When you start your preschooler’s allowance, you set in motion a years-long financial education in your home or homeschool. Starting early means your kids learn to manage money as a number, a skill they will need in their future.

In our society, young kids know at an early age what money does. Money gets stuff. They see something happening at checkout and taking goods home.

Buying things is the first lesson in learning about money. When kids have their own money, shopping and making their own decisions is exciting. Buying some of their own things gives them ownership in the process.

Shopping with one’s own money is a big thrill for any child. But simply knowing how to spend money does not help a child learn how to manage money.

Parents are the most effective teachers in the early years. Behavior experts say that young children shape many of the money habits they will carry into adulthood. In the home, parents can help kids develop good money management skills.

These years are a great time for you to show and tell as it relates to the world of money. You start by showing your child money in the form of cash and doing the activities in my book, The No-Cash Allowance. As your child learns about cash you tell how money works by explaining what you are doing when you use cash and cash substitutes (check, debit card, credit card, electronic fund transfer).

It is a great system to teaching children to handle money. It is easy to understand and deals with the subject in a very realistic and contemporary way. The examples of dialogue between a parent and child are excellent. They help to create a picture of a real life situation in conversation with children. – reference book critic

Kids love to talk about their money, making for money conversations in your family. Your kids grow to know you as a facilitator to help them, not a controller telling them what to do.

In the years before they go to school, kids absorb more than we think. Research by The Money Advice Service reveals that most children can recognize the value of money and understand the link between earning money and income by the age of seven.

Playing games and talking about money helps them be comfortable with money conversations. By starting early parents instill confidence about making money decisions at an early age.

Preschoolers, may not be able to add and subtract, but they can make decisions. When they want to buy something the one thing they want to know is if they have enough money or not.

Preschooler’s allowance creates a habit

A 5-year-old who tracks weekly deposits as a number will make over 600 deposits before graduating from high school. The preschooler’s allowance process is reliable and creates a habit of paying attention to cash flow long before they are adults.

Being a smart shopper is the first step to getting rich. ~ Mark Cuban

When you give your children money, your also give them the opportunity to make their own spending choices and to live with the results. Your kids will learn that there are limits to what they can afford. 

Start attaching some age-appropriate responsibilities to their allowance. When kids start school, you can transfer money to them to buy their own school supplies. Explain that this is their day job and they need to get the supplies for their job.

Allowance anecdotes

First quarter:  A young boy asked his mother for a quarter. The mother looked at him, “What would you do with a quarter?” The boy replied, “I’d go to the store and buy Star Wars stuff.” This child knows what money is and what it does. Next lesson–checking the price tag.

Counting to 100: When I started an allowance for my 5-year-old I didn’t think her younger sister was ready. When she asked if she could get money, I decided that counting to 100 was our starting point. She came back the next day, counted to 100 and started getting her own allowance.

When your kids track all their money as a number, they become better money managers.

Read more: Piggy banks fail at teaching money management

Watch on YouTube

Next. How 6-12 year-old kids grow their money management ability