5 Steps to Teach Kids About Spending vs. Saving

Try this save, spend, give and invest jar system to teach your kids money concepts.

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Trent Hamm
Trent Hamm
My 6-year-old daughter has a passion for LEGOs. She loves opening up a new LEGO kit, browsing through the instructions, laying out the pieces and meticulously building a model. Once that's done, she'll start remixing the model by adding pieces from other kits to her heart's content.

When we go to the store, she naturally wants a new LEGO kit. If we're in a store with a toy department, she's quite passionate about her requests to look at the kits. And if we look at those kits, she'll quickly find one that she cannot live without.

This is a familiar story for anyone who has young children. When they're little, children have a poor grasp on the concept of money. My daughter operated under the belief that people go to the store, pick out their stuff, simply show it to the cashier and head home.

When the reality of how money really works comes crashing into their world, it can be rather traumatic. It can also be a powerful time for parents to teach their children an important lesson about the world.

Children understand concepts best when they're dealing with tangible things. As adults, we often deal with money in an abstract way. We pay for products using a credit card. We pay the statement online. We deposit money in an account. This abstract way of dealing with money works for us because we've had years to become familiar with it. Children aren't prepared to handle that level of abstractness.

Instead, you should teach them about money in a direct and physical way. If you're a parent trying to teach your kids lessons about saving and spending, follow these simple steps.

Step 1: Introduce a jar system.

In my family, we've had success teaching our children about money through an allowance and a jar system. Here's how it works: We have four jars for each of our children, labeled with their name and the words "spend," "save," "give" and "invest."

  • Spend: money can be spent however they choose
  • Save: money they're saving for a specific item
  • Give: money to give to a charity of their choice
  • Invest: money used to teach about investing
  • Step 2: Give an allowance.

    Once a week, our children each receive an allowance of 50 cents per year of their age. So, my daughter receives $3. This money is given to them in quarters. When they receive their allowance, they put an equal number of quarters in each of the jars.

    This is a rudimentary budget. It's done with tangible elements that they can see and hold in their hands and understand.

    Step 3: Take the "spend" jar to the store.

    When we go to the store with our children, we allow them to bring along whatever amount they wish from their "spend" jar, and they pick out a few items they're interested in buying.

    We then point out the actual price of an item and round it to the nearest dollar to make the conversation easy. Then we count the money they have to see if they have enough to buy it. We'll literally sit down in the middle of the store and do this.

    Almost always, they don't have enough money for it. If that's the case, we talk about which item they want the most, and they set that as a "save" goal. So if my daughter wants a $20 LEGO kit, she would adopt that as her savings goal.

    Step 4: Let them decide to buy or save.

    If they find a small item they can afford, they are free to buy it. However, we tell them if they go home without buying anything, they'll get the item they really want much faster.

    None of our children have had temper tantrums with this approach. If we stick to this type of tangible discussion about money, they understand why they can't have the item they want and see a route to acquiring it that makes sense to them.

    Step 5. Set an example.

    We often try to use cash to pay for items. We'll make sure the children see us giving cash to the cashier and receive change in return. We'll also explain that Mommy and Daddy work hard to earn that money, which we use for food, clothes and other things our family needs. When the kids see actual money changing hands, the lesson sticks.

    The real key to all of this is to make money lessons tangible. Don't just talk about money. Show them how money is used in a physical way.

    Trent Hamm is the founder of the personal finance website TheSimpleDollar.com, which provides consumers with resources and tools to make informed financial decisions.