Four Things Your Kids Should Be Doing With Their Money

Financial habits form early. Children learn by observing your behavior and then through their own experiences.

That’s why it’s important to make sure your children are treating money the right way. From allowances and birthday money to cash they earn babysitting or mowing lawns, here are four things your children should be doing with their money to help set them on a path to a lifetime of fiscal responsibility.

#1 Withhold some for taxes.
Children need to be taught from a very early age that they don’t get to keep everything they earn. Just as the government takes a third of your money in taxes, you should withhold one-third of your child’s allowance, birthday money or babysitting earnings. Call it a tax, and without the child knowing it, put that money into a savings or investment account.

Then, when your child is ready to buy a car or go to college, hand over the account. Not only will your child think you’re a wonderful person, they’ll learn the value of delayed gratification and long-term investing.

#2 Let the child spend some.
The benefit of having money is the joy of spending it. Allow your child to buy candy or a small toy and let him or her learn the enjoyment that money can bring immediately.

#3 Save some for a long-term goal.
To help show the benefit of delayed gratification, have your child put some money away for a big goal. It can be a bike, an iPod or a video game, or even a car or college. The important thing is that the child be trained to save long-term for big goals.

#4. Give some to charity.
Children need to be taught the opportunity that comes with having money also contains the responsibility and obligation to serve those who are less fortunate. For every dollar your child receives, decide on a portion that will go to philanthropy. The amount should be consistent and material to reflect true sacrifice and service. Let the child decide who receives the money, whether it’s a church, a charity or a friend in need.

Children need to be taught what money is really all about — taxes, immediate gratification, delayed gratification and philanthropy.

By teaching your kids these facts, you can help them form positive habits that will last their entire lives.

Originally published in Inside Personal Finance November 2010

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