How to Teach Kids to Handle Money

Teaching kids to handle money prepares them to make smart financial decisions as a teenager and adult. Although children become aware of money at a young age, they may not understand how it works. Explaining your financial choices and giving kids an opportunity to handle money helps them make responsible decisions in the future.

Explain Money

Talk to toddlers and young children about money and show them coins and bills. If you usually pay with a credit or debit card, explain that the credit company or bank takes money from your bank account to pay for the items. Let kids make small transactions, such as feeding coins into a parking meter or buying something from a vending machine. Kids may also enjoy playing with coins or keeping them in a pretend purse or piggy bank.

Give an Allowance

Giving children a small weekly allowance gives them a chance to spend and save money. Teach children to put away some of their weekly allowance in their savings and to put some away for a larger goal, such as buying a bicycle. For example, if your daughter gets a $10 allowance, she can save $2, put $2 towards a pair of ice skates and spend $6. However, don't panic if your kids make poor spending choices with their allowance, such as spending it all immediately on candy. When kids later realize they don't have money for something they want, they'll learn and be more likely to make smarter choices the next time. Don't give an advance on an allowance; kids will learn more from having to wait.

Open a Bank Account

Helping kids or teenagers open their first bank account teaches them about saving and interest. Many banks and credit unions have accounts designed for children. Children can make small deposits every week or two and watch their accounts earn interest. If children don't understand the point of saving money, discuss big purchases that require savings, such as a gift for a friend or a teen's first car.

Discuss Credit

Talk to older children and teenagers about credit and loans. Many young adults rack up credit card debt because they don't understand compound interest. Calculate how much one purchase, such as a pair of shoes, could cost over time with compound interest. Conversely, discuss how compound interest helps savings and investments grow. As your child gets older, discuss the loans and leases advertised in automobile commercials. Calculate how much money they could save by buying a car up front instead of paying interest on monthly payments.

Model Responsible Habits

Setting a good example helps children learn to be smart about money. For example, while you are shopping with your child, explain that you would like a certain item but that it doesn't fit in your budget this month. Explain what you are doing as you write checks to pay bills. Look for ways to save money and teach kids to comparison shop in a grocery store. Show your kids your credit card bill and calculate how much interest you would pay if you only paid the minimum amount. If you make irresponsible choices or have made bad decisions in the past, explain your choices and the consequences to your kids.