Teaching a Child about Cash Flow

By age four, your child will probably understand concepts like food, money, appliances, and time. Almost every family has at least one relative who sends money to your child for birthdays or holidays. Assuming that the money was in lieu of a gift, you will want to take your child to the store and let them exchange the money for something they want (toy, pet, clothes, whatever is deemed appropriate). If the money is intended for savings, then take your child to the bank and have them deposit it with you or, if they already have a savings bank at home, have them place it in there.

What is important is that the child “sees” the flow of money to them and from them.

The flow away from them can be in exchange for something tangible or to grow their savings. A bank book or statement showing an increasing balance helps to turn the latter into something visually understandable. They need to recognize that money can be exchanged for something they value and that an exchange can be immediate or delayed to enable the purchase of something even “bigger” in the future.

Kids are very visual and tactile, so, if keeping a bank at home, let them see the pile get bigger and run their hands through the miscellaneous coins every now and then.

Take note of your child’s “wants” when you’re at the store. Our daughter had an obsession with Beanie Babies and would want to take me over to the rack of them at our local grocery store every time I went in with her. Knowing she would answer, “Yes!” I would ask her if there was a special one she wanted. When she picked it out, I would say, okay, this will cost $5.00, so let’s go home and get your money so you can buy it.

Now I know what you’re thinking, what a waste of time and gas to go all the way home and all the way back just for a Beanie Baby.

Well, maybe.

When we got home, I would help her dump all her savings on the floor, and then together we would count out the five dollars for the toy and put it in a separate pile.

When she saw how big the buying pile was and how small the “what’s left” pile had become, she decided that she didn’t really want the toy as much as we thought and put it all back.

If you don’t want to take the chance that you will end up going home and driving right back to the store, you can always “lend” your child the money to buy the toy with the understanding you will be paid back as soon as you get home. I tried this once and it did not end well. Not only was there another stuffed animal to pick up every day, but there was also a very sad little girl who, upon seeing how empty her bank had become, quickly decided that she didn’t want the toy anymore.

But, of course, that’s the point of this exercise!

You want to create an awareness of the value of money and to start forcing value decisions between money and the things money can buy.

Some children will happily give up everything they have to get another toy or piece of candy while others will just close the vault and figuratively seal it shut! Most will fall somewhere in between.

Once a child starts to understand the consequences of making a purchase, you know you are on the right track.

Do not become a human credit card by making advances against future gifts!

When they are out of money, make sure that they are fully aware that they must wait for the next gift to show up before they can make another purchase.

At this young age, they will not be able to understand the growing IOU that is being created if you give them loans. Keep it simple and highly visible.