Raising Money-Smart Kids

Money is a tool. Just as you wouldn't
turn your child loose with a chainsaw
without giving him a few pointers, you
shouldn't assume that he will learn about
money when he gets his first job.

One of my children asked the other
day how we learned how to do everything.
Digging into what she meant, she gave us
some examples. How do we know how to put
gas in the car? How did we learn what to do
at the grocery checkout? And the answer is, a
combination of seeing what others do, asking
some questions, and giving it a try. That's also
the best way to learn about money.

So what can you do to set up that type
of financial learning environment for your
children? First, give serious thought to what
you can include them in and show them
how you and the family receive and use
money. Second, encourage your kids to ask
questions about money and ask them questions
that make them take finances into their
decision-making process. Third, give them
opportunities to make financial decisions
and experience the outcomes.
The foundation of this method of teaching
kids about money is that you make
information available to them, set up the
ability for them to make choices, and allow
them to learn from experience how their
choices affect them.

In the case of your child's first exposure
to money, let her know that it's not up
to you to get her every toy she wants. Give
her a budget of her own money and let her
decide--within limits--what she gets and
what she doesn't. As she gets into middle
school, she'll be able to take a greater role
in deciding what discretionary purchases
she makes. By high school, she can begin
to make her own clothing purchases and
be involved in whether or not she has a car.
This helps avoid battles about whether she
gets the pair of designer jeans or the generic
brand, two dolls or one, the muscle car or
a safe, modest sedan. Most importantly, it
establishes early in your child's life the idea
that she will ultimately be financially responsible
for herself.

We'll talk about two basic principles:
savings and debt. These tips work, but make
sure you adapt to your family and your kids'
needs.

Savings

There are a couple ways to set up savings.
One is to have one place where your child
keeps her spending money and another
where she keeps her savings. Try two jars,
one jar and one bank, a purse and a piggy
bank--whatever makes sense for her and lets her still feel in control. The next step is to
discuss how much she is saving. If she takes
a fourth of everything she gets and puts it
in savings, she'll see it add up pretty quickly,
but still have a good chunk of change that
she can spend when she wants.
Another method is to put money in a
bank account, probably a traditional savings
account. Look around for the highest compound interest rate. Many banks or credit unions
have policies that allow minors to have
accounts without the minimum balance
requirements.
The important part is to convey that if
money is saved, it can make money while the
financial institution is holding onto it. When
interest rates are low, that's pretty hard to
get excited about, but it's still a better return
than keeping money in a can or spending it.

My son actually brought up the idea of
having a savings account before I introduced
it. He was about ten years old and said he
wanted to put some money in the bank. I
asked him if that was because he felt the
money would be safer there or if it was so he
could earn money on it in a bank. He said,
"The second one!" Then he asked about how
much he would earn. Rates were abysmally
low then, and I was afraid that he might lose
his motivation. I explained that he would
probably only get about one percent, which
meant that if he had one hundred dollars in
his account for an entire year, he'd get about
one dollar.

"Well," he said, "that's one dollar more
than I'd get if I didn't put the money in the
bank." This would be a rewarding moment
for any parent, but for a parent who is also
a fi nancial professional, it bordered on
euphoria.

Debt

Children can start getting the concept of
debt very young. In all likelihood, it's not
a concept you need to introduce--she'll do
it. At some point she'll want to buy something
she doesn't have enough money for
and she'll ask if she can borrow some money
from you.

First of all, have her think through why
she believes waiting isn't a good option.
Also, the purchase should be something that
will last longer than it takes her to pay you
back. For instance, you probably wouldn't
want to lend her money for a dessert, but you
might be willing to lend her money for a CD.
Once you and she agree that borrowing
may be okay, you can go to the next step,
which is determining how much to
borrow.

Up through elementary school, I suggest
never lending more than half of a purchase
price. Also, the loan should be an amount
that can be repaid in no more than a month.
So if your daughter wants to buy a doll that
costs ten dollars and she only has one dollar,
no loan. If she has six dollars, you can
loan her the other four. If she wants an iPod
for one hundred dollars, she has sixty, and
her allowance is only five dollars a week,
that would stretch the loan out too long for
someone her age.

When kids get into middle school, they
should start paying interest. You don't
have to use market interest rates; a simple
monthly charge works well. If she borrows
thirty dollars, every week she needs to
understand that one dollar of every weekly
payment goes to use as a finance charge.
By the end of high school, she needs to be
charged regular interest, just like she would
be at a bank.

Through the debt-learning process, your
child needs to be exposed to two concepts: repossession and credit.

When you loan her money, you'll need
to establish up front what her minimum
payments are. If she gets more than one
payment behind, the item she bought with
the loan needs to be repossessed.

Children also need to learn about credit.
If your daughter gets behind on a payment,
don't lend her money the next time she asks.
The next time after that, you might lend her
the money, but require her to save up more
of the down payment and charge her more
interest.

Remember to explain that the basic
tenet of debt is that you shouldn't take longer
to pay for something than its useful life.
You don't want a twenty-year car loan, but
you could probably feel comfortable with a
twenty-year home loan.

All of these principles mix three basic
techniques for teaching your kids about
money: hands on experience, example, and
conversation. When combined properly,
they can work toward your child having a
thoughtful process of how he or she deals
with money.

PLAYING IT SAFE

Here are four points to keep in mind as
you embark to teach your children about
money:

• Give them a few alternatives for how
to earn and spend the money. All the
choices need to be ones that you're
okay with.

• Respect the individuality your kids
express with their financial decisions.
It's not important that they make decisions
you would make. It's important
that they learn to make their own
choices and live with the consequences.

• Don't bail your children out of bad
financial decisions. Many people learn
best from their own experiences. When
they are young, the mistakes are less
expensive and more likely to change
future behavior than later in life. If you
do bail them out, you're teaching them
that you'll always be there to save
them.

• The hardest lesson for you may be that
you can't save people--even the ones
you love the most--from themselves.
Allowing children the opportunity to
learn from their own experiences while
they're young lessens the chance they'll
need saving later.

Linda Leitz has been a financial professional
since 1979. She is a certified financial planner and
enrolled agent with the IRS. She is the founder
and co-owner of Pinnacle Financial Concepts,
Inc. in Colorado Springs, Colorado, where she
helps families and individuals with their personal
finances. She is also the author of The Ultimate
Parenting Map to Money Smart Kids, from which
this article is excerpted.

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Teaching children about money

Pat in Arizona

I think your article is wonderful on teaching children about money. We need more help in this area. Thanks! I am going to try to buy your book.