One of the foundations of personal finance is budgeting because we could essentially end up bankrupt despite earning a decent income, if we fail to budget our money properly. This example illustrates my point:

Mr. Salamander earns $1,000,000 per month but spends $1,000,500 during that period. At the end of each month, he accrues $500 in debt.

Miss Flanders earns $3,000 per month and manages to save $200 during that time frame.

After a year, Mr. Salamander has reduced his net worth by $6,000 but Miss Flanders has improved her’s by $2,400. Assuming that niether person had any assets to begin with, the difference between the two becomes pretty big over time.

This is because Miss Flanders budgets her meagre income well while Mr. Salamander, despite earning millions each year, fails to budget his finances, making him worse off compared to the lady earning a fraction of what he does.

1. Make children budget their allowance

As a parent, budgeting is one of the first financial tools you should teach your children. This is because budgets are the building blocks of personal finance and children can be slowly introduced to budgets as soon as they begin to understand the idea/concept of money. A budget gives us a sense of control over their money, which is very empowering for young minds learning about money. Get your children to make mini budgets for their allowance and help them compare their actual spending with their budgeted spending.

2. Lead by example: parents are financial role models

During their formative years, children are heavily influenced by behavior patterns, beliefs and attitudes of their parents. As a parent, if you demonstrate irresponsible financial behavior, such as impulsive use of credit cards or other forms of careless spending, your child will tend to mimic your behavior.

So the first step in securing your child’s financial future is to acquire financial discipline yourself. Of course, your children have the capacity to develop sound financial skills on their own over time, but having a role model or mentor right in front of them (i.e. you) your kids will find it easier to adopt the desired level of financial discipline over time.

3. Needs, wants and luxuries – children must know the difference

This is something you can start teaching children from a very young age. I’ve seen children, as young as five, differentiate between these two states of demand, albeit at a very elementary level. Here is a simple definition for each:

  • Necessities are basic human needs that ensure survival. Examples include food, clothing, shelter and medical care. Everyone must have these to live.
  • Wants are a step above “needs” and are desires that we seek for the sake of convenience, support or to prevent discomfort. Examples could be a basic cellphone, extra pair of shoes and clothes, going out to eat once in a while instead of cooking at home.
  • Luxuries are items that are not at all essential for survival and provide pleasure and comfort, at a pretty high price. Branded items (clothes, cars, accessories, electronics, etc.) easily fall into this category, as well as high end travel and restaurants.

This list varies for everyone, which makes it difficult to create a fixed set of examples. Here’s a slightly more detailed article about needs, wants and luxuries that we published last year.

4. Delayed gratification and financial discipline

Your kids may make a stellar budget at the start of each month, but in order to follow it, they must pursue the idea of delayed gratification. Instead of impulsively purchasing items that they want to gratify themselves, parents should teach children how to delay or properly plan their purchases in order to align their demands with their finances.

A very simple analogy is that of saving your icing for the last bite of cake rather than eating it first. Delayed gratification (saving the best for last, as some put it) ensures you have thought well about the purchase and also increases the amount of pleasure derived from the purchased item as a bonus!

5. Teach them basic financial ideas – debt, saving, investment and plastic money

For children to properly understand the budgeting process, they must also understand certain financial concepts. A budget shows us how we plan to spend the money we possess and these ‘spending plans’ must make financial sense. You can start by telling your kids about how:

Use examples to teach children these financial concepts.

Let’s assume your 10 year old child recieved $5 as a weekly or monthly allowance (pocket money) and he/she wishes to buy a toy that costs $15. You can either get him/her to save 3 installments or borrow some money from you for the purchase. Explain that the borrowed money must be paid back and impose a small token fine for late payment.

The idea isn’t to punish your children with interest fees but to simply show them how debt works in the real world and that if you spend more than you earn, it has financial repercussions.

6. Upgrade your child’s budgeting skills with time

Initially, your children may budget their weekly or monthly allowance. As they move into their teens, parents can allow them to plan and budget for a family event like a vacation or party. As approach young adulthood, help your children save for bigger goals, like purchasing their first car, or saving for college. Your children’s money management skills will improve over time as they learn from their mistakes under your watchful eyes as a parent.

7. Play games that teach financial management

Budgeting should be a fun and engaging activity for kids because they learn quickly and willingly when they are enjoying themselves. Monopoly and other money-based board games are a great way to teach children about money – building assets, saving money for emergencies, regular expenses, future purchases, etc. These games make personal finance fun and present an opportunity to bond as a family.

8. Encourage them to give to charity from their allowances

For the giver of charity, the act of donating money develops empathy, gratitude as well as budgeting skills. Setting aside money to make donations requires a bit of planning because we choose to not spend the money on ourselves and give it away, essentially reducing our income. Trying to make ends meet with fewer dollars in the wallet teaches us to be frugal and more careful with budgeting the remaining funds. We’ve written a detailed article about why charity is important for us in general and how we can teach our kids to give to charity.

9. Take your kids shopping and to the bank

Mr. Banks from Mary Poppins famously tool his children to the bank to teach them about the glorious world of finance. While that trip didn’t go as planned, the kids got to hear a rather melodic and informative song about the importance of saving and how one’s money can grow through investments. Next time you visit the bank to make a payment or cash a check, take your children along and show them how banks can help us.

Shopping trips are another great way to teach children about budgeting and money management. Give your child the task of price comparison for a fun way to reinforce maths and budgeting skills.

10. Prepare your will while you have time

Writing a will may not directly impart personal finance skills to your children, but taking a step back from it all, the entire purpose of teaching kids about better money management is to ensure they are financially capable for a life without you. This is where a will comes in handy (not an affiliate link) because you’re ensuring the financial safety of your children in the unfortunate event that something goes wrong.

Are there any other board games you can think of that impart essential money skills? How about any other fun ways to teach children about money management?

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