How to Teach Your Kids to Handle Money
With skyrocketing national levels of credit card debt, record-low levels of savings and an economic crisis caused largely by a lack of financial literacy, the time has come to end the cycle. Unfortunately, a recent online poll conducted by Charles Schwab & Co. found that twice as many parents teach their kids how to do laundry as balance a checkbook.
The poll also revealed that many parents are uncomfortable talking to their children about money - maybe because they themselves don't understand key financial concepts. That's why we at Total Bankruptcy are here to help you help your kids. Many financial experts recommend giving kids an allowance as an excellent way to teach the value of money. But there's more to it than doling out a few bucks every week. Read on for details.
Part One: Budgeting
If you're recovering from bankruptcy or trying to cut back on spending, you're hopefully already following a budget for your household. Before you can determine how much money to give your kids each week (or month), you need to look at what you're already spending on them.
- For a month, write down everything you buy your children, including school lunches, candy from the grocery store checkout, music, toys, etc.
- Figure out your monthly total and categorize your expenses. This will help you separate needs (school supplies, new underwear) from wants (candy, CDs).
- Set an allowance that covers your child's needs and leaves a little left over for wants. You can base the "leftover" money on your child's age and your financial capabilities.
Part Two: Allowance
The purpose of giving your children an allowance is to teach them lessons of financial literacy, not to reward them for good behavior, etc. Experts discourage linking allowance to chores or "good behavior," since it sets up a false connection between such things (i.e. your kids will get the message that chores/kindness to siblings/studying for school are choices rather than expected behavior).
To make sure your kids learn the right lessons, be sure to set up rules about allowance.
- Make it a big deal. Sit down your whole family for a discussion of allowance. Explain how you decided what they'll receive, what the money is expected to cover, when you'll pay them, etc.
- Don't break the rules. If your child decides to spend her whole allowance early in the week, and wants something later, don't give her more money. She'll learn to plan ahead and make trade-offs when she realizes you mean business.
- Remind your children that they don't have to spend every penny you give them. That's where savings comes into play.
Part Three: Savings
Helping your kids understand the importance and power of savings is of utmost importance for their financial education. Don't be afraid to start them young.
- Take your child to the bank (or online) and open a savings account in his name. This allows him to feel the pride of ownership and presents you with great opportunities to learn how banks work. You can review monthly statements together, explain how compound interest works and demonstrate how to keep track of funds.
- Encourage savings. Some parents offer their children incentives, like matching a percentage of whatever their kids save (sort of the do-it-yourself version of a company-sponsored retirement program).
- Help them crunch the numbers. If your kid wants to save up for a big purchase, sit down and help her figure out how much she'll have to save and how long that may take.
So how do you know if your kids have become financially literate? Using such a broad term can make it difficult to assess progress, so it's helpful to set out specific goals. Common lessons you may want your children to learn may include the following.
- Delayed Gratification: This means waiting to get what they want, and is powerfully demonstrated by forcing them to save their own money gradually to be able to afford a big item.
- Making Tradeoffs: This often involves trading gratification now (buying candy) for a more substantial gratification later (buying an MP3 player). By limiting the money available to children, they learn that they can't have everything, and must make choices.
- Analyzing Purchases: Encourage your kids to save their receipts. At the end of the month, help your kids review how they spent their money and ask what they think. Point out how saving more would have gotten them to their goals faster.
- Balancing a Checkbook: For older kids, this is an important lesson. You can do it by having them sit in on a balancing session and talking them through it.
- Budgeting: Work with your children to make back-to-school, grocery or party lists. Determine what you want, how much money you have to spend and what things are likely to cost. Then work together to determine the necessities and the extras.
- Borrowing: If your kids want to borrow money, consider offering to lend it to them with interest. Help them calculate how much money they'll end up paying back and how long it will take. Then help them decide whether they still think the immediate benefit is worthwhile.
Depending on their ages, you may have different aims for your kids, so be sure you know what you want them to learn before you start. And remember: kids learn by example. If you want your children to have a healthy relationship with money and credit, it's important for you to make sure you're handling your own wealth in a reasonable manner.
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