Money gives people adults and children the opportunity to make decisions. Educating, motivating and empowering your children to become regular savers and investors will enable them to keep more of the money they earn, and do more with the money they keep. So where do you start with teaching your kids about money?
"Many parents just don't talk about money," says Carol Wilson, a financial adviser in Salt Lake City. "It's hard for kids to become good money managers if no one has taught them how."
Feed your preschooler some money basics
Experts recommend an early start for money talk between parents and children. Your toddler begins learning about money from what she observes during visits to the store. When she reaches age 3 or 4, you should be explaining some of your shopping decisions: 'We're buying peaches today because they're on sale."
Let your child help you put items into the cart and unload them at the checkout counter. If he's always asking you to buy him a treat, give him a small amount of money each week (a dollar is enough) to make his own purchase. Direct him toward appropriate items he can afford. Then let him give the money to the cashier and receive the change. Even if he can't count beyond 5 or 10 at this point, he'll begin to understand how money works.
At home, teach your preschooler to distinguish among pennies, nickels, dimes, and quarters, and explain that each has a different value. Empty a coin purse on the floor and help her sort the coins into piles. Tell her how many of each kind adds up to a dollar. (She may be surprised to learn that a dime is worth more than a nickel, even though the nickel is bigger.) To reinforce the lesson, play "store" with your child, using her toys as "merchandise" and your spare change for payment.
Use an allowance to help your child plan for expenses
By the time your youngster enters elementary school, he'll probably be lobbying for an allowance. Kids who aren't on allowance don't have consistent income; it's difficult for them to set goals, budget, and save, because they don't know how much money they'll have each week or month. In fact, kids who get allowances do tend to save more, a recent survey found.
"An allowance is an excellent money-management teaching tool," says Carol Wilson. "Young children can be taught to save and budget for things they want to buy next week or next month. As they get older, they can work toward bigger financial goals, such as buying a car or subsidizing college costs."
How much allowance? One recent survey showed that youngsters age 8 to 9 average about $4 a week, while 10- to I 1-year-olds get about $5, and kids 12 to 14 receive $7 to $9 weekly. Many teens supplement allowance income with earnings from extra chores or part-time jobs. Parents can foster the idea of extra pay for extra work by posting a list of special chores, with proposed fees.
To calculate an allowance, start with the expenses it must cover. Young kids might be required to pay only for treats; as they get older, you might have them budget for such things as school lunches, movie tickets, clothes, and transportation. A fair allowance should be enough to cover "needs," with a reasonable amount left over for "wants." (You and the child will have to negotiate the definition of "reasonable.")
Have your teen try on a clothing budget
Family physician Bob Smith and his wife, Lorraine, have seen firsthand how allowances can teach kids about money. When each of their two daughters turned 13, the Jones family established a clothing allowance. Based on spending histories, the couple determined how much each girl should be permitted to pay for clothes for a year. 'We took them to the bank to open checking accounts," says Bob. "Then we deposited one-twelfth of each one's clothing allotment into her account each month."
The daughters had to budget for all their clothes, and balance their checkbooks. "If they messed up, we wouldn't bail them out," says Jones. He recalls one bounced check and a winter when one daughter did without a warm coat - a hardship, since the family lived in Wyoming at the time. To keep their money responsibilities from seeming too burdensome, each girl received a separate allowance - $1 per grade level in school - for discretionary spending.
When each daughter turned 16, her clothing allowance was expanded to include all personal items. At this point, the Jones also provided each girl with a $3,000 used car (titled in the parents' names) and picked up the insurance costs. But the youngsters first had to qualify for the insurer's good-grade discount and agree to buy the gas for any non-essential driving.
"Things have worked out really well," says Bob Jones. "Our girls became thrifty. They scouted out clothing sales and cruised thrift stores. We listened at the end of each year if they pleaded for more money, but we never had to increase their allowance by much."
The Smith’s daughters are now 19 and 16. The older saved paychecks from her summer job to buy a computer for college. Her sister, a high-school junior, will save her allowance "like a skinflint," says father Bob, to pay for a plane ticket to visit a friend. Jones is satisfied that his daughters have become responsible about money. "I didn't want them growing up thinking it grows on trees," he says.