How Your Kids Can Nickel and Dime Their Way to Smart Money Skills
By Maura Keller
Fall 2003
It's a parent's worst nightmare: Your 19-year-old has maxed out another credit card, defaulted on a car loan and is two months behind on the rent. "I just can't seem get a handle on things," laments your grown child. "Can I move back home?"
If you think your children would never do this to you, think again. More and more young adults, many of whom are up to their ears in debt, can't afford to live on their own. Unfortunately, teaching money lessons to kids is one of those sensitive subjects many busy parents would rather avoid. But financial literacy is an increasingly important issue facing children of all ages-one that parents first have to master themselves.
Making the 'Green Stuff' Real
Long before they can add and subtract, children know about money. They see their parents putting coins into parking meters or "magically" receiving money from the ATM. They rip open birthday cards and shake them upside-down to see how much cash flutters to the floor.
"Good money habits begin at an early age," says Chris Farrell, the economics editor at Minnesota Public Radio and a contributing economics editor to Business Week. "By explaining the importance of saving and spending, you're giving them the confidence they need to manage money wisely later in life."
Although not all that much later. Today's 8-to-17 crowd has big spending power - $150 billion in 2001 alone. If that number sounds scary, here's what's scarier: Surveys say teenagers know almost nothing about how money works. The Jump Coalition, a group created to promote financial literacy among teens, gave a nationwide test in 2002 on personal finance basics to 12th graders. The average score was a 50 percent - an F in most classrooms. But until financial ed becomes as common as driver's ed, parents and grandparents must fill the role.
Small Change
Before adults can talk to kids about money, they have to determine their own values.
"Modeling appropriate actions does a large part in teaching kids about money," says Nathan Dungan, a financial consultant and author of Prodigal Sons and Material Girls: How Not to Be Your Child's ATM. "But for some parents, it's the classic, 'Do as I say, not as I do' scenario."
Just look around at the number of Americans swamped by credit card debt, struggling from paycheck to paycheck and making no effort to save toward retirement. Even parents who place restraints on their indulgences fail to convey that message to their kids when they whip out a credit card or go to the ATM. "Kids begin to think there is an unlimited supply of money," Dungan says.
If you want your children to control their money, rather than have money control your children, put money in the proper perspective. So when do you start? "As soon as they utter the words, 'I want,'" Dungan says. At age four or five, when children are able to count and can begin to distinguish between coins, they're ready for their first financial strategy: how money gets converted into things.
Many experts agree that allowances are an excellent way to teach money skills. "The goal is to give your child the opportunity to budget, spend and save his or her own money," Farrell says.
A simple way to set an allowance is paying a base rate - 50 cents or $1 a week - for each year of the child's age. "An allowance should be big enough so that a child has money to save and give to charity as well as spend," Dungan says.
By middle school, you can delve further into your financial puzzle: Explain that your income is divvied among living expenses, investments, your retirement plan, their college fund and other obligations. "Don't emphasize how much you have, but rather that you must manage your money wisely to meet financial goals," Farrell says.
Everyday Learning
Farrell urges parents to turn everyday consumer experiences into teachable moments. When you buy generic ketchup instead of the more expensive brand, tell the tyke in the grocery cart why. When using a credit card at a restaurant, take the opportunity to teach children about how credit cards work. Explain to children how to verify the charges and how to calculate the tip. And the next time your daughter begs to press the buttons on the ATM, tell her how the money got there in the first place.
"It's also important to establish a regular schedule for family discussions about finances," says Tony Valazza, a financial associate with Thrivent Financial for Lutherans in Arcadia, California. Discussion topics should include the difference between cash, checks and credit cards; wise spending habits; and the advantages of saving and investing. With teenagers, it's also useful to discuss what's happening with the national economy, advertising tactics and how to economize at home.
"All of this information will be important as they take on more responsibility for their own financial well-being," Valazza says.
Share, Save, Spend
Nearly every toy or other item children want can become the object of a goal-setting session. Such goal setting helps children set the "saving" gears in motion.
Some parents use matching funds to encourage their children to squirrel away money - as employers do with 401(k) plans. Consider paying interest on money children save at home; children can help calculate the interest and see how fast money accumulates.
And don't forget about consequences. If your son blows his allowance and then begs for more money to buy new trading cards, you have a chance to teach finance lesson No. 1: If you spend all your money today, you won't be able to get what you really want tomorrow.
"Invariably, kids make mistakes," Dungan says. "Let a child experience the consequences of his or her decision." Remember that it's much better for children to learn when they're young and the amounts of money are small, than when they're teenagers or college students and the sums and consequences are much larger.
It's also important to discuss spending pros and cons before more spending takes place. Encourage them to use common sense when buying. This means doing research before making major purchases and waiting for the right time to buy.
And encourage charitable giving. When you attend church, let your five-year-old put the family offering in the collection basket. Set up a separate money jar for gifts to non-profit organizations that your child can appreciate, such as UNICEF or the Humane Society. Never mind that the weekly gift is only $1, says Dungan. "Your child is developing a lifetime habit of generosity."
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© Thrivent Financial for Lutherans. This article appeared in the May/June 2003 of Thrivent Magazine, and is reprinted by permission.
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