As parents, we owe it to our children to talk freely about money and teach them how to become responsible when it comes to their finances. Then, we must follow up by providing real-world opportunities for to handle money on their own.
The Grocery Store is Your Friend
For a real-life budgeting and shopping, it’s hard to beat your local supermarket. Including your kiddos in the weekly grocery shopping is an excellent way to let them practice the skills you are teaching them. Share your grocery list and budget and then let them help you track down some of the items. Give them a set amount of money and challenge them to purchase as much food as they can with it. Or consider assigning older children a weeknight to be responsible for dinner. Require them to plan, budget, and shop for their meal and then actually prepare it and feed the family, it’s a great boost to their self-confidence.
Make a Plan For Allowance
It’s hard to learn to manage money if you don’t have any. Children need access to money and opportunities to practice using it. Allowance is a great way to create those opportunities. Some parents link allowance to household chores; others expect their kids to help out with chores as a contributing member of the family and keep allowance separate. Regardless of which method you prefer, what matters is using allowance as a tool to teach your child the value of money and how to handle it responsibly. Here are our favorite tips for handling allowance for different ages:
Preschoolers and Early Elementary Students
Very young children can learn a lot from playing with Monopoly money and a toy cash register. Playing store and buying and selling items around the house is great fun for little ones. Once they reach school age, a regular allowance is appropriate. A good rule of thumb is one dollar per year of age per week. So, for example, an 8-year-old would receive $8 each week as compared to the 17-year-old’s $17 per week.
Late Elementary Students and Junior Highers
You may choose to provide your children with opportunities to earn over and above their regular allowance by taking on larger house projects like cleaning out the garage or washing all the windows. Plus, as they get older, money-earning opportunities outside the home will become a reality. Kids can babysit, pet-sit, mow lawns, and hold down part time jobs at stores or restaurants.
High Schoolers and College-Aged Kids
Finally, at an appropriate age, replace weekly allowance completely with your kid’s own earnings. Let your child have his own checking account to help him build skills and practice with actual financial tools. And remember, he is going to make mistakes, but that is an invaluable part of the process. Better to make $50 mistakes now than $50,000 mistakes later.
Spending. Saving. Giving.
Don’t make the mistake of indiscriminately throwing weekly allowance at your kids with no rules about what to do with it. Help your children use their allowance to establish a budget. A common rubric is to designate three categories for their allowance: spending, saving, and giving. A breakdown of 30% for spending, 30% for short-term savings, 30% for long-term savings, and 10% for giving works well for many people. Make sure to teach them wise decision-making practices in each category:
How to Spend
Teaching your kids how to spend wisely is one of the greatest benefits of giving an allowance. Kids shouldn’t be left unchecked to spend their money however they choose. Create expectations for spending and, as they get older, give them increasing responsibility for their own purchases. Reasonable expenditures for kids include entertainment, birthday and Christmas gifts for loved ones, a set portion of their clothing, toys, cell phone bills and other electronics. Once your kids are of driving age, you may also consider having them pay for their gas or a portion of their insurance.
Use their spending endeavors as a vehicle for teaching about needs versus wants and help them make wise choices. For example, is there a critical difference between the $35 jeans and the $85 jeans? Encourage them to consider the values behind the decisions they make.
How to Save
Saving money must become a habit or it simply won’t happen. The earlier you begin, the better you will be at it. Talk with your kids about saving for short term wants, like a new cell phone for older kids or a Lego set or doll for younger kids. Help them set aside a specific amount of allowance each week to save so they can reward themselves with the exciting purchase.
Long-term savings is critical, but often neglected. Often times, long-term savings is used for large purchases like a first car or college tuition. You might open a special savings account earmarked for these long term goals.
How to Give
Lastly, nurture your child’s compassion and generosity by encouraging them to donate to their favorite charity. Help them choose an organization or cause that is near and dear to their cares and interests and make regular contributions to it. The more they believe in the organization they are supporting, the more motivated they will be to donate. Of course, money isn’t our only valuable resource — you can also encourage your kids to give their time and work to charities they love.
Teach Them to Delay Gratification
Teaching children the concept of delayed gratification is hard because everything is at our fingertips with the tap of a screen. Unfortunately, having instant access to whatever they want can set them up with poor or impulsive spending habits. Help your children develop self-control and the ability to delay gratification by requiring them to wait a set amount of time before making a purchase. Often, with a mandatory wait time imposed, your child may change their mind about making the purchase.
You can also nurture their capacity to delay gratification by implementing a wait policy for Keeping Up With the Jones. What we mean here is, when a new toy, gadget, or clothing item becomes all the rage among your child’s peers, don’t jump to make sure he’s the first to get the newest phone or the trendiest shoes. Give it a little time to play out. Let five or six friends or classmates be the cool kids first. The character development will eclipse any disappointment they may express along the way.
Talk About Your Own Finances
Many parents shy away from talking openly with their children about finances. The topic has a history of being taboo in American households. In short, many of us were never given the tools to talk about money with our partners, much less with our children. Or maybe we’re worried we are not modeling responsible financial management and don’t want our kids to know. But the truth is, parents are the biggest financial influence on their children. We are teaching them about money every day whether we realize it or not. They are watching us like hawks and picking up cues from our behaviors. To avoid wrong conclusions and misconceptions, it is far better to speak openly and honestly with your children about the household finances.
Within reason, allow your children to be privy to the family income and budget. Let them know what goals you are working toward and how you are preparing for retirement. Don’t shy away from sharing with them the financial mistakes and less-than-ideal financial decisions you have made over the years. Knowing your mistakes may be the very thing that helps them void a similar pitfall in the future. Consider giving them some input on certain appropriate family financial choices and decisions. Integrate them into the process to foster an appreciation for how the family budget works. A plus side to this practice: When kids know how the family budget works, and what’s on it, they are less likely to pester their parents for extras.
Talk About Debt
Besides telling your kids about the birds and the bees, The Debt Talk might be the next most avoided conversation. Debt is unpleasant, so it should come as no surprise that talking about it is not a barrel of fun. Nonetheless, educating your children now, could save them a lot of financial heartache in the future.
Parents must ensure that their kids understand the risks of unsecured debt. Explain to your children debt can create stress. Consider making your child a small loan for a purchase and implement a payment plan. You might even charge interest. Talk with your child about the experience and how it feels to be in debt.
Don’t be afraid to share your own bad decisions with your kids. You are your child’s most valuable teacher and he can learn so much from not only your good example, but your mistakes. Share with him how you turned (or are turning) things around and what you have learned. He will appreciate your honesty.
Lastly, emphasize the importance of living within your means and sticking to a budget. The earlier children develop these habits, the better. And of course, model this standard for them and talk freely with them as you make choices that keep you living within your means.
It Takes A Village
Fortunately, the entire burden of teaching your children about money management need not be solely yours. There are plenty of great resources out there to support you. Websites such as The Mint and The Centsables are loaded with fun interactive games and lessons. Dave Ramsey offers many products and classes for a variety of ages and settings. There are some wonderful guidebooks for parents, too. Ron Lieber’s The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money is a great place to start.
And, finally, Spero is here to help you and your children work together to build sound financial habits. We are happy to meet with you and your child at one of our convenient locations to talk about long-term goals and personal financial products that will set her on her way to healthy money management. We are committed to providing the same excellent member service to your children that we give you and make it our goal to develop a long-term relationship with them as they launch into their own adult financial journey.
This material is for educational purposes only and is not intended to provide specific advice or recommendations for any individual.