Teaching Kids Money Sense
Driving by a fast-food restaurant, many parents can predict the backseat refrain, “Mom, can we stop at McDonald’s for lunch?” Even more can relate to the response they get after explaining there isn’t enough money for a McDonald’s lunch today:
“Can’t you just go to the ATM and get some?”
It may be convenient – a machine that spits out cash – but ATMs, credit cards and our culture of instant gratification have conspired to give kids the idea that … well … money really does grow on trees.
Family finance experts say today’s kids have the most money available to them, the most pressure to spend it, and the least knowledge of how to manage their money in history.
Janet Bodnar, deputy editor of Kiplinger’s Personal Finance magazine and author of five books on kids and finances, cites the fast-food/ATM scenario as a classic example of how children view money these days. Changes in our parenting culture are a big reason why, she says.
“We’ve got a baby-boom generation of parents who’ve been doing things differently. They’re giving their kids more independence, including more financial independence,” Bodnar says. “They have more money and they’re willing to share it with their kids. … They think, ‘If my kid wants a new bicycle and I have the money, why can’t I just get him the new bicycle?’”
Then there are working parents who regularly give their older kids money – or a credit card – for shopping at the mall because they feel guilty about not being available to shop for the kids themselves.
In his book, Capitate Your Teens, physician and family finance author John Whitcomb refers to the home-cooked meals, homemade clothes and tightly knit neighborhoods of the past. In today’s families with dual-working parents – “neither of whom cooks, sews or stays at home much” – teens have more opportunities, and more of a need, to shop for daily necessities, Whitcomb notes.
All this cash flow has not escaped the attention of marketers. Children and teens are subject to a barrage of advertisements for toys, fast food, clothing, music and electronics. “They know kids have more money to spend, so kids have become the targets,” Bodnar says.
So it’s not surprising that many parents are exasperated with children’s endless requests for more “stuff” – and their poor concept of what it means to save money, whether for a coveted new toy or a college education. Complicating matters is the fact that many of today’s parents aren’t in the savings habit either. Americans’ personal savings rate dropped to zero percent last year, according to federal analysts. Because some of us really do have savings accounts, the drop means we’re probably spending more than we earn and have debt to overcome.
Meanwhile, financial experts say, the stakes are higher for today’s young adults. “If kids are clueless about finances, there are a lot more consequences than there used to be,” Bodnar says. Young adults graduating from college and getting their first professional job are asked to make decisions about health care, retirement and even flexible spending plans.
They have to make a lot of decisions as young adults that we may not have had to make because we didn’t have those things available when we were their age, Bodnar says. That’s why parents need to start teaching kids about money early on.
“The more you talk to them about money – even the bigger issues like jobs, retirement plans, etc.,” she says, “the better off they’re going to be when they’re independent adults.”
Where to Begin
With parents as role models and guides, kids can learn to understand and manage money gradually:
• Take advantage of circumstances that arise in daily life. The fast-food/ATM conversation is a perfect time to explain what bank machines represent. “Kids really do think – as many adults do – that there’s a little printing press in those ATM machines printing their money and spitting it out,” Bodnar says. “You have to say, ‘Really, the bank is a big piggy bank that we put money in that we make from working. Just like when your piggy bank is empty sometimes until you put more money in, ours is like that too.’” The conversation requires little effort, but teaches kids a valuable lesson about money.
• Let your kids in on the decision-making process for major purchases. Eileen and Jon Gallo head the Gallo Institute (www.GalloInstitute.org), which offers financial seminars and consultations, often for wealthy parents trying to teach generosity, work ethic and money management to their kids. In their book The Financially Intelligent Parent, the Gallos recommend including kids in discussions about big purchases, such as buying a new family car.
Bodnar agrees. “Tell them things like, ‘We’re not going to get a big-screen TV because we don’t think it’s worth it. We’d rather spend money on other things, like that vacation at the beach.’ Share your thought processes with them. These are lessons they’re learning.”
• Be more open about money with your kids. “Parents worry their kids are going to ask embarrassing questions, like how much they make, and then they’ll blab it to their friends,” Bodnar says. “But what kids are really fishing for is ‘How well are we doing versus other families?’ You can tell them, ‘We make enough to buy the things we need with some left over to give away or to put into savings.’”
Young Money Managers
Family finance experts differ on how parents should manage kids’ use of allowance, part-time job income or monetary gifts. Bodnar, for example, believes parents have the right to dictate that a portion of kids’ earnings be put into a savings account. It’s parents’ job, she says, to teach kids the importance and process of saving.
But Larry Lynch, author of Help Your Kids Become Millionaire$, believes kids need full rein over the small quantities of cash they receive while growing up, including allowance.
“Kids absolutely need to have full responsibility with their own money – to do anything they want with that money,” he says. “But parents need to point out to them things like, ‘You can buy all seven lollipops, but you won’t have any more money and you could get sick.’ The kid will probably buy all seven anyway, feel lousy and have no money. But he’ll learn from that and not do it the next time.”
Lynch is adamant that children need to develop a sense of personal responsibility – to understand that it’s ultimately up to them to save and manage their money wisely.
“Parents say things like, ‘Here’s a cell phone, so if there’s a problem, call me’ or ‘Don’t take a job shoveling snow; you could hurt yourself.’ There are all kinds of things working against kids taking personal responsibility,” he says. “It needs to be taught.”
Those lessons begin when children are very young, he says, and in money-dependent places like a grocery store.
“When he’s screaming for a candy bar, and having a tantrum on the floor, you do not give in; you don’t give him the candy bar he wants,” Lynch says. “You’re teaching deferred gratification.”
Tools of the Trade
• Allowance – Experts increasingly agree that children’s allowance should not be tied to household chores. Chores should be expected as being part of a family, while allowance should be used to teach kids about money management.
Bodnar and Lynch say that children as young as 6 or 7 can handle an allowance.
“That’s when they start to learn about money in school,” Bodnar says. But give them a sense of financial responsibility too, she adds. “If they’re 6 or 7, the logical thing they can spend it on can be things they like to collect … They’ll learn: ‘Oh, I can buy this, but I won’t have anything left over. Or I can buy this and have money left.’”
How much you give and when you dole out allowance is up to you. Family finance experts advise you to gauge what you believe your child is ready for. One common rule of thumb is to give a dollar per year of age. Some parents give allowance weekly to younger children and monthly to adolescents to teach older kids how to budget over a longer period.
• Checkbooks – While kids may not be ready to use a real checkbook until high school or college, Bodnar suggests teaching them about this tool at a younger age. Give them an old checkbook register and some spare checks, she says. “My kids did well with this in middle school. I would credit them their allowance every month. If they wanted $20 to go shopping or to a dance, they would write me a check for $20 and subtract that from their allowance balance. They learned how to write checks and they kept track of how much was in their allowance account.”
• Credit Cards – The legal age for owning a credit card is 18, but Bodnar advises parents against allowing their kids to apply for one until they’re nearly finished with college. “It’s much more of a temptation than a help to them. All they need is a continuation of allowance, a checkbook or a debit card. I tell people to see how their kids do off at school managing the money that you give to them. If they’re doing well, have them apply for a credit card their senior year.”