Teaching Your Kids the ABCs of Money If parents don’t teach children about money, who will? Should allowance be tied to chores, and how much allowance should parents pay? How can parents teach their children about budgets and savings? How should parents adapt what they teach according to the age of their children? Children and Money         There is an old saying: "Money talks." Well, our children are listening.         Children are listening to what parents, peers, the media, and advertisers say about money—whether we want them to or not. As they listen, they learn to earn, spend, and save. It is estimated that children ages 4 to 12 have an annual income of more than $14.4 billion.i They save almost $6 billion and spend around $8 billion, mostly on the likes of candy, soft drinks, snacks, toys, clothing, movies, video-arcade games, stereos, cosmetics, and compact discs. ii Children also influence adult purchases of $132 billion worth of items such as groceries, sports apparel and athletic equipment. iii         So, in our culture of buying and selling, our children are listening and learning about money all the time. But what are they learning from us, their parents? We tell them about love, religion, education, and ethics, but what are we saying to them about money, which will be part of many events they experience throughout life?         This brochure is for parents who want to teach children the responsibilities and rewards of money. Like Parent, Like Child          You can take a "do-as-I-say" approach with money, and it may work for a while. However, your parenting experience may already tell you that what you say to children is usually not as important as what you do. While others may influence your children, they probably will be very much like you when it comes to money issues.          This idea that the apple doesn’t fall far from the tree may concern you. From your own experience, you may have concluded that the less said to your children, the better. For example, as a child, you may have witnessed disagreements in your family about money. You may know parents who use money to manipulate children, or as a symbol of power, or as a substitute for love or time. You may go on budget-busting shopping sprees and dread the day when your child asks: "Why should I live within my budget, when you don’t live within yours?"          You may put off talking with your children about money because you think you do not have your own financial house in order. That is understandable, but financial planners say to teach your children well, you do not have to be a model of money management. The important thing with money—or any other family issue—is open communication.          Being open about money does not mean telling all the details to your children. Do not burden children with adult money problems, say experts. If your children are concerned and ask about family finances, tell them the truth in general terms. It is better to be honest than to let them imagine scenarios that are worse or better than they really are. But do not get into specific numbers related to your debts or income, especially with pre-high school children. Details, without understanding of the context, may confuse children and raise fears.          You can get into details in talking about the children’s financial future. Deep down, children fear what would happen if parents cannot be there to support them. Telling them how you will support them offers comfort and provides a good opening to talk about money, a will, insurance, trust funds, etc. You demonstrate to them that planning for the future is a good idea and that it is fundamental in money matters. CALLOUT          In 1993, the U.S. Department of Agriculture’s Family Economics Research Group calculated what it costs to raise a child born that year. The cost covered basic household expenses from birth to age 17. The amount came to $334,000iv . Hands-on activities help kids learn         When teaching children about money, setting a good example is only part of the challenge. Kids learn best when they do. Here are some age-appropriate, hands-on activities that will help your children learn that money has limits, people have to work for it, and spending means making choices, sometimes hard ones. Ages 3 to 5         Too early? No. Children can learn to identify coins (try it with eyes closed), how to keep money in a safe place, and that they can use money to buy things they want. Older children in this age group can learn coin equivalents, for example, how many coins it takes to buy a pencil, and that when the coins in the piggy bank are gone, you cannot buy any more pencils.          Here are four activities you can try with your children: "Let’s-pretend" games are a hit at this age. Set up a store using toys as merchandise. Have your children price each item with bright-colored stickers. Take turns being the shopper and the sales clerk. You can also have your kids open a bank using play money. Explain that this is where to put money from sales at the store. When at the grocery store, let your children be in charge of coupons. In treasure-hunt fashion, have them match coupons with items. As a reward for a job well done, let the children keep the money you save by using coupons. As you shop, explain your choices and why an item costs less, why it is better to buy on-sale items, and why a big box of cereal is a better deal even though it is more expensive. Have the children make their own money. First, explain the figures on coins and bills. Have the children make impressions of the coins in clay. Then have them make up their own clay penny, for example. Do the same with nickels, dimes, and quarters. Have them make up colorful dollar bills