August 2006 - Some of the reasons we have for not talking to children about money include our own lack of knowledge, the fear that we're not practicing what we ought to be preaching, and the fact that our parents didn't talk to us about money. Don't let these barriers stand in your way.
As soon as children can count, introduce them to money. Keep in mind the following guidelines when educating children about money or other subjects:
- Guide and advise rather than direct and dictate. Let children have responsibility for their decisions.
- Encourage and praise rather than criticize and rebuke.
- Allow children to make and learn from mistakes and successes.
- Use opportunities to include all family members in money management decisions and activities as appropriate for their age.
- Explain to children what they can and cannot do, and the consequences of going beyond their limits.
- As children get older, include them in discussions of limits and consequences.
Money lessons and your expectations need to be age appropriate. Concepts to teach and activities to provide to your children include:
- For young kids, spark interest in money by using the pictures of money. Work together to count money and make change.
- Set up a three-jar system, such as, "now, short-term and long term," or "spending, savings and sharing." All money earned or received as a gift should not be available for spending, but divided among the jars. Sharing includes gifts or donations to others. When the jar is full, that money goes into a savings account or may be used for a purchase.
- Go with your child to set-up a savings account or to purchase savings bonds. When saving at home, pay interest on the savings, or provide a match with the requirement that your contribution stays in savings. To encourage saving, let your child make the decision on account withdrawals. Regular savings is the quickest way to a good credit rating.
- Eliminate the "I wants" at the store checkout by allowing them to spend only their own money when they go shopping with you.
Lessons in life
- Create a lesson out of bill paying, for example the utility bill is a need, while satellite radio is a want. Help them figure costs per day, then subtract for account balances.
- Avoid criticizing when children make poor decisions. Focus on what happened and what was learned. Always try to recognize responsible behavior.
- Allowances help empower the child and provide money management lessons. It's also appropriate to expect all family members to perform unpaid, routine household chores appropriate for their abilities. Give a base allowance, which may be tied to chores. If chores are not completed, the penalty should be lost privileges. Always provide chore opportunities for additional earnings. Shift more spending decisions to your child, which reduces the need for the child to ask for money, and encourages wise spending.
- It is better that children learn money management under your guidance than alone in the real world. Parental loans should come with interest, terms and require some collateral. Let them learn that it is expensive to rent someone else's money for a period of time.
Occasionally express your desire to have things you can't afford. They need to hear that you, too, have to tell yourself "no" to spending money. Delayed gratification should lengthen as the child ages, with goal setting for achievement or for items they want as their motivation. Delay spending by requiring comparison shopping, a list of pros and cons for the purchase and thrifty alternatives.
Teach the difference between wanting and needing. For an older child create a list with three columns- needs, wants and wishes. This comparison helps children see that the three do not go together. As they make responsible spending decisions, let them keep the money they saved. Teach them that spending is not a fix for a negative feeling.
Ways to teach about money
One important lesson is how to track earnings, spending, and savings in order to know how you're doing financially. Ask your child to write down transactions into specific categories each month.
Another method for learning about money is to use the grocery store as your classroom. Demonstrate how to plan a meal, use leftovers, shop by unit price, question coupon or sale values, figure costs of eating out (including tax and tip), and ways to create lower cost options.
Teach about ways to build a good credit rating, and if your older child does not have a regular full time income, do not give them a credit card as it sends the message to "SPEND." Co-signing means you're liable and does not help them establish a credit rating. Credit purchasing can have a far more negative impact on a financial future than any other money decision.
Establish a regular schedule for a family financial discussion. Report current balances and concerns and work together on coming up with solutions to reduce expenses, avoid credit debt and increase savings.
Sometimes the best motivation for wise spending is to plan how to do more with the money you save!