How to Teach Money Management to Toddlers

teaching toddlers about money

Most people are young adults (or regular adults) when they finally pull their finances together, learn how to budget, and develop a debt repayment and savings plan. You likely struggled with debt for years before you learned the basics of money management — but wouldn’t it have been so much easier if you learned financial literacy when you were young?

As a personal finance devotee, you likely want to impart the lessons of smart money management onto your offspring and save them the stress and struggle of debt in young adulthood. Here are a few ways to get started on financial education early in your child’s development.

Set A Good Example

image 1 1 How to Teach Money Management to Toddlers

A study from the University of Cambridge determined that most children develop their lifelong money habits before the age of seven years! Your kids learn from you the moment they enter the world, so it is imperative that you demonstrate good behavior, even when it comes to financial matters.

Whenever you spend money, pay taxes, or visit the bank, you can explain what you are doing to your toddler, so they understand that managing money is an essential chore for functional adults.

Additionally, you should avoid bad habits, like impulsive spending or regular large purchases. You might think you are hiding these practices from your toddler, but more than likely they are absorbing your bad habits into their worldview and behaviors.

Let Them Handle Money

Money is a tool, and no one should be afraid or nervous when handling money. To ensure your kids feel confident working with money, you should give your toddler opportunities to experience cash first-hand.

Money-related toys, like fake payment cards and toy cash, allow kids to practice the same financial behaviors they see their parents modeling in the real world, which can help them develop confidence with money and establish good habits.

However, it is also important that you give your kids access to real money from a young age. You can allow them to collect whatever coins they find around the house or keep the change when you pay for things with cash. You should definitely give your toddler a savings jar — ideally a transparent one, so they can see their coins and bills stacking up.

When your toddler wants something special, like a small toy or candy bar, you can begin working through the process of making purchases with their savings.

Set Up Chore Commissions

Once your toddler has some experience handling money, you can start giving them a regular amount of cash to experiment with. It isn’t the best idea to give your kid an allowance, which is basically a weekly payment for doing nothing. Instead, you should set up commissions for their chores, which will help them comprehend that good work earns them good money.

Toddlers who are old enough to participate in even the most basic chores, like picking up their toys and books, making their beds, and caring for a pet, can earn small commissions that can fulfill their monthly budget. As your kid gets older, they will gain a greater number of more complex chores, and you should increase their commissions accordingly.

Talk About Financial Goals

You can start having conversations about financial goals even when your kid is incredibly young. Young kids don’t have any serious expenses; your toddler isn’t going to school and thus doesn’t need to save up for school supplies, clothes, or the latest kid craze.

Still, you should start talking to them about the future and demonstrating how to use a budget maker to accommodate all their wants and needs. You might even work with them to set up a college savings fund, which will need plenty of time to grow before your child takes advantage of it.

Most often, toddlers are interested in giving a significant portion of their savings away, sometimes to charity and sometimes to family and friends. While giving is a good habit, you should try to reign in this immature instinct, so your little one has enough cash to experience spending and saving.

You can build a budget where 10 percent of every week’s savings go to a charity of your toddler’s choosing — most likely something to do with other kids, like Save the Children, Ronald McDonald House, Make-a-Wish or similar. This should leave enough cash for savings goals and a small purchase each month.

Demonstrate Opportunity Cost

Usually, the hardest financial matter for children (and adults, for that matter) to understand is the concept of opportunity cost. In the vaguest terms, an opportunity cost is the loss of potential, a consequence of making a decision. In personal finance, opportunity costs tend to be how your money is gone once you have spent it.

Young kids often struggle to understand this aspect of financial management, perhaps due to their burgeoning sense of object permanence or perhaps because their critical thinking skills are a ways off.

You can demonstrate opportunity cost while you are grocery shopping when your toddler is interested in buying a favorite snack. Though they should be allowed to spend their savings how they wish, you should take the time to explain that if they purchase something impulsively now, they won’t be able to do something they have been saving up for, like buy a coveted toy.

Any time your toddler wants to use their savings, you should talk about how their purchase will affect them in the future, especially if they are trying to save up for some larger expense.

Wrapping It Up

Financial literacy should start young, which means you might already need to implement some of the above tricks and tips in your parenting strategy. With the right support and education, your kid can grow up with strong money management skills, putting them on the path to success.

Though it is never too late to learn good personal finance, you want to give your child the best possible financial foundation to ensure they thrive as children, adolescents, and adults.

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