Savings – Tim Connolly

Money Basics: How to Teach Kids Where Money Comes From

Understanding where money comes from is an essential part of teaching kids about financial literacy. Knowing how money is earned and used gives children a strong foundation for managing their finances responsibly in the future. While the concept may seem abstract at first, there are simple ways to explain how money is earned, exchanged, and spent. Teaching kids about money helps them understand its role in everyday life and instills important lessons about work, value, and responsibility.

1. Explain the Concept of Work and Earning Money

The first step in teaching kids where does money comes from is helping them understand the relationship between work and earning. Money is earned through work, which involves providing goods or services in exchange for compensation. Whether it’s a job, a business, or household chores, work is the foundation of earning money.

For young children, this concept can be introduced through small tasks and allowances. Assign simple chores like making the bed, putting away dishes, or organizing toys, and offer them a small payment as a reward. Explain that by completing tasks, they are earning money. This helps children grasp the idea that money doesn’t appear magically—it’s earned by offering time, effort, and skills in exchange for payment.

2. Introduce the Concept of Income

After explaining the link between work and earning money, it’s important to discuss the concept of income. Income is the money people receive in exchange for their work or services. Help children understand that income can come in different forms, including salaries, wages, tips, or business profits. For example, you can explain that someone who works at a store earns wages, while a person who owns a business might earn profits from selling products or services.

3. Teach About the Role of Banks and Currency

Once children understand the basic concept of earning money, it’s helpful to introduce them to how money is stored and exchanged. Explain the role of banks and how money is saved, withdrawn, and used for transactions. Banks hold the money people earn and allow individuals to manage their finances by saving or spending.

4. Introduce the Idea of Exchange and Spending

Money isn’t just earned; it’s also spent. It’s crucial for kids to understand the role of money in transactions, such as when it is exchanged for products or services. Start by explaining that when people want something—like a toy, food, or clothing—they give money to someone else in exchange for those items. This is the basis of a simple exchange economy.

5. Discuss Saving and Delayed Gratification

An important lesson in understanding where money comes from is learning the value of saving and delayed gratification. Explain that while it’s tempting to spend money immediately, it’s also important to save for future needs or goals. Help children understand that saving money is a way of planning ahead and preparing for larger purchases they may want in the future.

Conclusion

Teaching kids where money comes from doesn’t have to be complicated. By using simple examples and involving them in everyday financial activities, children can gain a solid foundation in understanding the value of money. As they learn about earning, saving, and spending, they will develop the skills necessary to manage their finances responsibly, setting them up for a successful financial future.

Tips for Teaching Your Child to Save Money

The habit of saving money may be a crucial life skill, but it’s not one that always comes easy. A 2021 survey by LendingClub found that as many as 54% of American adults were living paycheck to paycheck, with little or no money set aside for future needs.

Families can have good and serious reasons why they may fall into this trap, but the savings habit is an important one to help kids establish when they are young. Teaching them about delayed gratification when it comes to money can help them guard against unnecessary spending and learn to value establishing control of their money.

Discuss Wants vs. Needs

The first step in teaching kids the value of saving is to help them distinguish between wants and needs. Explain that needs include the basics, such as food, shelter, basic clothing, healthcare, and education. Wants are all the extras—from movie tickets and candy to designer sneakers, a bicycle, or the latest smartphone.

You can even quiz them on items in your home to drive home the concept. For example, point out items in their bedroom or the kitchen and ask them whether the object is a need or a want. This allows you to explain the idea that you have to prioritize what you spend money on, leaving some money for future necessities.

Let Them Earn Their Own Money

Two-thirds of parents said they paid their children an allowance in 2019, according to a survey by the American Institute of Certified Public Accountants (AICPA), with kids earning $30 per week on average, based on five hours of chores.2 If you want your children to become savers, allowing them to earn and save money provides them with the opportunity to learn how to use it. When you offer allowances in exchange for chores, they’re also learning the value of their hard work.

Set Savings Goals

To a kid, being told to save—without explaining why—may seem pointless. Helping children define a savings goal can be a better way to get them motivated.

If they know what it is they want to save for, help them break down their goals into manageable bites. If they want to buy a $50 video game, for example, and they get a $10 allowance each week, help them figure out how long it will take to reach that goal, based on their savings rate.

Provide a Place to Save

When your children have a savings goal in mind, they’ll need a place to stash their cash. For younger kids, this may be a piggy bank, but if they’re a little older, you may want to set up their own savings account at a bank or even get a kid-friendly debit card. Cards by the likes of FamZoo, Athenry, and Greenlight notify you when they make purchases and allow them to create their own savings goals.

Have Them Track Spending

Part of being a better saver means knowing where your money is going. Tracking expenditures is a little easier with a bank or debit card app, but you can also do it the old-fashioned way.

If your children get an allowance, having them write down their purchases each day and add them up at the end of the week can be an eye-opening experience. Encourage them to think about how they’re spending and how much faster they could reach their savings goal if they were to change their spending patterns.

One way for teaching kids about money and how to save it is by providing a place for them to save. For younger kids, that may mean getting them a piggy bank; older kids can open up a bank account or debit card of their own. You can also pay the interest on what they save, providing an incentive to set aside money for the future.