The envelope method works by putting money into specific envelopes each time you get a paycheck and when the money is gone, you don't spend anymore on what that envelope was specifically for. Envelopes can have uses for things like the food budget, gas money for the car, entertainment budget money, savings, etc. When using the envelope method with kids, to start you'll want to have three envelopes set aside for savings, fun money, and money to give. These are the three things kids do with money because they aren't paying bills or having to worry about putting food on the table. As they get older, you may want to add other envelopes, especially when they start driving, like "gas" or "expenses" envelopes so they aren't leaning on you to help them out with their expenses.

The saving envelope is essential to teach your kids sound personal finance principals. You can put this money in a savings account or invest it to teach them how interest works, but accumulating a stack of money they can actually see and touch may be more effective in teaching to save at first than storing it away somewhere where numbers don't mean as much as seeing how much they've saved. Each time they earn money have them put a certain percentage in their savings envelope. That percentage can be determined by you and your kids. Have a savings plan in place so they aren't tempted to go out and buy the first things they see either. Build an emergency fund first then start saving toward some big ticket items in your child's future like a car, college, or their dream vacation.

The fun money envelope is for having fun. This envelope helps kids keep their savings on track, so instead of seeing all their money go toward their savings, they get to spend a little of it and have some fun along the way to their big savings goal. This teaches your kids that it is okay to spend money on themselves and to have fun. Letting loose on your finances on occasion is good for the soul, especially since your kids have worked hard for those funds. Just make sure they aren't spending money from their other two envelopes or getting cash advances from you for having fun. They can save for their fun, just like they can save for their goals.

The last envelope is the money to give envelope. This helps your child learn to be generous with their money. If your child can learn to give money to charity, church, or to family in need, they will learn the important lesson of selflessness and keep away from greed. We want to imprint on our young the importance of finances, but we don't want it to run their lives. Giving to others is important, and there is more than enough to go around. If your child can learn this principle at an early age, they will always have enough to go around.