By Carey Rokovich
Winter 2005-06
Raising well-rounded children is hard work. Military moms and dads often face additional challenges. For parents dealing with frequent relocation's and months away from home, talking to kids about personal finance may not seem mission critical.
How children learn to save and spend money can play an enormous part in their future success. With patience and persistence, even the busiest parents can ensure their kids will become financially savvy adults. Here are five guidelines to get started.
1. Educate On The Fly
If you wait for the perfect time to have a sit-down talk about money, the day may never come. Instead, take advantage of real-life opportunities to teach.
As early as age four or five, children will watch curiously as their parents make financial transactions. When your kids notice as you pay and take change from a cashier, take a minute to explain the purchase process. When they see an ATM dispensing cash, let them know that the money comes from your bank account and you can only withdraw the money you've earned.
When they insist on owning every toy they see on television, discuss the difference between "wants" and "needs." Their begging may test your resolve, but standing firm will reinforce the message that controlled spending is important.
2. Encourage Goal-Setting
Just like adults, children need a reason to save money instead of spending it. Savings goals for young children should be short-term and small enough to allow them to see results quickly. Saving change for a few weeks to buy a new action figure is a process they'll grasp. Putting pennies toward a far-off college education is not.
As children get older, their goals should grow with them. In their teenage years, a part-time job can provide the means toward loftier goals while also teaching the value of hard work and the inevitability of taxes.
3. Develop A System
As early as the pre-teen years, introducing systems that mimic adult life can help prepare children for the real world.
A weekly allowance is a common tool to teach kids to live within their means. But lessons can be lost if the pay is too generous or limits aren't enforced. At any age, an allowance should be small enough to require kids to make choices about spending.
There should be some expectation that a portion of the allowance should go toward savings. Help your kids decide how the allowance is allocated. Consider rewarding them by matching all or part of their savings with your own contribution. Whether they're saving for a model car or the real thing, the promise of a bigger payout provides an incentive to adopt the saving habit early. Some parents even impose an automatic savings deduction from each week's allowance. While the kids might object, they're excited when they see their piggy bank filling up.
4. Move Beyond Savings
While a basic savings account helps teach the basics of banking, adolescents eventually should be exposed to the world of investments. For most people, investing early and often is the best bet to achieve financial security later in life.
The most important investing concept children should learn is the power of compounding. If they put their money in an investment with a positive return and reinvest those earnings as they are received, the money will build on itself and grow over the long term. Put in kids' terms, it means that after a long time, they can take out a lot more money than they put in. Children also should be aware that putting money in an investment vehicle does come with risk and that a positive return is not guaranteed.
To help young people learn the ropes early, some financial services companies now offer real investment accounts specifically designed to educate kids. Some kid-friendly mutual funds invest in major companies children know, and they allow low starting balances and monthly contributions as low as $20. Most of these programs aren't heavily advertised, so you may need to do some research to learn what is available.
5. Maintain A Unified Front
Some say it takes a village to raise a child. It's especially true for raising a financially savvy child. No matter the parents' focus on teaching smart money management, mom and dad's hard work can be innocently sabotaged by too many large gifts from grandparents, family members and friends.
At the very least, both parents should agree on the plan before making rules about money. Preferably, grandparents and other family members should be clued in as well, so their temptation to shower the kids with gifts and cash doesn't counteract your teachings. Let them know their generosity is appreciated, and suggest they create lasting value from their gifts through a college fund or other investment for the child.
When in doubt, the best policy for parents is to lead by example. Your kids may not read stock charts by middle school, but they'll always remember that mom and dad took care of their money. And that will give them a head start toward achieving their own dreams of financial success.
Building Blocks of Investing
The world of stocks, bonds and mutual funds can prove intimidating to adults and bewildering for teens. Understanding a few important concepts can put you and your kids on track for investing success.
Time is on your side. The earlier you start investing, the better chance you have to ride out dips in the market and take advantage of the powerful potential of compound earnings.
You can lose money. Investments offering the potential for high returns also come with high risk. Determine your risk tolerance, or your willingness to take chances with your money, before you invest.
Diversification limits risk. Spreading your money among different types of investments lessens your risk. Even if some of your holdings go down, others may go up.
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Carey Rokovich is a salaried Certified Financial Planner™ practitioner with USAA Financial Planning Services, one of the USAA family of companies. USAA is a diversified insurance and financial services organization that has served the military community since 1922.
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Do Kids and Credit Mix?
Most financial experts recommend against credit cards for children younger than college-age. Though some teenagers may be wise beyond their years, most lack the experience to fully understand the consequences of poor credit management. Moreover, parents co-signing for a credit card in their child's name take on the risk of damaging their own credit if junior forgets to pay the bill.
An alternative to credit is a prepaid spending card, which offers the convenience of a credit card without the danger of uncontrolled spending. Other advantages of a prepaid card include:
- The child's allowance can be paid to the card.
- It's safer than carrying cash or a credit card.
- It provides hands-on experience for using plastic without the debt and finance charges.
If you do choose to give your child a credit card, take a few precautions to heart:
- Set a low credit limit, such as $500, to keep purchases in check.
- Monitor the charges online to stay aware of the child's spending habits.
- Discuss your expectations for which types of credit card purchases are acceptable, and come to an agreement on reasonable monthly spending limits.
- Help your kids understand the importance of paying the entire credit card balance on time with every bill.
- Make them aware of the risks of identity theft and credit fraud if their card is lost or stolen.
Source: USAA Financial Advice Center. Call 1-800-898-7389 for more information.