As kids grow, they tend to become more thoughtful about money, and it's a process to teach them how to save more, shop wisely and earn money through small jobs. The current economic troubles provide a fitting time to school our kids on personal finance, according to Eric Tyson, author of Personal Finance for Dummies. If you're feeling guilty because you can't buy your child that video game system he desperately wants for Christmas, or you're asking him to choose between playing recreation basketball or taking karate lessons this winter, Eric Tyson has one word for you. Don't. In fact, he says, now is the perfect time to teach your kids some valuable financial lessons and learn that budgeting is how the world really works.
Steps
Expose your kids to the realities. "Kids are surprisingly aware of what's going on in the world," says Tyson. "And if they don't know that times are a little bit tough and Mom & Dad are having to watch their spending, it's time to tell them. Sheltering kids from financial realities does them no favors." A good grasp of personal finance is one of the most valuable life skills a person can have. And while previous generations may have been raised with the constant admonishment that "money doesn't grow on trees!" too many of today's parents neglect that lesson. It's time to change that—and the economic crisis we're in now provides a great incentive for doing so.
Tell kids the truth. Kids are perceptive. If you've been acting anxious and on edge lately, they've noticed. Rather than let them wonder why Mom and Dad are working so much lately or constantly talking about money, explain (on their level) what's going on in the family's financial world. This might mean explaining why vacations have to be cut back, why there will be fewer toys under the tree etc.
Explain to them how much things cost. Some parents are surprised to find out that their kids don't have a very good grasp on what things cost because they have been sheltering them from this always. A great hands-on way to open their eyes is to take them on a "money tour" around the house. For example, kids might not understand that hot water costs more than cold water, or that bumping up the heat results in higher power bills. This exercise will teach them how they can conserve and thus help the family save money. You can also pile up all of the bills for the month and have them look at the amount on each one. Show them what the family's cost of living is and again reiterate the areas where they can play a part in reducing the costs.
Realize that kids learn what they live. It may sound like common sense, but you—Mom and Dad—are your kids' most influential teachers. When you ring up a barge-load of credit card debt, take out exorbitant mortgages or car loans, and fail to save anything, that's what your kids come to see as normal. If you are modeling unhealthy financial habits, you can't realistically expect your kids to "do as I say, not as I do."
Deprogram them. Kids are constantly bombarded with information about expensive things, whether it's the fancy sports car they like, the wardrobe of their favorite athlete or actor or the many appeals to luxury in the 40,000 commercials that the American Academy of Pediatrics estimates the average American child sees each year. What they aren't bombarded with is knowledge on how to manage money effectively. And while schools are increasingly incorporating money issues into the existing curriculum, the broader concepts of personal financial management still aren't taught. Frightening though it may be, some schools rely on free "educational" materials from the likes of VISA and MasterCard!
Start an allowance. An allowance is a great teaching tool. You don't have to break child labor laws to find great ways to help your kids earn their allowance rather than just have it handed over to them. A well-implemented allowance program can mimic many money matters that adults face every day throughout their lives. From recognizing the need to earn the green stuff to learning how to responsibly and intelligently spend, save, and invest their allowance, children can gain a solid financial footing from a young age.
Start them saving and investing early. It's never too early to start saving, and the sooner you can instill the importance of saving money into your kids the better. After they start earning an allowance, have your kids save a significant portion (up to half) of their allowance money toward longer-term goals, such as college (just be careful about putting money in children's names as doing so can harm college financial aid awards). Tyson recommends that children reserve about one-third of their weekly take for savings. As they accumulate more significant savings over time, you can introduce the concept of investing.
Reduce their exposure to ads. The primary path to reduced exposure to ads is to cut down on TV time. When kids are in front of the tube, have them watch prerecorded material. You can direct the television viewing of younger children, in particular, toward videos and DVDs. And for older kids, if you use digital video recorders (DVRs), such as TIVO, you can easily zap ads. But when an ad does sneak under the radar and set the kids to begging, address it. Explain to your kids that there's never a good time for frivolous impulse spending—but it's especially harmful when money is tight.
Find entertaining ways to teach good money habits. You'll probably face an uphill battle when teaching kids about personal finance. That's why it's so important to find entertaining ways to instill good financial habits in them. For younger kids Tyson recommends age-appropriate books like The Berenstain Bears Get the Gimmies. For late-elementary-school-aged kids, Quest for the Pillars of Wealth by J.J. Pritchard is a chapter book that teaches the major personal finance concepts through an engaging adventure story. You could also get them a subscription to Zillions, a kids' magazine from the publishers of Consumer Reports, which covers money and buying topics. Consider playing the board games Monopoly and Life to teach more money skills as well.
Teach them how to shop wisely. Family shopping trips, whether for groceries or something else, are likely to be your kids' first encounter with spending. They'll see you make decisions based on what the family needs, maybe see the occasional coupon used, and will observe how you pay. These trips are a great time to teach them lessons about money and the value of product research and comparison shopping.
Introduce the right and wrong ways to use credit and debit cards. Those plastic cards in your wallet offer a convenient way to conduct purchases in stores, by phone, and over the Internet. Unfortunately, credit cards offer temptation for overspending and carrying debt from month to month. Teach your kids the difference between a credit and debit card, explaining that debit cards are connected to your checking account and thus prevent you from overspending as you can on a credit card. Make credit card usage the exception, not the rule.
Encourage older kids to get a job. An allowance doesn't have to be the only way for your kids to earn money. Your child's initial exposure to the work-for-pay world can start with something as simple as a lemonade stand. Depending on age, he or she might do yard work for neighbors or offer babysitting services. And the fact that we're in a recession makes it all the more appropriate for older kids to "help out" by getting a part-time job—especially to fund unnecessary purchases like DVDs or cool clothing.
Tips
More time comes out of less spending. You have to be more creative and more involved with one another when money flow slows or stops; and you have to team up to do things together a lot more. This is a positive and something to keep being grateful for.
Allowing children partial exposure to various ads (print or television) may more adequately prepare them for life in our consumer culture. When paired with adult or mentor coaching about the purpose of ads and ways to cope with the inherent disappointments of living on a budget this can prepare children for a lifetime of advertisement bombardment.
Things You'll Need
Time to sit down and talk
Budget
Savings account
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