Teaching Kids About Money (Part II) – Raising Money Savvy Kids in American Society
By: Arman Rousta
Generally, American kids tend to have negative connotations of money since it is the root of many struggles for their parents. Perceptive as they are even at ages as young as three years old, kids tend to pick up this sense of anxiety from their parents when it comes to money matters. Why does it seem like such taboo to talk about money with kids, like we are trying to protect their innocence? After all, more teenagers than ever have credit cards and kids' knowledge of math is for the most part advanced enough by the age of ten to understand basic financial concepts such as savings, compounding interest, debt, and financial goal-setting. So where do we expect kids to learn about basic financial principles? They are not teaching it in schools. Do not expect your kids to graduate from high school with any knowledge of how to balance a checkbook unless you take charge of this important yet underrated part of their overall education. A teenager with a credit card not understanding the basic principles of personal finance is a disaster waiting to happen. Let's do something about it.
Youth Money Management starts at home.
You have to develop a system that conveys to kids the important principles of finances. It goes without saying that you have to practice what you preach, because as we know, kids follow what they see you do more so than what you say. So, if you are in debt or your finances are not "in order", you must consider the negative impact that this will have on your system. The last thing you need is your kids questioning you and making you feel defensive about an area that you have made glaring mistakes in. If questioned or confronted by your child, my advice here is to turn it into a positive by saying something like "We have made financial mistakes in the past and we are paying the price for it. The key is that we are now committed to a new system and being more financially responsible will allow us to have greater control, peace of mind and freedom in our lives." Instead of trying to cover up past mistakes and trying to come off as perfect role models, it is more positive for you as a parent to admit mistakes to your children and use it as an example. Not to veer too far off the main topic here, but your honesty will go a long way in developing good, open communication within your family.
Allowance is a good starting point.
So why do only 60% of parents give their children an allowance? Truth is, they just don't know where to begin. In our "how to" culture, there are not many templates out there for how to go about starting an allowance program. In fact, there is no right or wrong approach when it comes to giving your children an allowance, although judging from the experience of others is a good place to start. If you have friends or family that give their kids an allowance, talk to them about it to see what is working and what isn't. Just beware that the same system may not work for your kids. Listed below are useful approaches to establishing or, if you already have something in place, improving your allowance system:
- Start early. The best way for you and your kids to learn about money management is through experience. You don't have to get it perfect on the first shot. While it is never too late to establish a system, the earlier the better for the development of good habits when it comes to money matters.
- To reward or not to reward for chores? The big controversial issue when it comes to allowance is whether or not to tie payments it into chores. Should you create an incentive type of system that allows kids to "earn" more allowance when they do extra chores and punish them if they don't fix their beds? The "experts" are all over the place on this one. The problem here is that experts seem to project their own experiences onto the world, assuming that because something worked or didn't work within their own family, everyone will get the same results. This is simply not true! Providing some level of incentives is healthy because it ingrains within kids the fact that there is some value in their work. It teaches discipline. After all, is that not similar to what we all experience in the "real world" once we are out here? Work hard, and get rewarded for it. Take care of your responsibilities and your needs will be taken care of.
- Create savings incentives works. Besides chores, it is a very good idea to reward your kids when they choose to defer the instant gratification of spending on games or CDs and instead elect to save their allowance for a longer term goal, like college or a new computer. Similar to the principles behind a 401k plan, parents could set rules such as "for every dollar you save for at least one year, we will match you 25 cents." This type of incentive can go a long way towards teaching your kids one of the most valuable lessons possible, delay of gratification. In a world full of marketing messages and tempting consumer products, this lesson is invaluable for kids to learn at a young age.
- Incorporate lessons on debt. Sometimes the only way to learn about something is to feel the pain. The U.S. has trillions of dollars in consumer debt, and the numbers are growing every year. If your kids want to borrow money from you to buy something outside of their means, you should consider giving it to them, but only if you charge interest for it, and make sure they see how they have to pay back more than what they borrowed by automatically deducting from future allowance payments. Let them feel the pain on this level instead of when they get their first credit card.
- Establish the rules and make sure that everyone is on the same page. Whichever way you go on the incentive allowance concept, make sure that the rules and timing of allowance are clearly understood by parents and kids alike.
- How much to give? This depends on a few factors: a) How much money you are currently spending on each child? If you don't know this, then take time for the next month to track your expenses per child; b) How old is the child and are they capable of managing their money? Most child psychologists agree that once kids have the capacity to understand what money is and what it is used for, they are able to manage money on some level. Somewhere between 5-7 years old is our recommendation; and c) What is your personal philosophy on buying toys, candy and games. If you believe that kids can earn these treats and you don't mind if they pay for them out of their own pocket, then plan to give them enough money so that they can cover their basic expenses, save at least 10% and also some something left over for spending on things that they want, whatever that may be.
- Be consistent. Make sure that you pay on time and according to the rules that you have established. According to Amy Nathan, author of The Kids Allowance Book, breakdowns in allowance are pretty common and often lead to the system falling apart.
- Be flexible. If the system starts to break down or becomes a cause of arguments, it does not mean that it is a bad idea to have an allowance system but that your system needs some discipline or adjustments! You must remain flexible to introducing amendments to the system as you gain experience as a parent. As your kids get older, naturally they should get more of an allowance and even be encouraged to participate in the college savings process. Encouraging them to find work when they are of age is not a bad idea either, but cutting their allowance off one day and sending them off to work is not advisable. As long as they are under your roof and abide by the responsibilities that you have laid out for them, they should continue earning their allowance.
- Allowance Reviews. Depending on how much time you are willing to allocate to Youth Money Management, at least once per year but more likely at the beginning of each season, you should meet with your kids to review the allowance system, let all parties suggest adjustments and make any changes that you see fit, including issuing "raises" and introducing new incentives or rules. Try not to make drastic changes to your system all at once as it may confuse your kids, which will hamper their ability to learn good financial habits.
Teaching unselfishness through money.
Another key rule of thumb to teach your kids, by example and also through discussion, is to give some portion of their earnings to a worthy cause. At least 10% is recommended but 20-25% is better in my opinion. Even if it is 10% of $10, that $1 can be a solid contribution to a charity or cause of some kind. It is the principle that counts, not the amount. As adults, we get hit so hard with taxes and burdened with the cost of living that it is often difficult to find the heart or money to make such contributions. We work so hard to "keep up with the Joneses" and build wealth that we may tend to overlook the possibility of putting our funds to use in other meaningful ways. Whether you believe it or not, anything you give comes back to you in multiples, maybe not financially or in an obvious way but it comes back, especially when you give without having any expectations. Teaching kids this lesson through their early childhood experiences with money can be the basis of future lessons in compassion and consideration for the struggles of fellow people all over the world. It also helps kids learn how not to be greedy when it comes to money or any possessions for that matter.
As we can see, money can be used as a tool and teacher for our kids, on principles of work, saving, wise spending, and sharing. Do not let this process overwhelm you! It is manageable as long as you follow the steps outlined above. Get the ball rolling and make adjustments where necessary. Remember, education starts and ends at home, so regardless of what they are doing at school, you have to set the tone when it comes to Youth Money Management.
To learn more about issues related to Youth Money Management, visit www.401kid.com.