It's Never Too Early to Teach Money Skills
By Carl Surran
Fall 2007
"Daddy, look – there's money coming out of that machine! How fun!"
Not long ago, I realized my five-year-old daughter believed that all anyone had to do when they ran out of money was to go to an ATM, put in a card and cash would magically appear. She didn’t understand that Mom and Dad had to have money in the bank in order to get money out of the machine.
Unfortunately, the financial sophistication of many children doesn’t seem to improve much as they begin to grow up. A number of studies have highlighted the dismal state of financial education among young people in the
Young adults are faced with far more financial choices and gain access to credit at a much earlier age than their parents. Among college students, 55 percent acquire their first credit card during their first year of college and 83 percent have at least one credit card.
Some of these young people are piling up thousands of dollars in credit card debt, which may have dramatic repercussions on their quality of life later on. Such financial missteps can make the difference between settling into a comfortable retirement and a bare-bones existence.
Many of these financial foibles may be circumvented if parents teach personal finance and economics from a young age, when children are forming the habits they use throughout their lives.
Setting a Precedent
It’s never too early to teach your children the value of a dollar and help them build strong lifelong financial habits (see “Common Cents at Any Age” sidebar).
“Parents can begin to teach good money habits to their children at a very early age,” says Jump$tart Coalition executive director Laura Levine. “By instilling in them a positive attitude toward saving and investing, parents can give children the confidence they need to manage money wisely throughout their entire lives.”
Since we do not know what the future holds, we prepare for the unknown by setting money aside. Help your children understand that we cannot have everything we want and that we need to make choices about how we spend our money.
Teaching children to save a portion of their money at an early age sets the precedent for future money habits. Giving a regular allowance tied to specific results, such as completing chores, is an effective way to teach sound saving and spending habits. By saving for a special item, children experience the accomplishment of achieving a goal they set for themselves. As they watch their money grow, they learn the benefits of delayed gratification.
How much weekly allowance is enough? As a sensible starting point, make it equal to half your child’s age. You can always increase the amount if you find the incentive is working well for you and your child.
Neale Godfrey, author of “Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children,” recommends helping your child split up all money he or she receives. Parents and children can talk about how to divide each week’s allowance, but Godfrey suggests dividing the money using a “10-30-30-30” system and placing it in four separate, labeled containers.
- 10% Charity – Take 10% off the top to share.
- 30% Quick Cash – Use this 30% to spend on little, fun things.
- 30% Medium-term Savings – Save this 30% for one to six months to purchase something special.
- 30% Long-term Savings – Use this 30% for important future needs, such as a college fund.
While your child is in elementary school, open a savings account. Most banks offer special accounts for children that can be opened with as little as $50. Bring children to the bank to set up an account in their own name and deposit their money.
When your child is in high school or middle school, study several investments together. Perhaps take your child with you to an investment club meeting or to visit a financial advisor, and research investments online together. Show how to track the investments online, from mailed statements and in the newspaper.
Everyday Learning
In addition to employing a wealth of available financial education materials (see “Free Financial Education Instruction Materials” sidebar), you can teach common-sense personal finance to your children through your everyday actions. Be a role model: Don’t be materialistic, and stay out of debt. Your children will follow your lead, especially if you talk to them about what you are doing.
Be firm in saying no when your child asks for expensive toys and clothes. Don’t let their droopy faces convince you to give in. But don’t just say no; give your child specific reasons why he or she can’t have something. Explain that families have different amounts of money, which they manage differently.
Do your children already have too many toys or clothes? Perhaps you can convince them to give some of the items to charity or organize a garage sale to raise money and make room for new belongings.
If your child is old enough, suggest that he or she perform odd jobs in the house or around the neighborhood to earn extra cash. Babysitting, mowing the lawn, helping elderly grandparents at home, and walking the dog all are ways for your child to pick up some additional money.
Turn everyday consumer experiences into learning opportunities for your child. On trips to stores, talk about the basics of shopping for sales and using coupons. When you buy generic cereal instead of the more expensive brand, explain why. When you make a purchase with a credit card, talk about how credit cards work.
And the next time your little girl begs to press the buttons on the ATM, tell her how the money got there in the first place.
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Carl Surran is editor of Military Money, published by InCharge® Education Foundation, Inc., a national non-profit organization which designs, develops and implements personal finance education programs for consumers of all ages, and conducts research on consumer credit, debt and related issues.
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Common Cents At Any Age
Pre-school: Recognize coins and begin to understand what they are worth and which ones are worth more than others.
Primary grades: Count, sort and save change. Help “manage” a family vacation or treat fund.
Grades 4-6: Set up a savings account online or at a local bank. Keep a budget of personal spending to see where your child’s money is going. Become more aware of costs of running a family and your child’s role in helping the family save money. Begin to understand the concepts of credit and the importance of using credit responsibly.
Middle school and up: Manage savings with an eye toward funding future needs such as clothing, school supplies, even some college expenses. Understand financial options, opportunities and obligations of adults – including credit, credit reports and investments.
Source: Common Cents™, State Farm’s online financial education program. Go to the Kids Stuff section at www.sfcommoncents.com.
