by setting an interest rate that's added weekly, say 5%. At the end of each week, count up the saved money and add the interest. Have your children track this on a simple chart to illustrate how interest increases the value of saved money over time.

5. Once your children have saved RM50 to RM100, head to a local bank and open a passbook savings account. Review the balance with your children and make a point to save up each month and visit the bank.

6. Show your children where to shop for cheaper things and substitutes as a way to spend within budget.

Come back next week for the continuation of this article, where Carol Yip outlines what parents should do for children aged 13 years old until when they enter university. If you have any ideas or feedback on this topic, share it with Carol Yip at carolyip@aboutmoneytalk.com