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

Ages 8-10: Bank on It

Help your kids open their own savings account. Of course, you can start saving on their behalf when they're much younger, and they probably have a wad of birthday cash stuffed in their sock drawer. But now they're mature enough for you to introduce how a real bank works. Even at this age, kids may be horrified to see their money disappear. It takes them a while to understand (and accept) that if they deposit, say, a $10 bill, they'll get their $10 back -- but not the same bill.

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Should you require your kids to save? That depends. Believe it or not, some youngsters hoard every penny and have to be forced to spend. You can always have them divvy up their allowance into pots of money for spending, saving, charitable giving, even investing. But if you don't want to take the trouble to parcel out the cash, a simple alternative would be to have them save, say, a nice, round 10%, or tithe that amount to charity. And you can always encourage kids to save by matching what they put aside -- your very own family 401(k).

Another strategy that works: Have your children save toward a goal, whether it's a toy or a new baseball glove. And when they reach their goal, let them spend their money and enjoy the payoff for their efforts. Saving may be spinach and spending dessert, but as my youngest child, Peter, once told me, "Saving can be dessert, too, if you save for something you want."

Ages 11-13: Parent Power

As you head into the difficult 'tween years, remember this: Parents have power. Despite media hype and peer pressure, kids will listen to you if you have a clear message and deliver it consistently. A young woman once told me that when she was a kid, her parents had a rule about holiday gifts: She and her siblings couldn't ask for something if they had seen it advertised on television. A bit extreme, I thought. But not only did the young woman and her older brother accept the rule, they also passed it on to their younger brother (misery loves company, perhaps?).

Now's the time to build on the foundation you laid when your children were younger. Expand their allowance money to include more discretionary purchases: video games, movie tickets, shopping excursions with their friends. My rule: Kids shouldn't hit you up for 20 bucks every time they head to the mall. Having to chip in their own money puts a natural brake on spending, keeps them from bombarding you with requests for expensive brand-name stuff, and gives them a reason to save for their own iPod.

If you're an investor, introduce your kids to the stock market. They're old enough to understand that owning stock means being part owner -- and sharing in the profits -- of a company whose products or services they use. (In answer to numerous questions I get from readers, investors can make small purchases of stock through Sharebuilder.com, with commissions as low as $4, and MyStockDirect.com, which links to more than 100 companies that sell stock directly to the public.)

Ages 14-15: Stick With Cash

The latest wrinkle in allowances is prepaid debit cards, which are aimed squarely at this age group. Parents are encouraged to transfer money to a child's online allowance account, which the child can access with his card to withdraw money at an ATM or to make purchases online or in stores -- and which Mom and Dad can top up when the money runs out.

My rule: Stick with cash. Even at this age, plastic of any kind isn't as real to kids as money they can see and feel. With a cashless society looming in their future, learning to manage hard currency is more important for children than ever. This is a good time to expand their allowance to include clothing, concerts and other high-school entertainment, plus buying gifts for friends.

It's also time to encourage them to get a job, at least over the summer. Teens this age are permitted to work in offices, amusement parks, movie theaters, restaurants and retail stores. For convenience, you can arrange for them to have an ATM card so that they can deposit and withdraw their own earnings from their own savings account. That's how my son Peter managed his money throughout high school. When he turned 18, I offered to help him open a bank checking account with a Visa debit card. Much to my surprise, he declined. "With a debit card," he said, "it would be too easy to spend money."

Ages 16-18 and Into College: Hold the Plastic

There's a school of thought that says teenagers should get credit cards when they're still at home so they can learn to manage credit responsibly when they're on their own. I disagree -- strongly. In fact, I'm on record as saying that giving teens credit cards makes as much sense as letting them use drugs so they won't turn into addicts.

I'm not against credit cards. I just think that teenagers in general aren't mature enough to manage them. And there's plenty of research to back me up. James Roberts, a marketing professor at Baylor University, has found that young people who use credit cards "are less price-sensitive, spend more, and overestimate their available wealth compared to those who write checks and pay cash." They're also more likely than adults to max out their credit, and they're more susceptible to impulse buying.

Kids this age need to learn about credit, but remember that a little basic knowledge goes a long way. Teens don't realize that a credit card is not free money. They need to know that when you use a card, you're borrowing from the card issuer, which will charge you a high rate of interest.

My rule: Cash is still king. Help your kids open a checking account (and get a debit card) so they can learn how to balance a checkbook -- either by using a check register or online entry -- before they head off to college (co-sign the account if the bank requires it because they're not yet 18). Fund the account with the money they earn from their summer or part-time jobs and will use to help pay for college expenses. Let them know upfront which expenses you'll pay for -- books, for example -- and which are their responsibility, such as food outside the meal plan.

Age 21 and Beyond: Ready to Launch

Once your kids are college seniors and you're confident they've learned to make their spending money last for a whole semester, they're ready to apply for a credit card -- on their own. My rule: Don't put your kids on your accounts or, even worse, co-sign for their obligations. That puts you on the hook if they don't pay up. (See Must I Pay My Son's Credit-Card Debt?) Besides, it isn't necessary. Even with today's tightened credit standards, my 19-year-old son gets several credit-card offers a week.

If you and your children have been talking about money all along, you'll move seamlessly into adult topics. (See Intro to Real Life and Golden Rules for Grads.)

Who else are they going to ask for advice on buying health insurance, starting a 401(k) plan -- and, yes, making big bucks in mutual funds? It's even more gratifying when your money-smart kids don't need your help. When our 23-year-old daughter moved 3,000 miles from home to take a new job, my husband offered to subsidize her apartment. Claire declined. "I'd rather do it myself," she said.

MORE ADVICE: See Our Raising Money Smart Kids Center

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