Welcome back! We’re glad to see you’re still with us on the journey to financial freedom but before we get too far down the road, we want to encourage you to scoot over and make room for some more passengers…your kids. Did she just say that? Yes, I did. You may be at the beginning and feel completely inadequate to teach your kids about money but don’t sell yourself short. Teaching teaches the teacher so bring them along before it’s too late.
If you’re like most parents, especially the parents of small children, it hasn’t occurred to you that your children are learning how to handle money and developing their values surrounding spending and managing it from you. While it is of utmost importance to talk to our kids about how to manage their money, a majority of their learning happens when they see the rubber meet the road, so to speak, as they watch us managing our money and as they are allowed opportunities to practice money management on their own.
The basic financial knowledge of young adults in our country is paltry at best. According to the Jump$tart Coalition for Personal Financial Literacy’s 2008 survey of high school seniors and college students, the financial acumen of our children is decreasing. The 2008 survey shows a 4.1% decrease from the 2006 survey in the number of correct answers to the survey questions about basic financial principles such as savings accounts, investing, loans and consumer debt.1 Considering these children are only a few years away from independence and becoming contributing members of our society, those numbers are frightening.
The education our children are receiving at home and in school about how to handle their money is sorely lacking but don’t think they are living in a vacuum of financial oblivion. You can bet that the advertisements they watch during commercial breaks on iCarly and Caillou are having a big influence as does the credit card industry. It is a dangerous symbiotic relationship between the wants our children have and the acceptance of our buy-now-pay-later culture. Credit card companies are shrewd. They know that, just as cigarette companies discovered in the past, targeting younger and younger audiences ensures they will have a reliably indebted customer base for years to come – think Barbie’s Shopping Time cash register which comes with six credit cards…YIKES!
Given the realization that marketing managers and credit card company CEOs have their sites set on our kids’ wallets and spending habits, the question is – are we ready to take our heads out of the financial sand and get down to the business of teaching our kids the correct way to handle money? If you’re still with me, then let’s get started!
Mary Hunt, author of Debt Proof Your Kids
Another way to limit family entitlement is to become givers. When we focus on someone else’s need, our “needs” pale in comparison. Live an understated lifestyle. Careful consumption is a powerful educational tool. When children ask for something at the store do not say, “We can’t afford that.” Instead, say, “We choose to spend our money on other things.” A young child’s security in the stability of your family may be affected by the assumption that their parents do not have enough money to care for them. Learn to limit shopping. Go only with a list, shop with cash, get what you came to buy and immediately leave the store. Limit television watching and make an effort to select non-commercial viewing options. Find alternatives to expensive and over-stimulating entertainment options. Cultivate a desire in your children to love the public library and to explore what their community has to offer. Try to pay with cash whenever you are with your children. Young kids are not abstract thinkers and they will have a hard time grasping the relationship between a credit card purchase and cash. Curb holiday and birthday spending in favor of family activities that show the child that you’ve thought about them specifically. Try making their favorite breakfast-in-bed, decorating the house for the day, relieving them of chore duties or having each family member write a personalized note telling the child how special they are. Entitlement doesn’t die quietly but with some creative and purposeful life changes you’ll find that you and your kids will adjust quickly to a more contented attitude.2
The second step Hunt recommends in her book is to continually work on your child’s financial education. Although it is a nice bonus when our schools provide personal finance classes, it is not the responsibility of their school to financially educate our children, it is ours. At the core of money management skills is this fact – it is not the amount of money you have, but what you do with it that matters.3 The following list is the bare minimum of basic money facts that your kids need to know. Begin talking about these things as your children become aware of and are able to comprehend them. Let me encourage you to get started, even with very small children. They often understand and are aware of more than we realize.
1. Money Management:
· You don’t need a lot of money to be good at managing it.
· We all need rules on how to properly use our money.
2. Giving:
· To help control our sense of entitlement, responsible giving always comes first, before saving or spending.
· Giving 10% is a reasonable amount.
· There are many ways and places to give.
3. Saving:
· If you always save money – before you even think about spending – you will never be broke.
· Long-term savings (money that you leave alone so it can earn interest over a long period of time) is mandatory.
· Short-term savings (money you accumulate for something you want) is optional, but a great way for kids to learn to delay gratification.
· Saving money can be as rewarding as spending money.
4. The Difference Between Needs and Wants:
· Needs are essential, wants are optional.
· It is not wrong to want things but we need to remember that our wants will always exceed our actual needs.
· A true need is never realized while you are in a store. If you actually needed it, you were aware of the need before you ever left home.
5. Spending Record:
· It is important to keep track of where your money goes. Write it down.
· During the month keep comparing your spending record to your income to make sure that your records are accurate. If you the difference doesn’t add up then you aren’t being diligent in your tracking.
· A spending record is a great way to keep money from unwittingly leaking out of your life.
6. Spending Plan:
· We all need a simple written plan of how we intend to spend our money. This plan should include giving and saving.
· An unwritten plan is nothing more than a dream.
· Your plan can be weekly or monthly.
· Each month the plan should be re-evaluated based on what happened the previous month.
7. Banking:
· There are two kinds of bank accounts – savings accounts which pay interest and checking accounts which allow you easy access to your money.
· Because they are federally insured (the government guarantees the money), banks are safe.
· When you are old enough to have a checking account, it is important to keep good records of the checks that you write and the money withdrawn.
