In my life before children I was a financial planner. For over 10 years, I spent my days talking and listening to people about their money. In the process of helping hundreds of clients untangle and rearrange their financial lives, I made an interesting discovery: when it comes to money, there are two types of people – those who are good with money and those who are bad with money.
The “good with money” people were like the retired couple in their 70s who, with just an average income in their working years, managed to squirrel away over $900,000 into a passbook savings account. The “bad with money” people were like the woman in her 20s who had the good fortune to win $100,000 in the lottery and then managed to blow it within a year.
I came to understand that the true secret to financial success is not about how much money a person has – or makes – but rather, it’s how that person has learned to think about his or her money that makes all the difference.
Now that I have children, I have realized that teaching them how to think about money ranks right up there with potty training and learning to brush their teeth. Without this basic skill, their lives will stink up pretty quickly and their chances of becoming happy, successful and independent adults will be slim.
Planting the Seed
Most experts agree that the best time to start teaching kids about money is when they start asking questions. Dr. Judith Briles, the author of Smart-Money Moves for Kids: The Complete Parent’s Guide, points out that “by the time a child is 3 years old they learn there is only one way for Mom and Dad to take things out of a store – by paying for it with money.”
Like most curious 3-year-olds, my daughter was full of “why” questions. Aside from “Why do I have to take a nap?” and “Why do I have to eat my peas?” she was very interested in the goings on at the grocery store. “Why did you give that lady some paper?” and “Why did she give you those pennies?”
To bring the concept that money has value into her thinking, I started letting her make small purchases on her own. If a store wasn’t busy, I would give her a dollar and let her buy a pack of gummy bears or bubble gum. She would march up to the counter, her head barely visible to the clerk, and proudly hand over the money. Not only did she begin to understand the concept that money gets you the things you want, but she was also developing a strong sense of confidence in her ability to successfully interact with people in the process.
At about the same time that kids are finished with putting money in their mouths, they are ready to begin learning the differences in value between pennies, nickels, dimes, quarters and paper money. A great way to introduce this is with money games.
There are loads of software programs, games, puzzles and books available on the subject. One of our family’s favorites is Funny Money, by Lara Bergen. Full of money stickers and silly illustrations, Funny Money is a great interactive book for the preschool set.
At our house, the favorite money game by far is separating and counting the coins in the loose-change jar. The kids and I will go to the bank to get coin rollers (most banks provide them free to customers) and then we separate and count the coins and pack them into the rollers. The big payoff for the kids is when we exchange the coin rolls for paper money and go out for McDonald’s Happy Meals™. The big payoff for me is how amazed the kids are that such a huge pile of coins only bought a couple hamburgers and a coke.
Making It Grow
By the age of 6 or 7, most kids have become enthusiastic consumers and the time is ripe to introduce the concepts of budgeting and saving. In order to learn how to manage money, kids need to have money to manage and a weekly allowance can be an excellent teaching tool.
There is a lot of debate about the pros and cons of allowance. I – along with most parenting experts – believe that allowance should not be attached to household chores because, as members of a family, kids should be expected to do their fair share without being paid.
The most effective way to use an allowance to teach children about budgeting is to have regular family meetings that involve them in the planning of their personal expenses. Their allowance should include all of the items that will be purchased for their benefit – lunch, new shoes, clothing, field trips, sport fees, etc. – as well as an amount for discretionary spending.
By doing this, the child begins to understand the choices he or she must make when dealing with a fixed amount of cash. For instance, if your son can see that signing up for the soccer team is going to cost $250 for fees and equipment, and his monthly allocation is only $300, he will have a better understanding of why he won’t be getting the $100 tennis shoes he wanted that month.
Learning to think like a saver is the single most important money skill we can teach our children. The biggest problem in learning to save is incentive. It’s no secret that it is a lot more fun to spend than it is to save and, for most adults, the incentive to save developed only after some financial disaster.
The best way to help kids get into a good saving habit is to create a scenario in which it becomes stupid not to save. You can do this by creating a “mini matched savings plan.” Just like a 401(k) plan, a parent agrees to match dollar for dollar the child’s savings, with the stipulation that the money cannot be withdrawn until some point in the future without a substantial penalty. Even though they don’t get to spend the money right away, kids love the idea because they are getting the immediate gratification of more money now.
The goal of teaching children about money is not to create little Warren Buffetts, but rather it is to get kids to think about money in a way that encourages responsibility so that if, someday in the future, you should get the call, “Hey Ma, guess what? I won the lottery!” you won’t have to worry.
Funny Money, by Lara Bergen, PPS, 1999. $5.99. A great interactive book for preschoolers.
Smart-Money Moves for Kids: The Complete Parent’s Guide, by Judith Briles, Mile High Press, 2000, $19.95.