Teaching Your Kids to Budget with Envelopes

We all want our kids to learn how to look after their money and handle it well, but it can be difficult to know how to do so. Do you take half the money away from them to save, or do you let them make their own mistakes? One ideal way to teach your children to budget is by using envelopes.

The system is very simple, but it works best with school-age children. They are better able to understand the concept of dividing money up and saving it for specific things. They can also write out the list of things they want, which is helpful to you!

To start off with, you will need several regular, letter envelopes. Colored ones make the experience more fun. You could also use separate boxes or piggy banks, but envelopes are far easier to store. The only thing you need is a small box to file them in.

Sit down with your children and give each one a piece of paper and a pen. Tell them that they need to write down first of all, how much they earn each month or week, depending on when their money comes in. This number goes at the top of the page. Next, they will need to write down one to three items that they would like to buy, along with the price. For example, your daughter might want a special Barbie that she saw for $20.

They should also write down how much they plan to spend immediately. This would be money for candy, collectible cards, sodas, etc. This amount is deducted immediately from the total. You can make an envelope for this amount. Write the quantity on the outside of the envelope, along with "General Spending" and put the money into this envelope.

Next comes the hard part. You will need to help your children decide which of the toys or items they want is most valuable to them. This will receive the largest part of saved money. Decide how much should go into the special account for each item and how long it will take to earn enough money.

For example, let's say your son wants a toy car that costs $12 and a book that is $8. He decides that the car is most important for him. He earns $20 a month in allowance, and spends half of that on snacks. So he is left with $10 to divide between the car and the book. He might decide to put $6 toward the car and the remaining $4 toward the book. In this manner, he could buy both in just two months.

Make an envelope for each savings item and mark how much your child will put into the envelope each month. As the money adds up, a running total on the back of the envelope is a good idea. Be sure to include if your child "borrows" money from one envelope to put in another.

This is an excellent way to show children how to budget wisely and how to keep their money separated. It is a much more hands-on lesson than simply putting money in the bank, which can be a bit confusing to younger kids who feel that the bank is stealing their cash! Monetary gifts for birthdays and Christmas can be divided up in a similar manner.