How an In-Home Economy can Teach your Preschooler about Finances

When it comes to financial literacy, you can never start too young. Your preschooler is capable of building habits now that will help them make great financial decisions in the future. The earlier your child understands financial literacy, the earlier they can begin relying on their habits for financial success. There are plenty of things you can do to teach your child about financial literacy, but none is more hands-on and immersive than establishing an in-home economy where your preschooler can learn the ins and outs of personal finance, firsthand. 

What is an In-Home Economy?

An in-home economy is a great way to teach your child how to earn, save and spend money responsibly. In an in-home economy, you provide your child with 'money' in exchange for the completion of chores. Your child will then have to budget that money to pay bills that you set. With any extra funds they can decide to save for a rainy day or use their funds to purchase fun and exciting snacks and prizes. An in-home economy rewards a child for helping around the house while learning the ins and outs of finance. You can choose to use real money or replace actual dollars with a token system. However you choose to implement it, an in-home economy can help your child build financial skills that are applicable in adult life. 

Earning “Money”

Create a list of chores that need to be done around the house. Set rates for each job, with harder more time-consuming tasks being worth more. As your child completes these tasks, pay them the rate promised. This is a great way to teach children about the value of hard work. As your preschooler racks up tasks they will see just how important it is to work hard and earn all of the money you can. 

Budgeting for the month

After your preschooler starts earning money, have them sit down and lay out a budget for the month. Have them list their expected income first. This will help your child determine which of the listed jobs they will need to complete to earn the amount of money needed for their bills and wants. Next have students subtract the cost of their bills from this income. They will then be left with the remainder of their money. Discuss the importance of saving money with your preschooler and have them divide their remaining funds into savings and fun money. A monthly budget for your in-home economy will keep your preschooler organized as well as allow them to practice their counting skills. Doing this process monthly will provide your child with the practice needed to form great budgeting habits for their adult lives.

Bills and Savings

As your preschooler earns money for the tasks they complete, they will get the urge to spend their money as soon as it gets in their pocket. A great lesson in responsibility and personal finance is to require your child to pay their monthly bills. These “bills” can be for anything from rent to utilities to TV time. Whatever you decide, make sure your child can earn enough money each month that their bills can be covered with about 50% of their income. Be sure to explain to your child how important it is to pay your bills on time to build good credit. 

After your child pays their bills, it is time to discuss what to do with the remainder of your child’s funds. This brings up an opportunity for your preschooler to build great savings habits that will help them build wealth throughout their lifetime. Talk with your preschooler about dividing their remaining funds into a savings account and a spending account. The more money they choose to save, the bigger items they will be able to afford in the future. If your child has their eye on a special toy or a trip to their favorite museum, talk to them about using their savings to be able to eventually afford it. Your preschooler will be motivated to save up their hard-earned money to get the bigger items they want. After you have been running your in-home economy for a few months you can consider adding interest to your child’s savings so they can learn how important it is to allow your saved funds to increase in value. 

Spending Fund

After your preschooler pays their bills and determines how much of their funds they want to put into savings, they will have a remaining balance to spend. For the best results, consider setting up a shop in your house with your child’s favorite snacks and small toys. Allow them to shop with their remaining funds and see their hard work blossom into a reward. The longer you run your in-home economy consider charging a sales tax when your preschooler spends their money. This will provide a valuable lesson on how we interact with the economy on an everyday basis. By the time your child is ready to handle real money, they will have all of the skills and knowledge they need to be financially competent. 

The Value of an In-Home Economy

The In-home economy can be a microcosm of the real world. Your preschooler will have the opportunity to become financially literate while earning their usual allowance. In addition to helping around the house, they will receive a valuable education in money. The in-home economy is valuable because it helps kids become confident around bills, savings, and spending. Financial confidence is a great foundation for a healthy financial future. When our preschoolers take the time to learn how to use money properly from an early age, they are less likely to make dangerous mistakes later on. Two of the best things you can do for your child's future are to build their confidence and financial competence early and often. These are lessons that will lead to a better financial future for your preschooler while creating lasting memories that they can share for generations.