Raising Money-Smart Kids
It's harder than ever to teach kids the value of a dollar. They live in a culture that suggests you should sacrifice what you want most for what you want this minute -- and buy it on plastic with a minimum payment at exorbitant interest rates. That's why it's critical to give kids a head start on savvy money skills. Here are seven ways to make it happen:
1. Create a "Dream Jar"
Invite kids to participate in specific family goals. For instance, when my family planned our first trip to Disneyworld, I spoke with my three daughters about the budget for the airfare, hotel and park tickets. Ten months before the trip, we took a coffee can and labeled it the "Disney Dream Jar," where my husband and I tossed our loose change. The kids got into the spirit, contributing their profits from a lemonade stand. As the jar filled up, we'd take the coins to the bank so they could see our savings grow (they love the coin counter).
Discuss simple economics in every day settings. While grocery shopping, explain why it's smart to choose the package that costs less per pound, or a generic brand over the name brand; and why it makes sense to stock up when an item is on sale. I always explain money to my kids in terms of choices: By saving just $15 a week using the grocery store's loyalty cards and coupons, we'll have almost $800 at the end of the year to spend on something fun.
2. Bank on Their Futures
Savings habits that start young usually continue, so help your child open a bank account by age 7. Explain why it's important to set financial goals -- such as saving for college -- and why it helps to start early. Talk about the magic of compounding interest, and consider offering a dollar-for-dollar match for any money they save. (Tell them one day their employer may do the same if they join the company's retirement plan.) Explain how checks and credit cards make shopping convenient -- but you need to have the cash in the bank to pay them off.
3. Provide Hands-on Experience
Let your teen do the grocery shopping as soon as they can drive. If they can prove to you they saved money (easy to track, since most stores note the savings on the bottom of the receipt) they get to keep that amount.
Also require older kids to do the research: If they want a cell phone, ask them to check out three plans and present you with the results, and explain which one represents the best value and why. Agree in advance on which costs you'll cover -- the basic plan and a specific number of minutes a month -- and what they will pay for, such as ringtones, and extra minutes. (For a cell phone that teaches budgeting lessons, consider Kajeet.)
Whenever you buy a child something, take the opportunity to talk about the difference between needs and wants. Ask them about the commercials they see and hear, and the art of persuasion in advertising. If there's something they really desire, discuss how they can earn the funds to reach that goal. Price the item on craigslist or Ebay; use a comparison site such as bizrate.com or epinions.com.
Older kids may roll their eyes, but don't be fooled by the act. A 2007 survey by Charles Schwab found nearly two-thirds of teens say they prefer to learn through experience than in a formal classroom. But only one-third said they understand why their parents make the financial decisions they do.
4. Don't Be a Human ATM Machine
Whether it's souvenirs or spending for necessities for back to school, give kids a budget. When we went to Disneyworld, the kids got $40 each to spend on souvenirs, and they knew when it was gone, it was gone. It forced them to think consciously about their choices -- a princess outfit versus a larger variety of smaller items.
For teens going back to school, examine their wardrobe, figure out what's missing, create a budget together and then let them spend the cash. Yes, they may blow it all on two pairs of sneakers, but let them make that mistake. Send them over to the Salvation Army or Good Will stores with their next allowance. (The lesson is worth a season of cringing at their appearance.)
5. Learn From eBay
There's no better lesson in depreciation than having a child sell something they no longer want or need (that thing they couldn't live without!) Books, CDs, sporting equipment, clothing -- hold a garage sale or sell them on eBay. Compare the proceeds to what they originally paid, and talk about how some things we buy go down in value, while others (like interest-bearing savings accounts) go up.
6. Develop Their Negotiation Skills
Teaching kids how to negotiate the price of their services is an invaluable skill for the future -- especially for your daughters. Workers who fail to negotiate a first salary stand to lose more than $500,000 by age 60, according to Linda Babcock and Sara Laschever, authors of Women Don't Ask: Negotiation and the Gender Divide. The authors found men are more than four times more likely than women to negotiate a first salary.
When you ask your child to perform a special task -- such as cleaning out the garage -- invite them to negotiate the price. Have them offer an opening bid; if it's lower than you expected, accept on the spot -- and suggest they aim higher next time. They'll quickly learn to ask for more. If it's higher, negotiate to lower the price, while showing them how to stand their ground.
I occasionally hire teens to babysit, and when I inquire about their hourly rate, eight out of ten don't specify. Have your kids research what their peers are offering for similar services. Discuss why they should charge more for babysitting three children versus one, or mowing a large lawn versus a small one.
7. Teach the Art of Giving
We want our kids to be diligent and responsible, but also grateful and generous. Of the $20 in monthly allowance, 10 percent is set aside for a charity of their choice, 20 percent for savings and the rest they are free to spend. Several companies, including moonjar.com and prosperity4kids.com, offer piggy banks that teach similar lessons. With regular practice, we hope the value of giving will become second nature.