How to Budget: Explain to a 5-Year-Old

When we think of “budgeting,” most of us imagine spreadsheets, apps, or complicated charts. But if you want to teach your child about budgeting we will need to make it much simpler.

What is a budget?

Imagine your child has 10 toy blocks. If they want to build a house, they can’t use all 10 blocks for the roof—they need to save some for the walls, the door, and maybe even a garden.

A budget works the same way. You get a certain number of “blocks” (money) each month. You decide how many go to:

• Needs (food, home, bills)
• Wants (toys, treats, fun outings)
• Savings (for future goals, something big or emergencies)

Budgeting is simply deciding which of the three categories your money should go into. At the big picture (eagle’s eye) level, it’s about Needs, Wants, and Savings. Of course, you can always get more detailed, like having a vacation budget, a weekly food budget, or a fun budget, but those all fit under the three main categories.

The 3-Jar Method (kid-friendly budgeting)

For children, a great way to show this is with three jars or envelopes:

• Save – money that stays for the future
• Spend – money for things they can enjoy now
• Share – money to help others or give away

The Save Jar Needs a Goal

Imagine your child wants a $30 LEGO set. If they just toss $5 into a jar without a goal, it feels like the money disappeared. But if the jar has a big LEGO picture taped on the front, every time they drop in a dollar, they can see themselves getting closer.

Try to set a goal that your child can reach within a few weeks or a couple of months, depending on their age. Younger kids need quicker wins, while older kids can handle waiting a little longer for something bigger.

How Much Goes in Each Jar?

That’s the beauty of a budget. It’s flexible! Parents can guide the process, but ultimately kids should be part of the decision.

Think of it like this:

• For young kids, you might suggest a simple split, like 1/3 Save, 1/3 Spend, 1/3 Share, so they get used to the idea that not all money is for spending right away.
  
• I let my 5 year old decide how much he wants to put in each jar himself. If he puts too much in spend, he knows that it will take him longer to get his shinny toy that he is saving for.
• Kids learn by making choices. If your child really wants to put more in the Spend jar, let them try it! Then, when they don’t have enough for that big toy they were dreaming about, it becomes a natural lesson in patience and trade-offs.

Instead of saying "You must save half," you can ask guiding questions:

• "If you put more in Spend, how long will it take to get that skateboard you wanted to save for?"
• "What happens if you put less in Save this time?"
• "Do you want to have fun now, or more fun later?"

This way, your child sees that budgeting is about choices and consequences, not rules. Over time, they’ll find a balance that works.

Why it matters

When kids see budgeting as a way of making choices, it becomes less scary. They learn that:

• You can’t buy everything at once.
• Saving today means more choices later.
• Money is a tool, not magic.

And for parents, explaining it this way is a reminder too: budgeting isn’t about restriction. It’s about freedom to choose what really matters.