Recently, I took my son, Gavin, to the CoinStar machine to turn the random coins he’s been getting into cash. Added to the last two years of birthday money, his total was right around $150. As he stared at that money (and lamented the fact that now all he had was paper instead of a huge jar of coins), I realized that it was time to start teaching Gavin about money.
Money basics for young kids
Really, it is a good idea to start with the basics. Gavin doesn’t really grasp the fact that four quarters equals one dollar. But he does know that money is needed to buy things. And we are trying to expand his horizons by teaching him about other uses for money. In order to do this, we put envelopes in his big (recently vacated) money jar:
- Donating. One of the essential principles taught by many personal finance gurus is that donation to charitable causes is important. This is something that we want to teach Gavin: That success in life is about more than just buying things for yourself. We talk about how lucky we are to have the things that we need, and point out that others aren’t so lucky. Gavin already knows that we can help others through donations to thrift stores (we do this regularly), and now he is learning that it can work with money. We have an envelope for donations to our church’s efforts to help the needy.
- Saving. We are explaining to Gavin that it is important to save up for things that he wants. He already has an idea of this. For a few months, we allowed him to earn “TV coupons.” When he behaved, he received a coupon for TV watching time. All of his videos were labeled with a number (connected to length) that indicated how many coupons he needed. When he saw that The Incredibles warranted four coupons, he decided to wait on watching a two-coupon video so that he could watch what he really wanted to. We explained that saving money worked the same way. He should save up for more expensive items. There is an envelope for savings in his jar.
- Long term. We are also teaching Gavin that sometimes things happen unexpectedly. He doesn’t really understand this, but we are helping him understand that he needs to build up a store of money for when he is older. We asked him what he wants to do, and he says he wants to “be in charge of construction trucks.” We explained that he’ll need money to go to college to learn about this, and he should start now to save. When Gavin understands how money works a little better, this is likely to become an investing envelope. And we’ll tackle things like interest.
- Spending. We don’t have an envelope for this. He can just drop the money in the jar — after the other categories have been funded.
Helping older kids understand money
This can be a little easier than helping young kids, since older kids can grasp larger concepts. If you have laid the foundation in their younger years, older kids should continue building good habits. This is a time when you teach them about concepts like credit, compound interest and investing. You can help your kids navigate money by helping them open bank accounts and helping them balance their statements. Open different accounts for different purposes: long-term savings, checking and investment accounts. If your teenager has a job, he or she can even open an IRA and start saving for retirement.
Some parents like to help their older children start establishing credit. In order to do this, you can co-sign on a car loan or help your child get a credit card. But there are some things to remember in such cases:
- Have kids make their own payments. You may help your child get a loan or credit card, but before you do, make sure he or she knows that he or she will be responsible for their own payments. Talk to them about making choices they can afford and impress upon them the fact that regular payments must be made. My parents made it clear to me that if they ended up making the car payments, I would no longer be driving the car.
- Be clear about interest. This is very important in terms of credit cards. Show them interest charges on credit card bills. I have saved some of my old credit card bills — from the days when I was somewhat careless of carrying balances — to show my son when he’s older. Point out that interest doesn’t provide any return value. All it does is make someone else rich. Point out that credit cards represent someone else’s money, and that balances should be paid off every month. Even if you don’t get your child a credit card, this is still an important lesson to teach. Who knows what he or she will do later on.
An allowance can be a good idea. This lets young children learn how to manage money early. As children get older and get their own jobs, an allowance may not be as necessary. In such cases, though, it is important to clearly state what you will pay for. My parents gave us a school clothing allowance of $100. If we wanted more, we had to pay for it. I (along with two of my brothers) avoided designer brands and usually got an entire wardrobe for the $100. My sister and one of my brothers wanted the hottest styles. They burned through their allowance quickly, and then had to use their own money. After two years of that, my brother started re-prioritizing.
Most parenting experts agree that an allowance should not be connected to chores. I tend to agree. Gavin has things he is expected to do as a member of the family. He does not get paid to do them. While I want him to learn how to manage money, I also want him to learn that money shouldn’t be the only motivator.