Let's face it -- kids are under more pressure these days to spend. Babies are wearing designer clothes, and even toddlers are brand conscious. (At age three, my son only wanted to drink the juice with Buzz Lightyear's picture on it -- he called it his "spaceship juice.") So the sooner we start making kids aware of saving, budgeting and spending wisely, the better they'll be at navigating the consumer jungle, says Jayne Pearl, author of Kids and Money (Bloomberg Press, 1999) and financial columnist for Oxygen.com.
Do your kids have a bad case of the "gimmes"? Can't go to the mall without them whining for you to buy them something? Put them in charge of their own spending from their allowance, says Pearl. "Once you start giving your kids allowance, you should pull back on spending for discretionary items, especially for the things which you've identified as being things for the kids, like CDs or computer games or collecting cards or beanie babies. Then a parent no longer has to say No. If a kid has the money and wants to blow it, that's fine, but then they won't have it the next time."
What about shopping for clothes? To kids, popular brand names are more important than prices. Let's say you find a good pair of sneakers for $50 but your child demands a pair of Nikes for $100. Pearl calls that difference in price the "Cost of Cool" and says that kids should be responsible for paying that difference from their allowance.
For stress-free back-to-school shopping, Pearl says make a list with your kids, determine a reasonable price for each item, and calculate your final budget. At the store, the kids must buy every item on the list, but if they find some bargains, they can use the savings to buy something more expensive than what you've budgeted. You then become the child's "shopping coach" instead of the villain always saying No. "There's nothing to argue over. Your kid is deciding what they want and you're helping them see if they can afford it." With this strategy, you make kids aware of their spending and teach them to look for bargains and make trade-offs instead of just saying Gimme!
Pearl also has a "one comment rule" in her household. "When my son is about to make a purchase, I'm allowed to make one comment -- a suggestion, a critique, whatever. Then he makes his decision and I have to shut my mouth. There are family rules, like no sexual content and no violent content. As long as he's not violating one of those rules, he gets to buy what he wants." If your child makes a bad purchase, it's all part of the learning process, says Pearl. "I'd rather he make a 12 dollar mistake at age eleven than a 12 thousand dollar mistake when he's out of college and buying a car, making decisions based on foolish criteria."
Learning About Investing
Encourage your children to save a portion of their allowance long term, says Hollis Harman, author of Money Sense for Kids! (Barron's, 1999). Once they have saved about a hundred dollars, show them ways to invest that money so it will grow faster. Harman uses a bicycle metaphor to explain investment and risk to kids. "The bank is the tricycle, and a bond is a two-wheeler with training wheels. Take off the training wheels and you're into a mutual fund and you have this pool of managed stocks. And when you put the responsibility on yourself, suddenly you're on this road bike with your shoes clamped to the pedals and your helmet on. You're in for the ride of your life with the greatest risk but also the greatest rate of return."
Kids (and parents!) who want to learn more about the stock market can play at investing with several online stock market games geared towards kids. The Stock Market Game (http://www.smg2000.org/) for grades 4-12 helps kids research stocks, choose portfolios and track the progress of their "investments." Harman is also launching her own stock market game on her website http://www.kidsfinance.com/.
When your kids are ready to invest, instead of paying brokerage fees, look for companies that sell shares directly to the public with little or no transaction fee, says Pearl. These dividend reinvestment plans (DRIPs) are offered by about 1100 U.S. corporations.
Credit Cards for Kids?
Easy credit bombards kids once they leave home. Teach teens how to use credit cards responsibly before they leave home, says Pearl. A secured credit card is a good way to start. It allows kids to charge only up to the amount deposited in a savings account. "Get them in the habit of paying off the entire balance every month and only charging what they know they can afford."
The goal is to teach our kids to be fiscally responsible. After all, they're going to be taking care of us one day, right? "Establish a good relationship with money and maybe in the future you don't abuse it," says Harman. "The sooner kids start, the more cushion they can be building for funding a dream, providing for an education, and helping those who are less fortunate."
Stock Market Game
Stein Roe's Young Investor Fund
JumpStart: Financial Smarts for Students
Practical Money Skills: By Visa U.S.A., teaches parents and kids about finance
Sovereign Bank's Kid's Bank