Should You Discuss the Family Budget With Your Kids?
This is a common financial coaching question. Yes, after the age of 6 - 7 is an excellent opportunity to explain to your kids why they cannot buy the newest smartphone or snazzy sneakers. The family budget determines long-term items, like saving for retirement, or short-term items, going on vacation.
And the best way to discuss the family budget with your kids is by teaching them what opportunity cost is. In economics, the concept of opportunity cost means that in every choice made, there is a choice you didn't make. If we have decided to purchase a product, we will not be able to buy another product because our budget is limited. If we choose to consume today, we will have smaller savings for future consumption.
Any chosen path means giving up another path simply because our time and money resources are limited.
An easy way to demonstrate how the family budget works is with allowance. Once a week, give each child an allowance based on their age and explain when and how they can use their money. I suggest using this principle when wanting to explain to children that the budget is limited but to do so in a practical way.
When going out to the mall or the store, the kids choose how to spend the money. But they have to stay within their budget. If the new smartphone is $400, and your kids have only $250 saved, so it's clear they have to wait and save to buy a phone. And that buying $150 sneakers will postpone the new phone purchase.
Now that your child understands how their allowance is connected to their budget, we can bring it back to the family budget as parents. Our income is the basis for the family budget. As parents, we have to decide for the family on how much is available for the Disney vacation and how much to save for your higer education. Each choice is an opportunity cost, and an increase in the allowance can postpone the next great vacation.