Find yourself digging out of a small mound of debt? Haven't balanced your checkbook in months? A budget-- what's that? Just because we parents have hit a few bumps on the road to financial security doesn't mean our kids are condemned to repeat our mistakes. With a little planning, we can teach our kids some money smarts...and maybe even learn a few new tricks ourselves.
In order to learn how to use money, kids need to have some. Allowance remains the best teaching tool, says Jayne Pearl, author of Kids and Money (Bloomberg Press, 1999) and financial columnist for Oxygen.com.
At what age?
"It can be started quite young in a very modest way," says Pearl, citing age six or seven as a common starting point.
Before receiving an allowance, kids should...
- be able to count, add, and subtract
- be familiar with the different coins and bills
- show interest in money or spending
Should allowance be linked to chores?
No, says Pearl, along with other experts. Tying allowance to chores can lead to power struggles and take away the incentive for helping out the family with no reward. ("Sure, I'll help bring in the groceries...if you give me a dollar.") It also reinforces discrimination since women don't get paid for doing chores. "Children (and fathers too) should have to contribute to household chores just because they are part of the family," says Pearl. Instead of money, parents can tie chores to other consequences: "When my son doesn't do his chores because he doesn't feel like it, I might not feel like taking him to soccer practice," says Pearl. However, kids can be paid for extra tasks that you might otherwise pay someone else to do, like washing the car.
Base it on family circumstances and what you expect kids to pay for. Make kids responsible for certain purchases, like school lunch, bus fare, sports fees and equipment. "Give the kids the money that you're spending anyway and put them in charge of it," says Pearl. "For instance, my son would get his hair cut every week if I let him, but it gets expensive. So I put into his allowance, which is based on a budget of what he's supposed to pay for, a monthly amount for haircuts. If he wants another haircut during the month, then he has to use his own money. He has to make trade-offs, which is the whole point of allowance, to teach the kids how to tell themselves No, how to make trade-offs, and how to delay gratification instead of just saying Gimme!"
When should it be raised?
Though most parents automatically give a child a raise each year, Pearl says this isn't absolutely necessary. A raise should be based on increased expenses a child has to cover. Allow your kids to negotiate their raise and have them document their spending to prove they need a raise. This is an important part of the learning process.
Teach the Value of Saving
"Pay yourself first!" say financial experts. Unfortunately, saving money is a skill that many adults haven't mastered. Hollis Harman, author of Money Sense for Kids! (Barron's, 1999), says start them young. "I think the concept missing in our culture is this default mentality of saving a portion of everything you receive. If that could be plugged into our kids before the age of ten, it would be like brushing your teeth-you have to do that too."
For young kids, Harman recommends three glass jars: one is for spending now, one is for short-term savings, and one is for long-term savings. "It's the jar that becomes their bank account that then becomes an investment account and starts to build their future and their net worth." Allowance, gifts and earnings should always be divided among the three jars.
Teach kids the rewards of saving by giving them meaningful short-term goals, says Jayne Pearl. Five- or six-year-olds might save for a five-dollar toy that they can get in just two or three weeks, while ten-year-olds might save for a fifty-dollar item over several months. "Kids feel the power of delayed gratification," says Pearl, "and it teaches them that they can set goals that are meaningful."
Pearl uses the example of her son, who saved for a year and a half to buy an electric guitar. "When he got it home, he was so overwhelmed he was in tears," she recalls. "There's so much pride attached to this guitar. I would have robbed him of that experience had I just bought it for him."
Teaching kids how to save carries rewards far beyond material objects. It shows kids the power of setting and achieving goals. "If you don't believe that you are able to set goals that are meaningful and achieve them, you're not going to be successful in life. You're not even going to try," says Jayne Pearl. "So this is a very important element of getting kids on a cycle of success."
JumpStart: Financial Smarts for Students
Kiplinger.com: Money Smart Kids
Sovereign Bank's Kid's Bank
The ABCs of Money Archives: A guide to raising money savvy kids by Susan Beacham.