How To Teach Kids About Money: Pocket Book Technique

There are many different educational techniques that may be used to aid in the development of financial responsibility in children and young adults. Clear communication and discipline must be stressed when developing a new financial skill in a child. One of the most commonly used techniques today is known as the "Pocket Book Technique."

Pocket Book Technique (Ages 7-18)

The practice of accounting for real money is one of the most effective skills that a child or young adult can acquire. By using a small pocket book or notepad to account for expenditures as well as earnings the child has an opportunity to grasp the idea of financial responsibility through daily practice as opposed to necessity.

The child must keep all receipts from purchases made and also maintain accurate bookkeeping. All purchases made must have logical and beneficial reasoning behind them and a budget must be created. The parent is responsible for double-checking the work of the child of young adult and in questioning the reasoning behind their purchases. First and foremost, the budget is an essential part of the pocket book technique and distribution percentages should reflect actual budget percentages on a smaller scale. A very good budgeting example is as follows:

Weekly Budget For Allen

Earnings: $10.00

Future Savings: 25% or $2.50

School Snacks: 15% or $1.50

School Supplies: 30% or $3.00

Daily Misc.: 15% or $1.50

Monthly Savings: 15% or $1.50

Rollover Percentage

The combination of future savings and school supplies commonly represent the average household expenditure in monthly bills and mortgage, which is approximately 55% or less. School snacks and daily misc. represent food purchases as well as gas purchases and other required business expenditures. Rollover Percentage refers to any unspent money in accumulation from allowed spending percentages. Finally, Monthly savings is exactly that, monthly savings.

Using the idea that money must be saved as a requirement for at least 40% of the budget helps to instill both discipline and responsibility. By mimicking actual budgeting techniques the child or young adult is also being prepared for real life applications. Proper accounting procedures are also key to engraining discipline into the child's mind and everyday life.

The accounting portion of the pocket book must accurate and exact. The expenditures cannot exceed the set percentages and any unspent money accumulated must be placed into the rollover percentage for allowed future spending. The idea of receipt collecting and annual storage is an integral piece in the over all budget puzzle. Saving receipts and proper accounting allows for additional income from future tax write-offs as well as warranty and insurance requirements.

Punishments must be in place in order to enforce proper accounting and budgeting procedures. One of the most effective ways to punish a person regardless of age is to reduce or remove the weekly income. When following a budget, the loss of income dramatically affects a persons overall expenditures. The immediate and overall effect is noticed at the beginning of the week where the enforcement has been imposed.

In addition to the Pocket book tool it is absolutely imperative that the child or young adult learn to develop additional income as well. This income can be gained through a job or any form of self-employment, which requires the student to actively participate in earning money. This includes but is not limited to: mowing lawns/gardening, cleaning, actual employment, lemonade stands, and professional services.

In perfecting proper accounting procedures and business practices the student develops a sense of pride and responsibility not only for their actions, but also for themselves. Creating an income and maintaining a record of both the income and all expenditures pertaining to the student on a daily basis will teach the student the fundamentals of business and living on a daily basis. These traits must be developed and are key ingredients in growing a money tree.

A money tree is a concept. The idea that a person can grow money is relatively new but is more a less a metaphor pertaining directly to patience. It takes time to make money and time to grow grass or a tree. Therefore, a money tree must be carefully cared for and respected until one can reap the benefits from it.

Growing money is a daily business tactic developed from extensive financial responsibility and experience. The only step that is left for the student to decide and learn about directly involves "growing money." This is the step we call investing.

Investing can be a very precarious and expensive venture regardless of the area of business that the investment is in. Understanding the value of investing is the last stage in creating a financially successful mindset. There are many different forms of investment and it must be understood that our economy is in an ever-changing state.

Therefore, preparing a child to become financially successful by giving them the required tools is essentially the same as teaching them to grow money. Creating multiple sources of income can be very challenging but also an extremely rewarding experience. The final stage in preparing a child to grow there own money is in providing the proper educational tools that will allow them to learn a variety of different investment vehicles.

There is no teacher like failure. By allowing a child or young adult to diversify their investments there is no better way for a student to learn to both fail and succeed. Diversifying investments and understanding various techniques and business strategies gives the student a broader spectrum and more realistic perspective in our world of money. Teaching a child to grow money is a lifelong process filled with harsh realities and discipline, but it is possible and easily achievable if the proper tools are provided.