How To Teach Your Kids Financial Planning

While shopping with a friend, I was surprised to hear a beeping sound emit from her purse. “This must be an emergency,” she says, pulling out a cellular phone. “Only my family has this number.” As she spoke with her son on the phone, I saw her panic turn to anger. Her child had called to ask her to buy the latest action figure for his collection, since he knew she was in the store. But what surprised me more was that after lecturing him about using this number for “emergencies only,” she hung up and bought the toy anyway.

 

Teaching money lessons to children is difficult. Their friends appear to have every toy on the planet. Advertisements pressure them into buying things they don’t need with money they (and you) don’t have. And one of the joys of parenthood is to be able to treat your child to an occasional extravagance. But teaching fiscal responsibility is important. Financial planning and the rewards it brings become second nature to an adult who was taught as a child the basics of financial responsibility.

Here are a few ways to help your children mind their money:

Spending Money

Most parents award an allowance for chores. A good guideline is to give a dollar a week for each grade the child is in ($4 for a fourth-grader, $5 for a fifth-grader, etc.). Whenever children ask for a luxury item, insist that they use their allowance and don’t back down. Once they realize that they’re responsible for their own purchases, they quickly learn to rate items by importance.

A portion of the allowance (anywhere from 75 cents to $1.50) should go into a “family fun jar” to which the whole family contributes. When enough money is saved, the family can do a activity together, such as a movie. It’s important for children to learn that money goes to services as well as to goods.

When children are looking for extra money consider posting a chart on the refrigerator with a list of chores and the price you’re willing to pay for them. The harder the job (washing the dog or the car), the higher the pay ($2-$3). Simpler jobs, such as removing and dusting all the books in the bookcase, require less pay (50 to 75 cents).

If your child wants to spend money on a big-ticket item, offer to pay the amount that you would normally spend on the smaller-ticket version. Have your child make up the difference. Before purchasing the item, take them comparison shopping. One mom said her son saved $14 by comparing sale prices from different stores. Had she offered to buy the shoes, he would have chosen them from the first store they entered.

Budgeting

Children often have unrealistic expectations about how much parents earn. Telling your children how much you make and what things cost gives them an idea about how much money it takes to run a household each month. Sally and her husband, John, demonstrated this in an interesting way. One month they cashed their paychecks in one-dollar bills and heaped the pile of money on the table. The children peppered the conversation with phrases such as “We’re rich” and “Buy me a Porsche.” Then Sally and John had the children count out money for the basic necessities. First came the mortgage, car payment, insurance, food, phone, cable, gas, electric, credit-card bills, school lunch money and allowances. Next, money was put aside for medical bills, daily household expenditures and emergencies. The money ran out before the list of necessities did.

Another way to teach kids about finance is to present them with an extended budget. One summer Karen gave each of her children an old checkbook and told them that she was the bank. She had them write in the register the amount equal to their entire three months’ summer allowance. She told them they were to judge how the money would be spent. They could use it all at once or a little at a time. Whenever they wanted money, they wrote out a check and turned it over to Karen. She paid them and taught them to balance the checkbook. By mid-summer, one child was broke, the second was spending at a reasonable rate and the third was lending his older brother money. That brought up discussions about lending money with interest, just as banks do. (The younger child charged interest not in dollars, but in chores.)

Giving older kids an annual clothing allowance teaches them how to make smart choices. Judy’s son wanted a particularly pricey pair of jeans one year. She let him buy the jeans, but he only had enough money left to buy two new shirts. She said he would have to wear his old clothes no matter how quickly he outgrew them. She also refused to do extra laundry. If he ran out of clean clothes before it was time for her to do the regular wash, he would have to wash them himself.

All was wonderful for the first five weeks of school. Then the novelty wore off. Within two months her son had learned his lesson. Not only did those “cool” clothes have to be washed more often but the constant wearing made them look old. And he soon grew tired of putting on the same outfit all the time. The following school year he bought five shirts and three pairs of jeans for about the same amount of money he had spent on the extravagant pair.

Finance

One of the best ways, of course, to teach your child the value of money is to have them open a savings account. Many banks will open an account with as little as $10. Depositing unexpected “income,” such as birthday money, is a painless way to save and helps the child to get in the habit of saving.

Investments can present another learning opportunity for children. Putting some money toward stock in a company they are familiar with is best. An investment in a company they know about will increase their interest. Periodically receiving a dividend check is always a fun surprise.

Not all these suggestions will work for everyone, but using those that work for you will start your child on a lifelong road to financial responsibility. And as a bonus, you’ll be saving some of your own money, too.

 

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