How do you teach kids about money–so that they understand what life actually costs?

Those of us who are blessed to be parents need to remember that we’re not raising children; we’re raising future adults. And one of the biggest ways that adults get into trouble is by messing up their finances. The more that we can teach kids to budget and teach kids to save when they’re young, the more ready they’ll be to launch well when they’re 18.

And I think one of the biggest gifts that we can give teens is to let them understand what life costs. So today I’d like to share 7 ideas for teaching kids about money.

1. Make allowances based on budgeting

Instead of paying them an arbitrary amount based on their age, set a budget where they’ll have to cover certain expenses.

When our girls were 13, we started a clothing allowance where we required them to buy their own clothes. At 14 and 15 we added shampoo, deodorant, toothpaste, etc. We figured out how much they would need in a year, and then figured out how much that would cost, and divided everything by 52. That’s how much they got a week.

When they needed things, they had to buy it themselves! It taught them how to budget before they left for school.

If you’re paying a portion of their cell phone bill, or if you’re paying for internet that they’re using, you can also “give” them this in their allowance, but then present them with a bill every month for their portion. So if your internet is $50 a month for 5 people, and cable is $60 a month for 5 people, and their cell phone is $40 a month, then they owe you $62 a month ($10 for internet, $12 for cable, and $40 for their phone), or $744 a year. That means that every week they get an extra $14.30 in their allowance, but that will end up coming back to you. It may sound like an extra step, but it’s good for them to see how much the life they enjoy costs.

2. Pay for the basic version–they have to save the rest

When setting your amount for allowances, decide that you will pay for the basic version or “on sale” version of an item. You’ll pay for cheap jeans, or for the price of shirts you can get at a consignment store or at year end sales. Then, if they want something more than that, they’ll have to earn the money themselves.

3. Use FamZoo as a family bank

I absolutely LOVE the idea behind FamZoo!

Here’s how it works. They have an online system where you can track your kids’ allowances, payments for odd jobs, money they owe you, or whatever else.

And if you want to take it one step further, you can even order prepaid Mastercards that the parent can load up. The parent has the primary card, and then you can transfer money–with no fees–to the kids’ cards. Give them their allowance, pay them for jobs, even give them a parent-assigned interest rate to encourage them to save. Here’s an easy way to transfer money to them, but then “bill” them for that cell phone or cable bill.

You can even create an account for charity, so that you can pool all your kids’ charity money into one account so there’s more to distribute every few weeks.

And this helps kids see a record of what they’ve purchased and what they’ve saved. I think it’s awesome.

If you don’t feel comfortable giving your child a card, you can also use their IOU system, where the parent can keep track of allowances and payments. This would have come in so handy for me! I remember lots of times I was out with Katie and she’d want a chocolate bar, and I’d tell her that I’d buy her one, but then she’d have to pay me back out of her allowance. And then we’d both forget. Here’s a way to make sure no one forgets!

The kids can also see their own accounts on their phones or iPods, so they always know how much they have.

One of the biggest drawbacks I found for giving my kids allowances was that I often didn’t have the right cash on hand. If you can do it through a card system or an app, then it’s automatic and things don’t get forgotten.

Check out all about FamZoo right here!

(Just so you know, there’s a freebie coming up!)

4. Play the “what does this dinner cost”? game

Every night at the dinner table try to get the kids to figure out what the meal costs–how much is the rice and the peas and the carrots and the meat?

They’ll soon see which meals are super cheap and which ones are super expensive! You can even start to give a small “prize” to the kid who guesses the closest.

5. Require tithing from the time they get an allowance.

When our girls were 3 we started them with “jars”–spend, save, and give. And we gave them their money, and then they had to divide it into the jars, so that they could physically see that 10% was going towards giving. Then every few months we’d decide where to give that money.

To us, tithing was non-negotiable. Until they were 18, they couldn’t refuse to tithe. Honestly, though, because they started so young they did it willingly. And because it became a habit, they still do it now that they’re on their own.

There really is no greater lesson you can teach your kids than how to give!

6. Have the kids make the budget one month

Have all kids who are 10 and over participate in this one together.

Give them your budget (you can download a free budget worksheet in the next step) with your income and all of your fixed expenses (insurance, car payments, property taxes, etc.) already filled in. What you have left over is your disposable income, and that has to cover groceries, health and beauty, entertainment, gifts, eating out or savings for upcoming needs. Once they figure out how much is disposable, have them divide the remaining money up into these various categories.

Then every night at dinner talk about how you’re doing, and take a look at what’s left in the envelopes. If they want to go see a movie as a family, for instance, and there’s nothing left in entertainment, then where will we take the money from? Let them make the decisions!

7. Do the Backwards Salary Builder Exercise

Most kids have no idea how much money it costs to have the kind of lifestyle they want. And they also have no idea how much most jobs pay. So no wonder so few kids are motivated to work hard in high school!

I remember when I was 19 I got a temp job in the summer making $15 an hour. I thought I had it made. I was honestly tempted to not return to university that fall. But while I thought $30,000 a year was a ton of money, I had never had to pay for a nice apartment and a car and all my food before.

Sometime BEFORE their junior year of high school (grade 11 for my fellow Canadians!), when marks and electives start to really count, set aside a week when you’ll assign them budgeting homework. Here’s what you’ll do:

• Ask them to go through the real estate pages and find the kind of house they’d like.
• Look that listing up online, and find the asking price, the property taxes, and the utility bills (these are usually included in the comprehensive house listing).
• Use your bank’s online mortgage calculator (just google it; it should pop right up) to figure out the monthly payment. For instance, a $200,000 mortgage at today’s interest rates amortized over 25 years has a monthly payment of $1,139.
• Now calculate the total housing costs. Add up the monthly mortgage payment, the property taxes, utilities, and throw in some insurance. For instance, if property taxes are around $300 a month, insurance is $100 and utilities are $250, then your total housing costs are $1,789 a month.
• Figure out the annual salary needed to support that house. When banks give out mortgages, they decide that housing costs shouldn’t exceed 30% of your income. So housing costs of $1,789 mean that you would need a family income of around $6,000 a month, or $72,000 a year.

Now you have something to work with! And here is a free worksheet to make this exercise a breeze!

Is it worth it to pay to go to school for a 3 year college diploma to be a social worker if the highest salary they make is $38,000? Is dropping science a good idea if jobs as electricians pay so well, and it’s a career I’d enjoy? Help them to see the future!

What if they feel called to go into a job that doesn’t pay very much–say a youth pastor, or a music leader, or that social worker? That’s fine. You never argue against God’s calling! But it’s still good to know up front what your lifestyle will be like, so that they get used to the idea that they may not have everything that their peers will.

This exercise isn’t meant to say, “you want a great lifestyle, so you’d better make a big salary!” Instead, it’s meant to say, “let’s get an idea of what an average lifestyle costs, so that you understand money.” It’s absolutely fine to aim lower–and in many cases God calls us to that. And we all can make smart money decisions that let us live on less. But many kids don’t even understand how much life costs, and we need to remedy that.

Kids won’t learn about money unless we give them real life experience with money–and talk about money a lot. It’s one of the best lessons you’ll teach your kids!
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