The Last Word on Kids and Cash

What your children need to know about money and how to teach them.

By Janet Bodnar, Editor

From Kiplinger's Personal Finance magazine, September 2008

Not long ago I got a phone call from my 25-year-old son, who sounded a bit testy. John had just read a story in Kiplinger's about a young investor named Deirdre, also 25, who had amassed more than $100,000 in Vanguard index mutual funds. "You write about kids and money," John said accusingly. "How come you never told me about mutual funds?"

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I patiently explained that John's Roth IRA -- which my husband and I started for him when he was in college and to which he has regularly contributed since he graduated -- was in fact invested in a Vanguard index mutual fund. One reason Deirdre had managed to accumulate all that money (aside from the bull market of the early 2000s) was that she lived at home with her parents and socked away more than 60% of her salary.

What John learned from this episode was a little more about the stock market and the value of thrift -- and that he should pay closer attention to his IRA statements. For me, it confirmed several truisms that I have learned from more than 15 years of writing about kids and money: First, no matter how old they are, your kids will come to you for advice. Second, nothing you can tell them is too basic. Third, a little information goes a long way.

Because I advise parents about how to raise money-smart kids, I've always felt a weight of responsibility to do the same for my own three children. People often assume I have a magic formula for calculating the right amount of allowance (I don't, but I have some strong opinions), or that my kids are stock-market whizzes (obviously, they're not). But the older two got through college without overdrawing their checking accounts or running up credit-card bills, and the youngest is following in their footsteps. And to be honest, I've learned as much from them as they've learned from me.

Thanks to them, and to the thousands of parents with whom I've spoken and who have written to me over the years, I've come up with a set of practical rules for raising money-smart kids at every age. They may be different from what you've read elsewhere, but they work.

Ages 3-5: big-picture years

Give a 3- or 4-year-old a choice between a nickel and a dime and he'll choose the nickel because it's bigger. My rule for preschoolers: Keep things simple and don't expect too much. If your daughter thinks that "everything costs $68," as a fretful parent once complained to me, don't worry. You've accomplished a lot if you can teach children this age that money can be exchanged for other things.

Encourage them to put coins in a vending machine or pay the ice-cream man. They can play with fun savings banks, learn the difference between pennies, nickels and dimes, or collect state quarters. The more hands-on the activity, the better.

Don't push your kids into things they don't understand or can't appreciate. For example, youngsters this age live in the moment; for them, a week might as well be a lifetime. So asking them to save for college, although a worthy goal, isn't realistic. But they can save their birthday loot for a trip to the dollar store, where they can choose -- and pay for -- something they want.

Ages 6-7: Time to Start an Allowance

Kids will spend unlimited amounts of money as long as it's yours. When their money is on the line, they've got skin in the game, as one of my regular correspondents is fond of saying. The best way to let them start making their own decisions is to give them an allowance, and this is a good age to begin.

For one thing, kids are learning about money in school, so they understand that four quarters equal one dollar. Also, they have a more mature understanding of money in the abstract, so they have some sense of how much that dollar will (or won't) buy, and they can plan further into the future. Think of it as stealth budgeting.

How much to give? Start with a basic weekly allowance equal to half the child's age. I know, I know. Some people recommend giving a weekly allowance equal to a child's age. But in the real world, I've found that parents often balk at giving a 6-year-old $6 a week. Hence, my half-age rule. If you'd like to bump that up, feel free.

Now for the even bigger question: Should the allowance be a quid pro quo for doing chores? My advice: No, it shouldn't. I'm in the camp that believes kids should clean their room or help unload the groceries because they're asked to, not because they're paid. Plus, over the years I've learned that many parents have a tough time keeping track of whether their children have actually done their assigned chores that week.

But an allowance shouldn't be a handout. My rule: Tie the basic allowance to "financial chores" -- spending responsibilities that the kids take over from you. You could start by having them pay for their own collectibles, for example, or refreshments at the movies. The beauty of the system is that as your kids get older, you can expand their allowance and their responsibilities.

To make the connection between work and pay, give your children the opportunity to earn money by doing extra jobs, such as vacuuming the family room, raking leaves or washing the car, and pay for each task as it's completed to your satisfaction. That's easier for you to monitor than a week's worth of chores. Remember rule number one: Keep things simple.

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