with Uncle Bill—or themselves—replacing President Washington. Play money bingo. First, make colorful bingo cards. Each card has 25 spaces on it, five rows of five circles. Make the circles by tracing pennies, nickels, dimes, and quarters. Write the value of each coin in each circle. Make different cards with the circles in a different order. Provide a variety of coins for each player. To play, hold up a coin and say its name, not its value. The child has to match coins to circles on the card. After four rounds, the child with the most filled-in spaces wins. Ages 6 to 8         Most kids this age receive an allowance (which is the topic of the section below), and they can estimate the total cost of purchases. They also know about getting correct change and are curious about value shopping. Here are four activities for children this age. Test your children on counting money. Give them some cash and coins, and have them count out the amount. If it is correct, give them a few dollars and have them pay their bill at your favorite fast-food restaurant. As a reward for doing it right, let them keep the change. At the grocery store, send them off with $4 and the assignment of finding the biggest box of breakfast cereal that doesn’t list sugar as one of its top ingredients. Tell them they can keep whatever change is left over. To explore the area of value shopping, have your children purchase three brands of orange juice, for example. One brand is the one they recognize first from advertising, the second is a less popular national brand, and the third is the store brand. Have the children note prices, and then do a taste test. Ask: Which brand tastes best? If it is the top-selling brand, is the taste worth the extra amount, even if that extra amount could help pay for popcorn? If they all taste about the same, why do shoppers pay more for one brand? Let your children be "parents for the day," and make them responsible for planning a fun family day at the beach or amusement park. As "parents," your children will have a budget of, say, $30 to buy food, pay for rides, buy gas—whatever the costs involved. Ages 9 to 12         Kids this age typically have big eyes and small budgets (small according to them). Therefore, they usually come up with ways to supplement their allowance. Also, some preteens are ready to learn the basics of investing. Here are four activities to try. To visually explain your refrain "Because we cannot afford it," bring home one of your paychecks—in cash. If you do not want to use real cash, use play money. Stack the bills on a table and start arranging piles for housing, food, utilities, savings, insurance, etc. The amount left over should show children why buying a compact disc or pair of in-line skates usually involves trade-offs. Are those skates worth a week’s worth of groceries? Encourage your children to earn extra money beyond their allowance. They could set up a lemonade stand or a neighborhood carnival. They could sell unwanted toys at garage sales, or sell handmade greeting cards, and homegrown vegetables and flowers. Other ideas would be to tutor adults about computers, hold a make-your-own T-shirt event, mow lawns, rake and bag leaves, shovel sidewalks, wash windows and cars, paint fences, clean garages, be a golf caddie, repair bikes, walk the neighbors’ dogs, do pet-sitting, and take in mail and water plants when neighbors are on vacation. The ideas are limited only by the imagination. Loan your children money—but make them repay. If they want a bike now but are $40 short, make a loan that they have to repay with interest. This should teach them that instant gratification without financial support has its price. Discuss terms of the loan, interest rate, payoff date, and payment schedule. Show how much of the amount repaid will be due to interest. Form a family investment club. Using play money, give each family member $10,000 to invest for one month. You can also divide the family into teams. The team or family member with the most valuable portfolio at the end of the month wins. Each family member picks five stocks. For help in picking, check out some investing books from the library or browse the Internet. Encourage the children to pick stocks that they know, such as their favorite soft drink or toy company. As an incentive, offer the winner $1 in real money for every $100 earned in the market. Teens         Teenagers are experiencing adult money issues, and the activities you do with them should help them understand budgets and savings as well as plan for the future. You may help them find a job, set up checking and savings accounts, and purchase insurance. You may even have to help them establish credit. There is plenty to do, but here are two activities to try. Teens are thinking about careers and how much money they can make on their own. Have them make a list of 10 jobs or professions, and then estimate the average annual income for each. Next, they should do research to find out the exact figures for someone starting out and for someone in the field for 10 years. This is a "let’s get real" exercise that helps them make plans. If this exercise goes well, have them do the same research into estimated versus actual take-home pay and estimated versus actual costs of rent, cars, insurance, and other living expenses. Rehearse a job interview. You are the storeowner or manager, and your daughter or son is a candidate for a job. Have her or him schedule an interview, dress for it, and answer questions. Give feedback and then repeat the interview. Remind the child to save questions about pay until the end, and to follow up with a thank-you note. Teaching kids about sharing money (sidebar)         Teaching children the dos and don’ts of sharing money—with siblings, friends, and charities—also is an important lesson in financial management. Young children, in particular, often are generous with money because they don’t fully appreciate the value. Giving them basic money information will help them make better judgments about sharing.         