· While checks are a safe way to send money through the mail, living on cash is simpler. When cash is gone you always know it!
· It is illegal and unethical to write a check when you know that you do not have the money in your checking account.
8. ATMs:
· ATMs are for adults.
· An adult needs a secret code called a PIN to access their money.
· An ATM card is not a credit card. It allows bank customers to get some of their money that was already in the bank.
· It is very important to keep careful records of ATM withdrawals so that you don’t accidentally use all of your money.
· Most banks do not charge their own customers for ATM withdrawals but using an ATM owned by another bank will cost you a fee.
9. Credit Cards:
· Buying items using a credit card creates a loan. You don’t really own something you bought on a credit card until you pay the bill in full.
· Responsible adults use credit cards as a tool to help them build a good credit history, not to buy things for which they do not have money. You only need one all-purpose credit card.
· Abusing credit cards means that you use it to buy more things than you have money to pay for. Carrying a balance from month-to-month is very unwise and expensive because of high interest.
· If you buy something on a credit card and then only make monthly payments you will end up paying three times more for the item than it originally cost.
· Credit card debt is one of the biggest reasons for family’s filing for bankruptcy.
10. Debt:
· Unsecured debt is very dangerous. If you can’t afford to pay it, there is very little remedy.
· Secured debt is safer because the value of the item purchased provides security for the creditor and the borrower.
· Never borrow money for something that will lose its value quickly or be used up in less than three years.
· It is always best to avoid debt, but if you cannot, in the case of buying a house or a car, make sure the debt is secured and that you pay it off as quickly as possible.
· Debt-free is a wonderful way to live.
11. Consumerism:
· Responsible consumers spend their money wisely and make smart choices.
· Consumers have the right to full satisfaction. If you are not happy with the quality or performance of a product, return it for a refund or exchange.
· The best value may not always be the item with the cheapest price.
· Buying things second-hand or used is a great way to get what you need at a bargain price.
12. Credit Reports/Credit Scores:
· A credit report is a financial report card that is kept by the credit reporting agencies.
· When you apply for a credit card or loan a credit report is opened in your name.
· It is illegal for anyone to look at your credit report without your written permission.
· Because a credit report shows how good you are at paying your bills and keeping your word, it becomes more of a character report.
· You should order a credit report from the credit reporting agencies once a year to make sure that the information is correct. You can go to this site https://www.annualcreditreport.com/cra/index.jsp to receive a free copy of your credit report. You should not use any other site for this purpose.
13. Compound Interest:
· Compound interest makes your savings and investments grow. It is important to leave the money alone so it can grow. When you withdraw money the growth stops.4
The information above is the least you need to teach your children about handling money and how it works before they leave your home. If you aren’t familiar with some of the terms or principles discussed above then you have some homework to do. Some of these points will have to wait for your child to mature but some of them, like giving and saving, can be taught to very small children on a basic level. Here are some age-appropriate steps you can take to help your child begin to learn about handling their own money.
Preschoolers – begin introducing them to coins, using the coins to teach counting. Help them learn responsibility by requiring chores commensurate with their ability but do not pay them. We all need to contribute to our family simply because we are members of it. Encourage children to choose toys, clothes or other items they no longer use to be donated to those in need. Take the child with you when you drop off the donation or when you volunteer your time.
School-aged kids – begin giving them an allowance. The amount is up to you but this will allow them to start learning the principles of saving, giving and spending. Give the allowance in denominations that will allow them to easily give and save. If you require them to save and give 10% each then pay the allowance in $1 bills to make this responsibility easier. Determine the items or activities for which the child will need to use his/her allowance. If they spend all of their money, do not give them an advance. They must wait until the next allowance payment.
Middleschoolers/Teenagers – begin giving them a “salary”. Hunt outlines this process in thorough detail in her book using their family’s personal example. In short, you and your spouse will begin to determine all of the things for which you spend money on your child that are not considered necessities. For example, food is a necessity but birthday presents for your child’s friend’s party are not. A family dinner out can be considered a necessity but the class ski trip is not. You average out these expenditures and, at the beginning of each month, begin giving your child as a salary the amount you anticipate you would have spent on them. The child is then responsible to manage that money according to his needs, wants and giving and saving requirements. At first it will be very difficult for you and the child as they learn to navigate this new world of money management. Undoubtedly, many kids will spend all of their money at the beginning of the month but you must bite your lip and control the urge to lecture, pass judgment or bail them out. They will have to miss out on things but that is their choice. The pain of missing out can be a powerful motivator to rethink their actions. The idea is to allow them to make these mistakes in the safety of their home so they can adjust their thinking and behavior before the mistakes are much more costly in the “real world”.
To effectively mold our children into savvy money managers, it is vitally important that we begin talking to our children about the principles of money management early in their lives and, just as important, we must start making moves to get a handle on our finances. Remember, when it comes to our children, more is caught than taught. We can preach a good lecture but if we aren’t practicing what we preach, they will see right through our veneer.
Stay tuned for the next article in our series, Taking Control of Your Finances, when we will be talking about the importance of savings and how best to begin the process.
1”Jump$tart Coalition for Personal Financial Literacy’s 2008 Survey of High School Students” (www.jump$tart.org)
2Hunt, Mary. Debt Proof Your Kids (Paramount: DPL Press, 2006), pp. 125-136
3Ibid, p. 138
4Ibid, pp. 137-167.
For more articles in the Taking Control of Your Finances series, check out the Finance Mom section.
