Written by Shirley Nelson, CFP®, J.D.

In this article I will share with you some practices I have tried with my four-year-old daughter to help her grasp the concept of money. Interested in finding out more? Read on!

We live in a world where paper money is slowly fading into history. Modern shopping puts goods and services right at our finger tips. Everything from that fancy cashmere dress you see online, or that delicious sizzling steak at your local restaurant — is just one click on your phone and it’s delivered to your door.

Many of us can’t remember the last time we made a large purchase of more than $50 with cash. In fact, a lot of us don’t even carry cash on us anymore due to the convenience of credit cards and digital payments. This convenience comes with an unintended consequence that could be a problem to some of us who are parents: how do we educate our children about money, when they don’t even see money around them? Are we going to show them the statements of our bank account where our salary is deposited each month? Or perhaps that digital order confirmation on Amazon showing that we just bought $80 worth of pet food? Will our children see these digital transactions as being so “easy” that they see money just like a game?

To many of us, an actual, physical thing in our hands that we can touch and feel seems more real. A string of numbers on the screen? Not so much, at least not initially. I still remember that when I was little, my grandma would lay out a small stack of $1, $5, $10, $20 bills and some coins on the dining table under a dim ceiling light to budget the family spending each month. She looked so focused and serious that my mind captured a still image of her at that moment, so vivid, that till this day that image comes to me when I am working out a budget plan for our clients. Granted, I am using a computer, a keyboard, and a mouse now and I type numbers into Excel…but that image of my grandma anchors me to the reality of money that I’ll never treat these numbers lightly.

When contemplating this article, I thought about the importance of money. Money, or put more broadly, currency, is the building block of a functioning society. An in-depth knowledge of money is like that first castle our young “Super Marios” need to conquer before carrying on the rest of their financial journey.

So how do we teach our children about money? Call me old school, but I’m a strong advocate of the old way: cash. The concept of shopping – pay the money and you get the goods – is fairly straightforward for a child to understand when you use cash. It took my four-year-old daughter two trips to her favorite local ice cream shop to understand that these green paper bills can buy her an ice cream!

But teaching children what money can do is only the first step, we shouldn’t stop there. We want to teach our children to be responsible with their money, earn money nobly, and use money to enjoy a fulfilling life. Here are a few principles that over the years helped me personally in making money decisions:

  1. Making money is a value exchange. You are awarded money when you create value for others.
  2. Saving money gives you more choices and more freedom later on.
  3. Before spending money, think twice. Only proceed with payment if you are absolutely certain that you want the item and not the money.
  4. Money is a tool, a byproduct of value creation, and should not be an end goal. What we aim to have is a secure, fulfilling, and happy life. Sometimes, sharing and providing for others can bring us more joy than keeping all the money to ourselves.

To instill the above principles into my daughter I tried a few ways. Note that my daughter is only 4. If you have an older child and you’d like to try my methods, feel free to make some tweaks here and there.

Here is my method. First, I create a table each week. On the left of the table, I list ten items that I’d like my daughter to work on. I assign different weights to these items. Those that are expected from her, such as “wake up early” and “put away toys”, are given one star. The last two items, where she has to go out of her way to help us around the house, are awarded five stars.

Every evening, we go through the table together. I’d give her a star sticker to put next to each item she performed, and write down the total number of stars she gathered for that day at the bottom. Here is a picture of her pasting stars she earned onto the table today:

Then, the money talk kicks in. I had previously told her that each star is worth five cents ($0.05). I then calculate with her how much money the stars she earned will be worth, and take out a handful of nickels and quarters matching that amount.

I lay my left hand out with the money sitting on my left palm, and with my right hand pointing at the one-star items, I say: “Mom is very happy to see you did so well today on these tasks. These are great qualities to have and they make you a better person. Mom is willing to award you with money for your excellence.” I then move my fingers down to the five-star items and say: “You even went out of your way to help mom mopping the kitchen floor today. That’s very valuable to me and I’m willing to pay you for that service.”

“Now, you have a choice.” Slowly, I reach out to the drawer and take out three small candies with my right hand. I lay them out next to the money on my left hand and say: “Would you like to buy these three candies now? Each of them is worth ten cents. Or, would you like to deposit these 30 cents you made today into that jar and save for an ice cream next week?”

I direct her attention to that glass jar on the counter, where it has a picture of an ice cream pasted on the outside and a big, red “$3” written next to it.

“You already have about $2 saved in that jar. You only need $1 more. These 30 cents could really help you get that ice cream you like if you save them,” I encourage her.

Well, do you recall that my daughter is 4 years old? So yes, not surprisingly, many days she chooses candies. But lately she’s been taking one candy and saving the rest of the coins in the jar, getting the best of both worlds.

After a few weeks of these practices, she actually has managed to save $3 a couple times. That proud look on her face when she takes money out of that jar and pays for the ice cream on her own is priceless.

Time to throw in some challenges. A couple weekends ago, instead of taking her to that ice cream shop, I made a detour and took her to Target instead. She quickly discovered their toy section and in there, she saw an Elsa doll that sings.

“Elsa!!” my daughter shouts in excitement, “I want it!”

I took a look at the price tag, $19.99, and smiled at this opportunity to teach her about saving for a major purchase.

“What a beautiful doll!” I said to her, “but I only have $12 on me now. Are you ok with not having the ice cream today?” Pointing at her jar I add, “If you don’t get the ice cream, you’ll get to save these $3 you have here, and I will help you.” Taking out of my $12, I said “I will put this $12 into your jar tonight. Then you’ll have a total of $15! This doll costs $20. You just need $5 more. That’s 100 stars! Collect 100 more stars, you will save enough to pay for this doll!”

“I will?” Her eyes lit up. Looking at the $12 bills I hold in my hand, she nodded.  We headed home. Guess what? She collected 100 stars in the next two weeks and she now takes that Elsa doll to bed every night!

I am lucky that I have a smart, understanding child. Every kid is different and things might not go as smoothly with other children. As a parent we need to be creative and patient. My husband’s birthday is coming up in a couple months. My next plan is to guide my daughter to save for a birthday present for her dad. Wish me luck!