Money gives people — both young and old — decision-making opportunities. Educating, motivating, and empowering children to become regular savers and investors will enable them to keep more of the money they earn and do more with the money they spend. Everyday spending decisions can have a far more negative impact on your child’s financial future than any investment decision they may ever make.
Start teaching your children about money when they are young. As soon as your child can count, introduce them to money. Take an active role in providing them with information. Observation and repetition are two important ways children learn.
Communicate with your child as they grow about appropriate values concerning money — how to save it, how to make it grow, and most importantly, how to spend it wisely.
As a parent, you want what is best for your child. So make financial education one of your parenting goals. Develop a plan, put it on the calendar and make it a recurring event. Children are naturally curious and love to ask questions. Seize the opportunity to teach children about money. Make it fun.
EDUCATION
Establish a regular schedule for family discussions about finances. For younger children, it gives them something to look forward to each week: counting their savings and receiving interest. Other discussion topics should include the difference between cash, checks, and credit cards; wise spending habits; how to avoid the use of credit; and the advantages of saving and investment growth. With teenagers, it’s also useful to discuss what’s happening with the national and local economies, how to economize at home, and alternatives to spending money. All of this information will be important as they take on more responsibility for their own financial well-being.
GOAL-SETTING
Setting goals is fundamental to learning the value of money. People who do not set goals, rarely reach their goals. By writing down your goals, you are much more likely to achieve those goals. You may not have thought about teaching money matters to your kids in terms of goals, but it helps to do so. Setting goals helps you measure your (and your child’s) progress. Set goals that you want to see your child achieve.
The goals you now decide on depend in part on the age of your child and what your child already knows. You can always adjust your goals as you go. Nearly every toy or other item children ask their parents to buy them can become the object of a goal-setting session. Such goal-setting helps children learn to become responsible for themselves. Help your child learn the differences between needs, wants, and wishes. This will prepare them for making good spending decisions in the future.
Allowance and Spending Decisions
When giving children an allowance, give them the money in denominations that encourage saving. If the amount is $5, give them 5-1-dollar bills and encourage that at least one dollar be set aside in savings. (Saving $5 a week at 6 percent interest compounded quarterly will total about $266 after a year, $1,503 after 5 years, and $3,527 after 10 years!)
Allow young people to make spending decisions. Make sure that you are not harsh or controlling when your child wants to withdraw a portion of their savings in order to make a purchase. Whether good or poor, they will learn from their spending choices. You can then initiate an open discussion of spending pros and cons before more spending takes place. This gives you an opportunity to challenge your child to understand the significance of what he can do if he saves up for a special purchase.
Teach your child to use common sense when buying. This means doing research before making major purchases, waiting for the right time to buy, and using the “spending-by-choice” technique. This technique involves selecting at least three other things the money could be spent on setting aside money for one of the items, and then making a choice of which item to purchase.
Show children how to evaluate TV, radio, and print ads for products. Will a product really perform and do what the commercials say? Is a price offered truly a sale price? Are alternative products available that will do a better job, perhaps for less cost, or offer better value? Remind them that if something sounds too good to be true, it usually is.
VALUE OF SAVING
Begin a regular savings habit early to teach your child how to be successful. Initially, a piggy bank works well. Choose one that can be opened in order that a regular activity of counting money occurs.
Introduce children to the value of saving versus spending. Explain and demonstrate the concept of earning interest on savings. Pay interest on money that your child saves at home; children can count their savings, and you can show them how the interest allowed their money to grow. Your child will be pleased to see how fast money accumulates through the power of compound interest. Some parents even offer to match what children save on their own.
Although many of us do our banking on line now, when your child understands money concepts, take him to a credit union or bank to open their very own savings accounts. Bankers love it and so will your child.
You can also introduce children to U.S. savings bonds. Bonds are still a good value, costing one-half their face value and earning interest that in some instances will be tax-free if used for a college education. Perhaps more importantly, when given as a gift, bonds will not be spent immediately, reinforcing the value of saving.
RECORD KEEPING
Keeping good records of money saved, invested, or spent is another important skill young people must learn. To make it easy, use 12 envelopes, 1 for each month, with a larger envelope to hold all the envelopes for the year. Establish this system for each child. Encourage your child to place receipts from all purchases in the envelopes and keep notes on what they do with their money.
TEACHING OPPORTUNITIES ABOUND
Use regular shopping trips as opportunities to teach children the value of money. Going to the grocery store is often a child’s first spending experience. About a third of our take-home pay is spent on grocery and household items. Spending smarter at the grocery store (using coupons, shopping sales, comparing unit prices) does save you money. To help young people understand this lesson, demonstrate how to plan economical meals, avoid waste, and use leftovers efficiently. When you take children to other kinds of stores, explain how to plan purchases in advance and make unit-price comparisons. Show them how to check for value, quality, repairability, warranty, and other consumer concerns. Spending money can be fun and very productive when spending is well-planned. Unplanned spending, as a rule, usually results in 20-30 percent of our money being wasted because we obtain poor value with our purchases.
CREDIT
When using a credit card at a restaurant, take the opportunity to teach children about how credit cards work. Explain to children how to verify the charges, how to calculate the tip, and how to guard against credit card fraud. Alert children to the dangers of borrowing and paying interest. If you charge interest on small loans you make to them, they will learn quickly how expensive it is to rent someone else’s money for a specified period of time.
Be cautious about making credit cards available to young people, even when they are entering college. Credit cards have a message: “spend!” Some students report using the cards for cash advances and also to meet everyday needs, instead of for emergencies (as originally planned). Many of those same students find themselves having to cut back on classes to fit in part-time jobs just to pay for their credit card purchases.
Teach your child what credit reports are and the value of a good credit rating if there is a history of regular, successful savings.
Adapted from “Dollars and Sense,” in the April 1999 issue of Our Children, the official magazine of the National PTA®.
Paul Richard is executive vice president of the National Center for Finance Education (NCFE), a nonprofit organization dedicated to helping people learn to manage money.
