Top Things To Know
1. When it comes to teaching kids about money, the sooner the better.
Up until they start earning a living, and sometimes well beyond that, kids are apt to spend money like it grows on trees. This lesson will help you put your children on the road to handling money responsibly.
Long before most children can add or subtract, they become aware of the concept of money. Any 4-year-old knows where their parents get money - the ATM, of course. Understanding that parents must work for their money requires a more mature mind, and even then, the learning process has its wrinkles. For example, once he came to understand that his father worked for a living, a 5-year-old asked, "How was work today?" "Fine," the father replied. The child then asked, "Did you get the money?"
2. Once they learn how money works, children often display an instinctive conservatism.
Instant gratification aside, once they learn they can buy things they want with money - e.g., candy, toys - many children will begin hoarding every nickel they can get their hands on. How this urge is channeled can determine what kind of financial manager your child will be as an adult.
3. Seeds planted early bear fruit later.
It's important to work on your child's financial awareness early on, for once they're teenagers, they are less likely to heed your sage advice. Besides, they're busy doing other things - like spending money.
4. An allowance can be an effective teaching tool.
When your kids are young, giving them small amounts of money helps them prepare for the day when the numbers will get bigger.
5. Teenagers and college-age kids have bigger responsibilities.
Checking accounts, credit cards, and debt are as elemental to the college experience as books and keg parties. Teaching high-schoolers about banking and credit will make them more savvy when they leave the nest.
6. Even investing should be learned early.
High schoolers can and should be taught about the market - using real money.
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Allowances
Want to teach your kids about money? Pay them.
There's a strong argument that an allowance is the best way to teach a child to handle financial responsibility. There's an equally convincing case that nothing could be further from the truth.
In either event, before they get an allowance, a child should be old enough to count money. The key to a successful allowance is structuring it right from the outset.
Make it clear to your children what kinds of expenditures the money is for, and that they are expected to save some of it. Younger children - ages 7 to 10 - shouldn't be held accountable for items like school lunch money as part of their allowances, but it's not a bad idea for older kids and has the added benefit of fewer payments changing hands.
Some experts think parents should not link the allowance money to household chores. Children should be expected to help out around the house and in the yard because they are members of the family, not because they are paid. That's your call, obviously, not ours.
Yet with children over 8 or 9 years old, giving an allowance doesn't preclude paying them for specific chores, especially the occasional type that you might otherwise pay outsiders to perform, such as shoveling the sidewalk or washing the car. Why not keep the money in the family?
Some parents complain that giving their children allowances puts the parents in a position where their kids are often begging for raises or advances. Jayne A. Pearl, author of Kids and Money: Giving Them the Savvy to Succeed Financially (1999, Bloomberg Press), would say these parents are missing the point.
"Remember, allowance is supposed to be a teaching tool," she says. "Negotiation skills are an important part of that, which they're going to need for dealing effectively with friends, teachers, and eventually, their bosses."
So instead of grimacing when your children hit you up for a raise, decide when the time is right, and then engage them in fruitful negotiations. How long since the last raise? Will new expenditures be covered? What amount of the raise will be saved long-term for expenditures requiring your approval?
The most vexing decision on allowances is how much - a decision affected by personal values, family income, and common sense. Don't let your children influence the amount by saying what they're friends are getting: Any normal child will bring in high figures.
Many parents like to give their children the equivalent in today's dollars of the allowance they received at the same age. Assuming that these parents have more or less the same means as their parents did, this can be a comfortable solution.
Use the calculator provided with this lesson to figure out what the allowance you received in a given year of your childhood would be worth today.
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Saving & Spending
Your kid doesn't like to save? Try the carrot - and then the stick.
One way to encourage your children to develop sound money discipline is to make savings a condition of their allowances. So try to account for this when deciding on a weekly or monthly figure.
This, of course, means setting a budget - and deciding what to do when children run afoul of their own guidelines.
One answer is to require them to save their allowances in locked boxes. But since this doesn't teach restraint and you won't always be around to oversee savings deposits, there are more instructive ways to make the point.
Neale S. Godfrey, co-author with Carolina Edwards of Money Doesn't Grow on Trees: A Parent's Guide to Raising Financially Responsible Children (Fireside, 1994), recommends what she calls the Bill-Paying Game, inspired by a scene in the film, "I Remember Mama."
Count out a reasonable "salary" in play money, like that from a Monopoly game. Then, take some old bills and write the amount due on the back of the envelope of each. Show the child the entries in each for "date due," "minimum payment due" and "balance due," then let them decide how much to pay. If the allotted money is enough to pay the bills, everyone wins.
Use the leftover money to introduce the concept of savings. The younger your child, the more limited his or her concept of time.
If they've been receiving your sage financial teachings from an early age, older children shouldn't have trouble understanding the concepts of long-term and short-term saving. If not, illustrate the concepts by using goals, as with a new video game a month from now versus a bicycle this summer.
Remind them of these goals to keep them from straying.
The more worthy and ambitious the long-term goal, the more you may want to consider matching grants to reward your child's savings discipline. These grants can be anywhere from 1.25 to 1 to 3 or 4 to 1.
Younger children understandably have trouble grasping off-site savings, so the best mechanism for them is often a piggy bank for coins and a wallet for bills. Count the money with them periodically, and tell them how close they've come to their goals. Above all, praise their progress.
Once children reach the age of 9 or 10, they're more amenable to banks. Quantitatively adept children of this age can understand the concept of interest rates. Until they're old enough to handle a checking account, children may take withdrawals as cashier's checks or money orders.
The best way to encourage sound spending habits is to exhibit them. When planning a trip to the grocery or discount store, get your children involved in making a judicious list and sticking to it. This will teach them to avoid the bane of all savers: impulse buying.
For big-ticket items like appliances, show them how to do the research: reading articles and reviews, phoning stores to see if your choices are in stock, negotiating with salesmen on price, going to several places to see what's available and compare values.
Doubtless, an occasional purchase will be defective. No problem. Use this to demonstrate the importance of saving sales receipts and reviewing warranties. When you return the goods, take your children along and show them how to overcome salesmen's arguments.
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