I’ve told you before on this blog that I use the envelope method at home. The envelope method helps you see where your money is going each month. I love the debit card, but I used to use it religiously, and we never kept track of how much money was going towards certain areas of our life. With the envelope method, you can only use as much money that you put in the envelope, and then your done for the month. It’s a great way to force those of us who spend money like water (that would be me).

On Monday, I spoke about the importance of teaching kids sound financial principles as early as they can grasp the concept, which is earlier than you would think. It’s like there’s this gene in us that helps us understand how to use money if we are taught at an early age. When kids start collecting money on the pay-for-performance method of giving an allowance, then they have to have a system for what to do with the money. Most banks require you to be 18 to open a checking account. You can open a savings account for your child, but its hard to withdraw the money when they want it and brick-and-mortar savings account interest rates are worthless. Dave Ramsey who wrote the book “The Total Money Makeover”, among others, suggests that you set up three different envelopes of three categories for the money. He suggests to set up envelopes to for your child to save his or her money, have fun with it, and give it. Essentially, these are the three things that we do with money other than pay bills.

The saving money envelope will teach your child the value of saving money at a young age. Again, you could set up a savings account for this or maybe even a mutual fund in your name but invest their money to show them how compound interest works, but otherwise, the fact that they are accumulating a pile of cash will teach them the value of savings just fine.

The “fun” envelope shows them that its okay to have a little fun with your money and blow your money every now and then. It helps them develop a balance between being diligent with their finances, but also letting loose a little bit and having fun with their hard-earned money.

The giving envelope helps your child know the importance of being generous with his or her money. This is probably the most important envelope, because money greed can destroy relationships and ruin lives later on in life. If you can teach your child to be generous now, then he or she will live a much more fulfilling life. He or she will experience the true joy of giving at a young age. That’s a pretty cool thing!

If you have a teenager who is on the envelope system and you want them to start paying for some of their car insurance, cell phone bill, or gas, then you could start an “expenses” envelope where they use this money to pay for bills and gas money. Like I said, I first learned about this system from listening to Dave Ramsey, and I think it is simple and concise. It seems like it will work well with any age child. Are there any of you out there that have your child on this system? If so, shoot me an email or leave a comment.