The challenge for older adolescents and teens often is dealing with peer pressure. It’s hard to resist a friend’s request for a "loan" to buy a candy bar or go to a movie. Make sure your children understand that it’s okay to loan money, but that it also is okay to ask that a loan be repaid by a specific deadline. Role playing with your children—giving them tips on how to say no if they don’t want to loan money, how to set a repayment schedule, and how to "call the loan"—can be very helpful.         Teaching children about charitable contributions also is an area many parents feel is important. One tactic is to collect all the charitable solicitations the household receives in a month. At the end of the month, sit down with your children and go through each one. Explain which ones you contribute to and why. What does the organization do that appeals to you? Invite your children to make their own contributions, even if it is to causes that you might not be donating to this month. Make sure the contribution is sent in the child’s name. You might want to enclose a note or call the organization to direct a thank you letter back to the child. The positive reinforcement of an acknowledgment is very valuable. Board games (sidebar)         Check at your local toy store for games that help children learn to handle money. Monopoly and The Game of Life are good choices, but they may be too complicated for younger children. So try Junior Monopoly, which takes less time to play (about 45 minutes). Other games include:v The Allowance Game, for primary school-age kids, puts players in situations of earning or spending their allowance. The first person to save $20 wins. Roup, for primary school-age children and up, mixes politics and money. Players bid in rubles for 39 properties, such as the Kremlin, Red Square, and the Lenin Mausoleum. The game ends when all money has been transferred from the Old Communist Bank to the New Democracy Bank and all properties have been sold to private owners. The Reward Game, for junior high youngsters and teenagers, has players buy and sell stocks, bonds, gold, and real estate. Prices fluctuate with inflation. You can borrow to buy, but the first player to earn $10 million debt-free wins. A money magazine for kids (sidebar) Zillions: Consumer Reports for Kids is exactly what the title says. This lively magazine does comparison shopping for hamburgers, bubble gum, and other youth-oriented products. It also gives advice on shopping, saving, and handling money. The magazine is for late grade school and junior high students.vi Your kid with a credit card? (sidebar) Teens on the verge of leaving the nest are like the rest of us: They like the convenience of credit cards. This is especially true at college. Last year, the proportion of college students using at least one credit card rose to 59 percent; 20 percent of these students carry four or more cards. vii         Teenagers, like adults, can use credit cards to dig themselves a big financial hole. To help avoid credit-card abuse, have your children follow these guidelines: Keep all receipts and compare each purchase when the bill comes. Don’t charge what you cannot pay for at the end of the month, except in emergencies. That means do not be tempted to make minimum payments. Don’t charge to the card’s limit, and don’t charge food and other everyday items that will be used up before you pay the bill.         Review with your children the potential price of not paying the balance each month. Crunch numbers showing how paying off a stereo over four years at 17 percent interest, for example, raises the price of the purchase substantially.         You may want to ease your children (and yourself) into the credit card world by allowing them to practice using a card issued to them but on your account. Make them follow the above rules, and after they show they can use the card responsibly, help them apply for their own. Making allowances         A weekly allowance is the way that most young children learn about money. While most parents tie an allowance to chores, there are many financial experts who feel chores and allowance should be separate. The reason: Allowance linked to performance, or behavior or grades at school, is inconsistent. Kids need a week-after-week-after-week income—a regular, tangible reminder—in order to grasp how to manage money. Another reason, according to some child psychologists, is to make children feel they are a part of the family, not hirelings. They should have regular jobs that are for the family, not for their own finances.         Other experts take the middle ground, advising parents to give an allowance as base pay plus extra money for jobs not included in the child’s regular routine.         Whatever approach you use, begin early—some say as early as age 3. The amount varies according to age, but make sure the allowance is enough for your children to practice money management. Neale S. Godfrey, author of Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children,viii uses this rule-of-thumb about allowances: the weekly amount is the same number of dollars as the child’s age. That may seem like a lot, but to practice saving and budgeting, she says, your children will better grasp the concept if there is enough money to work with.         