Ages 8–10: Strengthening the Financial Foundation

The family budget. Kids quickly learn that Mom and Dad spend a good deal of time working and paying bills. When your child shows an interest, tell her about the big spending categories—food, shelter, clothing and transportation and how much the family spends on each of these categories. To provide hands-on experience, let your child help you write checks for a month; or if you bank online, let her fill in the blanks and click to send the money.

Needs and wants, continued. Stress that central budget items are needs. To help make the distinction, consider having your child inventory the family room, listing each item as either a want or a need. She’ll soon see that the Nintendo is a want, and the telephone a need.

Learning to wait. You may also want to talk about delayed gratification—not in those words, of course. Point out that if you don’t actually need something, you can wait to purchase it until you have cash in hand. To the inevitable question of “why?” offer a simple answer: “We don’t want to owe too much money. We have to earn the money before we can spend it.” Anticipating a purchase and finally being able to afford it can instill a great sense of pride.

More about choices. This may be a good time to introduce the idea of trade-offs. Tell your child that even very rich people can’t have everything. This is a tough concept and may lead to a discussion about value. Point out that you have to know what you value most before making a choice. For example, if your child begs for an expensive software game, you might ask if she’s willing to trade off Saturday movies for a while.

Starting a savings account. Now is the right time to set up a savings account for your child. Some banks and credit unions have child-friendly accounts that don’t require a minimum balance and charge low or no fees. Explain to your child that once she saves a certain amount, she can open a money market account or a certificate of deposit (CD) with a higher interest rate—what the bank pays in exchange for holding and safely using the money you’ve deposited. This can become a savings goal. Few financial institutions offer passbooks anymore, so you will probably need to find other ways to make the growth of savings visible. One way is to have your child write down all deposits in a notebook. Also, go over the savings statement with her to see how much interest her account has earned. Keep the savings statements in a three-ring binder, by date, for easy reference.

Should your child have to save? Ironclad rules seldom motivate, but you may want to strongly suggest that at least 10 percent go into savings. Financial planners recommend the “70-20-10 Rule”—70 percent of income should be earmarked for spending on immediate needs, 20 percent should be set aside for the purchase of big-ticket items, and 10 percent should be saved or invested for long-term goals. The point is to establish the savings habit.

Help your child establish savings with short-term, intermediate, and long-term goals. Show your child that some savings goals are short-term (money for snacks at the movie), others are mid-term (a baseball glove), and still others are long-term (such as saving enough to open a higher-paying savings account, or buy a computer). It helps to break total amounts needed to meet each goal into the amounts your child will need to save each “pay day” to meet the goal. For example, let’s say she decides she wants a pair of ice skates. They cost about $40. How much must she save each week to buy them? If she can save $4 per week—or $8 every two weeks—it’ll take 10 weeks. To keep children interested, some parents set up matching programs. For every dollar the child saves, the parent puts in a dollar— much like some employer savings and retirement plans. This can be especially helpful in keeping a child focused on long-term savings goals.

Encourage entrepreneurial effort and earning extra money. One great source of extra money is a garage sale. Kids can sell their old toys, books and clothing. They can polish, wash and mend things so that the sale items will be more attractive to prospective buyers. You may have to help set realistic prices. The depreciation in what was originally paid for the item and what it can be sold for can be instructive.

Paul Golden is the communications manager for the National Endowment for Financial Education (NEFE), a nonprofit foundation dedicated to improving the financial well being of all Americans.