By Eleanor C. Jacobs

Six Easy Steps

Whether children are working summer jobs, earning money cutting lawns, or receiving an allowance, now is the time to teach them how to budget and save money. Without any guidance, impulsive buying trends occur with little to show for the hard work that’s been accomplished. You know the expression: “Easy come, easy go.”

When bad spending habits develop, they are extremely difficult, painful and costly to change. Teaching children concepts of money management will build a strong foundation for a healthy, secure financial future. Children can become financially independent but it takes a lot of work, dedication and discipline.

Here are six steps to teach children money management skills to help them become financially savvy.

1. Create a Budget –

When that first paycheck comes, you need a plan. Without any guidance, the money will be spent on wants at that given moment versus items that might really be needed. Introduce the concepts of a budget to allocate money for savings (the “pay yourself first” theory), personal spending and charity. Use jars or envelopes for each category depending on the age of your child and the amount of money earned. Discuss wants and needs and set realistic short and long term goals to achieve their needs. Working hard for needs will help children realize they might not need as many items as they think.

2. Maintain a Financial Journal –

A simple notebook will work for this exercise as will a basic Excel spreadsheet. Create columns to record: (A ) Date, (B) Income (money earned), (C) Expenses (money spent), (D) savings (money deposited in bank) and (E) description to explain the source of income or disposition of funds. This financial journal provides an opportunity to recognize the good choices such as money in a savings account or a donation to Alex’s Lemonade Stand and provides an opportunity to discuss how money could have been better spent. Will children make some poor spending decisions? You bet. We all do. They’re not mistakes, they’re learning opportunities. Make suggestions for better choices in the future and suggest ways to cut costs. Guidance, not control, will improve their future financial decisions.

3. Open a Bank Account –

Go through the exercise of physically taking your child to your bank or credit union to open an account. Receiving that monthly or quarterly statement is their financial report card. If your bank allows debit cards for teens, this is an excellent use of plastic for point-of-sale purchases versus credit cards. It automatically tracks how cash is spent. This should be the only introduction to plastic at this point in their lives. Credit cards come much later in life when teens who have now become adults and have demonstrated excellent spending habits and the ability to manage money.

4. Teach your child the difference between “shopping” and “buying” –

As a child, my father would always remind us that “any fool can pay retail.” Even today I hear that echo when I buy something that is not on sale. Teaching children the value of buying items on sale, using coupons, shopping at consignment shops and garage sales and, of course, on e-Bay and other online sites that offer great deals, presents opportunities to increase their purchasing power. Before buying, research the product you’re looking for on the Internet, in magazines, and in advertisements to comparative shop and determine a fair price before spending money. Convert the power of advertising to cash-in-pocket. Often items are purchased because it is something your child thinks they need and cannot live without, only to find out the item is totally overrated and it sits on a shelf.

5. Make saving money fun –

Every Sunday, Spencer Soper‘s feature “On The Cheap” in The Morning Call, provides many suggestions for creative and unusual ways to save money. Share this article with your family to generate great ideas for saving money.

6. Taxes –

Most people are quite surprised when they open their pay envelope and look at their paystub only to be disappointed in their net pay. “What are all these deductions? Social Security, Medicare, State and Local taxes, you must be kidding. I can’t even vote!!!” Well, this is an excellent time to introduce your children to the fact of paying taxes and the responsibility to file yearend tax returns. Save those paystubs; they don’t take up that much room. Although not a very pleasant subject, don’t miss this opportunity to explain the tax facts of life.

Income is generated from hard work and effort, and understanding the concepts of wise money management will make those hard earned dollars go further. After working hard and understanding the concepts outlined here comes the most important step - implementation of the budget!

Initially review the budget process with your child every time money is earned and recorded in the journal to assist in the process. If the budget does not provide for the lifestyle your child would like to support, suggest this very simple yet basic alternative: Find additional employment or reduce spending. Continually review the process until it becomes second nature. Remind them, frugality is your friend and will allow more leisure time for fun activities.

Remember, if you don’t control your money, your money will control you. More importantly, don’t forget to practice what you teach!

Eleanor C. Jacobs is a Lehigh Valley CPA at Jacobs, Kenneson & Co., currently teaching money management skills to her grandchildren. And, yes, they struggle with the concept of wants and needs.