You can set some basic ground rules for using allowance money. For example, no purchase of war toys or junk food. Require that they save up to 50 percent of the allowance in addition to saving for specific goals. Beyond your basic rules, however, allow the allowance to be your children’s. They have to learn to make decisions, reap rewards, and pay consequences. Forget the word "budget"          Use "spending plan" instead. It sounds nicer and is more descriptive. A spending plan helps your children pay for what they need and save for what they want. It also helps them face consequences of spending money and establish discipline. They start to understand delayed gratification, wants versus needs, and the concept of limits.          Keep your children’s spending plan as simple as possible. A 21-line budget will glaze over the eyes of a seven-year-old in a hurry. The basic idea with a spending plan is to help your children understand where money is coming in and where it is going out—and that it is important to keep track of it. So, with young children, your spending plan could be a two-column sheet of lined paper. Every time they bring in money from allowances, gifts, or jobs, they enter the income under the "Money Coming In" column. Whenever they spend money, they enter the amount under the "Money Going Out" column.          At the end of one month, have your children tally the totals for each column. Compare the numbers. Tell them that the income total should exceed or at least equal the expense total. That’s the rule.          Let this basic spending plan gradually evolve according to age and whatever concepts you want your children to learn. Factor in savings as a fixed expense, and then list other fixed expenses, such as lunch money, religious donations, school supplies, etc. Fixed expenses vary (some families even include the idea of taxes as part of children’s fixed expenses), but it is important for your children to understand that not all income is play money.          In addition to fixed expenses, there are flexible and fun expenses. Flexible expenses are the amounts your children spend on occasional purchases, such as birthday presents, hobbies, magazines. Fun expenses are for the fun things—defined by your children, not you. When helping them with a spending plan, you and your children should understand that they are making the decisions.          Guard against two things with spending plans: complexity and rigidity. A spending plan should be a guide, a reminder that handling money calls for planning. The best plans account for changing needs and wants. Save it          Guard Perhaps the best way to present the concept of saving is to tell your children this: Saving is money that is growing, just like them. It is putting money in a safe place so they can use it later on something special. Emphasize the "something special" part. To raise your children to be savers, give them reasons to save. Here are six tips for saving: Set up a "payroll-deduction" plan. When you give out allowances each week, pay in change so they can put aside savings immediately. Set up a jar system. A store-bought piggy bank will do, but a glass jar with a "Savings" label works well. Kids can see savings grow through the glass. Once you set a goal for savings, kids can tape a picture of the goal—a toy, for example—on the jar. If you have success with one jar, try another for medium-term savings goals, like a bike, and for long-term goals, like higher education. To children, these other jars may seem like money wasted on goals too distant. But establishing the jars gives you a chance to explain how money grows. To help explain interest, pay interest on their savings. For example, put a dime in their savings for every dollar saved. You can also use this illustration of compound interest: When Benjamin Franklin died in 1791, he left the city of Boston $5,000, with the stipulation that it could not be spent for 100 years and should be left to accumulate interest. By 1891, Franklin’s $5,000 had grown to $400,000. That same year, $308,000 was withdrawn to build a school, and the remaining $92,000 was left to accrue interest. Today the account is worth over $1 million.ix Make a chart that shows savings progress. Have your child draw a thermometer or an outline of the toy (or whatever the savings goal). As the savings grow each week, have your child color in the appropriate portion of the chart. Try a "no-frills" week. Have your children and everyone in the family cut back on all candy, videotape rentals, dining out, movies, comic books, whatever you deem unnecessary At week’s end, discuss how much you saved and have your children put their portion in a jar. Come up with your own version of a 401(k) savings plan. Explain to your children that you will add incentive to their savings efforts by matching dollar-for-dollar the amount saved. You can set up a time limit or do it according to specific goals. Contact us for financial planning          As your children grow up and learn to understand the fundamentals of handling money, they may have questions you cannot answer. Questions about funding for higher education, for example, or the variety of investment tools available for young people. We invite you to contact us at ReliaStar for information on establishing and maintaining a firm financial foundation for you and your children. We have detailed brochures on topics ranging from college savings, insurance, annuities, and mutual funds. It is never too early to learn about retirement, and we have information on retirement planning strategies and managing investments during retirement. Call the ReliaStar Line at 1-888-757-5757 to request these free brochures. Back   Gary Legwold glegwold@lutefisk.com (612) 926-1877 "Ideas Need Words" Home Page © Copyright 2004 Gary Legwold and Conrad Henry Press. All rights reserved.