When I wrote my first column about kids and money in the 1990s, the hot topic was whether to buy Pump sneakers, one of the first items of kids' apparel with a price tag that passed the $100 mark. Two decades later, I found myself weighing in on whether to pay for LeBron X sneakers, which topped out at $270. While some challenges are a matter of degree, today's parents (and grandparents) are also wrestling with new quandaries that didn't even exist back in the '90s. Should they let teens spend with a prepaid card? What happens if kids run up charges on the family cell-phone bill? Should children be allowed to download games to Dad's iPad?
What I've learned from raising my own three children and speaking with thousands of other parents and kids over the years is this: The circumstances may change, but you are guaranteed to raise kids with sound financial values if you follow these eight guidelines.
1. Harness your parent power.
Studies show that parents—not the media and not peers—carry the most weight when it comes to teaching kids about money. In a recent study of millennials by Bank of America and USA Today, 58% of those interviewed cited their parents' advice or example as most influential in how they handle their own finances. Nevertheless, a study by T. Rowe Price found that 72% of parents are at least somewhat reluctant to talk to their kids about financial matters.
What parents need is a confidence boost: Even if you feel a little insecure about your knowledge of finance or your money-management skills, you always know more than your kids. You don't have to understand or explain the nuances of the Federal Reserve's monetary policy. Just use everyday examples to talk with your children about how you make financial decisions—say, which brand of cereal to buy at the grocery store, whether to purchase a new car or repair the old one, and why you're cutting back on eating out to save up for a family trip to Disney World. Learning to make choices is what managing money is all about.
2. Take small steps to reap big rewards.
There's no need to overwhelm kids with information. In a major international study of financial literacy among 15-year-olds in 18 countries, U.S. teens ranked in the middle of the pack. But students scored appreciably higher on the exam if they simply had a bank account.
- When teaching teenagers about credit cards, for example, the first lesson should be that plastic is not cash; it's a loan that you have to repay plus interest if you don't pay off the entire amount each month (the calculator at www.moneychimp.com can help make your point). If they understand that, they'll be well on their way toward staying out of debt even if they're too young to understand a credit card agreement.
And when talking about investing, ease up on the jargon. When I attended an investing boot camp for teens last summer, the kids asked basic questions that cut to the heart of the matter: "Can you tell a company whether you'd rather buy a stock or a bond?" "What's the difference between a bond and a savings account?" "What's the Fortune 500?"
3. Match the lessons to your child's age.
- Preschoolers, for instance, think in concrete terms. They're prime candidates for playing with fun coin banks, putting change in vending machines or using their money to buy something at the dollar store. You've accomplished a lot if you teach very young children that money can be exchanged for other things.
When kids enter elementary school and start learning about money in math class, they develop a more mature understanding of how much a dollar will buy and how to save for short-term goals. Now's the time to help them open a real bank account and to start an allowance so that they can take more responsibility for spending and saving their own money.
As kids move into middle and high school, you can expand their financial responsibilities to include paying for their own clothing, entertainment and cell-phone charges. Encourage them to get a summer job, and help them open a checking account.
Once they're in college, they should be responsible for making their spending money last for a whole semester and paying the rent on an off-campus apartment. If they've accomplished all that by the time they graduate, they should be able to move seamlessly into real life—with a little help from our starting out guide for millennials.
4. Let kids manage money on their own.
They'll spend unlimited amounts as long as it's yours. When their money is on the line, it's a whole new ball game. An allowance is the best hands-on tool for children who are too young to earn money. But here's the rub: Should you tie the allowance to chores, or should you expect kids to pitch in around the house without payment?
My solution is a two-tier allowance system. Give kids a base allowance that isn't tied to basic household chores, such as doing the dishes and making their beds, which they're expected to do without pay. But the money does come with what I call financial chores: spending (and saving) responsibilities that the kids take over from you. To make the connection between work and pay, let children earn more by performing extra jobs, such as taking out the trash or recycling, mowing the lawn, washing the car, or whatever tasks you define as service above and beyond.
This system has three pluses: It sets up a sensible, workable arrangement for tying allowance to chores; it's easy to keep track of (you can pay for jobs on the spot); and it's an effective way to make kids responsible for managing their money.
How much should you give? Start with a weekly allowance equal to half a child's age, and then increase it as necessary depending on where you live, how old your children are and what they're expected to pay for.
5. Think like a kid.
A prepaid card or a credit card may seem like a convenience to you, but in a child's mind, it often represents a direct line to your wallet. Kids won't learn personal responsibility if you're the one loading the card or paying the bills, so be judicious in your use of plastic. I think prepaid cards are most suitable for special situations, such as when young teens are managing their earnings from a part-time or summer job, or when a student goes out of town on a class trip. (If you go this route, Kiplinger's likes the Bluebird card from American Express and Walmart, which is light on fees.)
The cashless society may be a techie's dream, but even for older teens nothing beats the hands-on experience of managing real cash. That means a regular checking account linked to a debit card. In a study of 42,000 first-year college students by education technology companies EverFi and Higher One, experience with a checking account made a positive difference in students' financial knowledge and behavior. "Feeling prepared to manage money in college was not related to a student's experience with credit cards—it actually decreased as they got cards earlier in life," the report concluded.
Once young people have proved they're mature enough to cover their expenses without overdrawing their accounts, they can consider applying for a credit card—preferably when they're 21 and can do it on their own.
6. Be straight with your children.
- They need to hear you say no. The key to making it stick is to tell them why you're denying their request and offer an alternative, if possible. For example, if your 13-year-old wants a new video-game system and you think his existing one is fine, say so—and tell him that if he wants to replace it, he'll have to spend his own money.
Don't shy away from awkward questions. If your kids ask how much money you make, they aren't necessarily looking for an accounting of every dollar and decimal point. Young children may simply be seeking reassurance and will be satisfied with a response along these lines: "We have enough money to buy the things we need and also save for the future."
With adolescents, you can be more forthright about your finances, but it's always best to put your income in context. They need to know that taxes and retirement savings take a bite out of your salary, and that you have to pay the mortgage and the car insurance bill before you can buy a new flat-screen TV. And before they start applying to college, they need to know how much you can afford to pay and how much they'll be responsible for.
7. Use common sense.
- Adapt these guidelines to your own children and to new issues that are bound to crop up. If you're concerned that your kids are running up the bill on the family's cell-phone plan, have them pay the overcharges (or get a better plan). Paper checks still play a key role, but teens can also manage a checking account online or with an app as long as they learn the discipline of tracking their expenses.
To avoid your kids downloading games and apps to your tablet, don't give them the password. One of my coworkers limits his two sons, ages 8 and 5, to free downloads, for which they still have to ask permission. (And the boys have to earn tablet-time credits with their good behavior, such as washing hands before dinner, bringing in belongings from the car and doing homework without complaint.)
8. Set a good example.
- By giving kids a clear message and practicing what you preach, you can set any standard, teach any lesson or pass along any value, whether it's saving for the future, giving to charity or, one of my favorites, saying thanks. A written thank-you note is most desirable, especially when a gift is extra special or extra generous. But that's adaptable, too. An e-mail, a text message or a Facebook photo or video also works. The key is to teach children how to express gratitude, rather than feel entitled, so they'll pass along that tradition to their own children.
Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.
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