Welcome to Frugal Fridays where we share money saving tips, discuss living frugally and generally talk about personal finance issues. I've been thinking a lot lately about how to teach children to be wise money managers. It seems that every day I read another report about how people in our society are taking on huge debt and not building up savings. This problem seems particularly endemic amongst the young. This is not a sustainable lifestyle, and yet, it seems that many people don't figure that out until they have dug themselves into a financial hole that is supremely difficult to get out of. I can't help but think that some of this is because children are not learning money management skills before they leave home, get credit cards and start to make financial decisions that will affect the rest of their lives. So, although some may say I am totally the wrong person to discuss this since I'm not a parent, or a teacher and so I have no personal experience teaching children at all, I find myself compelled to discuss how to break this cycle and how to make sure the the next generation doesn't grow up as financially inept as the current one.
Disclaimer: I am not a financial professional. I'm just a consumer who tries to be educated. Take anything I say with a grain of salt.
Fifty years ago, two big taboo topics of discussion in our society were money and sex. Parents were loathe to discuss either with their children. Back then, however, children could pick up a fair set of money handling skills just by watching their parents. They saw their parents bring home a paycheck regularly and take it to the bank for deposit. Since most transactions were in cash, children saw the money being exchanged for goods and services and they learned that what went out had to be balanced by what came in.
While we as a society have recognized the tragic outcomes that can happen when children are kept in the dark about sex, and we have become much more open toward breaking that taboo, the taboo against discussing money seems as strong as ever. This is particularly unfortunate since nowadays, most financial transactions take place electronically. Children can no longer learn by observing, since all they see is mom and dad go to the ATM, or use a piece of plastic whenever they want to buy something. Since they haven't seen the connection between the deposit and the withdrawal and they don't internalize the message that you can't spend money you don't have. Parents and educators need to take a proactive role in teaching children how to manage their financial affairs. Would you want your child to learn about money from some guy on a street corner?
Children learn by watching, they learn by play and they learn by doing. I think the latter is the most important, but every child is different, so I would try to expose your child to all three methods and hope that something sticks.
Lead By Example
It's important that children see that managing money is not something that happens all by itself. It is something that takes time and attention. Let them see you paying the bills on the computer, balancing your checkbook, reviewing your expenses and making your budget. Don't exclude them when you have discussions about household budgeting decisions. They need to see that buying one thing means giving up the opportunity to buy something else that may also be attractive. Sometimes it is the good parent that denies their child a special treat. The lesson they learn from that may be much more worthwhile than the treat ever could be.
One good teaching method is to demonstrate the monthly family budget using cold hard cash. Gather your kids around and show them the amount of your monthly paycheck in cash (you can use Monopoly money, if you like). Then divide that pile into smaller piles for each of your expenses: taxes, mortgage, groceries, college fund, car insurance, etc., until finally you are left with a much smaller pile that is your "fun" money. It's important for kids to see that even as an adult, you still must live with an allowance. The visual and tactile nature of this lesson tends to make a much stronger impression than numbers on a spreadsheet ever will.
Games, Toys and Books
I've found some toys and games that come well recommended. Some of these I remember from my youth.
- For very young children, A Chair for My Mother, is a story about a child and her family saving money for a special purchase.
- Alexander, Who Used to Be Rich Last Sunday is a book directed at young school-age children about a young boy who gets a windfall, but it manages to disappear.
- Boardgames with money can be both fun and educational. Monopoly, Life and Payday are all good examples of these. One new gimmick I've seen is to replace the physical money in these types of games with some sort of electronic counting system. I think that's a really bad idea. There's nothing like seeing your mound of hundreds twenties dwindling to a pitiful pile of ones and fives to bring home the value of money.
I don't have any good recommendations for electronic or video games, mostly because I don't have a lot of experience with what is out there right now. Keep in mind that games that are designed with the goal of teaching some lesson, often end up being boring and languish un-played. Also, I think that games where children are physically exchanging money for items are much better teachers than electronic games where they trade numbers on a screen for other pictures on a screen. But if you know of game that is a fun and helps kids learn, please mention it in the comments.
Learning By Doing
As I said above, I think the best way children learn to avoid problems and pitfalls of money management is by managing their own. They should be getting an allowance from a young age, and, even more important, they should be responsible for managing some of their own household expenses from their own money. For very young children, this might be candy or treats. For older children, this could include books, toys, video games, cell phones and even their entire wardrobe. As for how much to give them, well, that is dependent on their age and what you are requiring them to buy with it. One good rule of thumb is that if they aren't complaining about needing more, you may be giving them too much. (Not necessarily though, some children are just naturally frugal.)
There is evidently quite a strong debate between the two schools of parenting on whether to tie children's allowance to the performance of chores. I'm in the "it's a really bad idea" camp for the following reasons: it teaches children that they deserve to be paid for helping out around the house (trust me, your child's future roommates and spouse will greatly appreciate it if you do not teach them that lesson) and it lets children treat housework as an optional task. If they don't need their allowance that week, why should they do the chores? On the other hand, some parents argue that they want to teach their children that you don't get something for nothing and that they need to learn to value their own time and effort. I'm not convinced, but I do see some validity in those arguments as well. I just think they can learn those lessons by earning money outside of their allowance.
You may want to add incentives to encourage your children to start earning money from jobs outside the home. You may offer to match some part of what they earn and save toward a special goal like buying a bike, a computer, or a car. When they get their first real job (even babysitting for the neighbors counts as income for the IRS) I would encourage you to open a Roth IRA for your child and fund it for them, at least in the initial years. It's a gift that they may not truly treasure for 20 years or so, but someday in the future, they will thank you profusely.
Encourage Savings
I'm not sure it's wise to force children to save a set portion of their allowance or earnings, but I do think it should be strongly encouraged. Children as young as four should have a coin bank. (Younger than that and they are more likely to swallow the coins than put them in a bank.) I'm not a big fan of traditional piggy banks (the kind with a slot for coins to go in, but no way to get them out) for young kids. The one advantage that they have is that since you can't access your savings without physically breaking the bank, it does help teach that dipping into your savings is not to be done lightly. I think you can teach that in other ways, however, and, I think that being able to watch your savings grow and counting out the coins is a valuable exercise. They have coin banks now that will electronically count your savings for you, but why would you deny your children the opportunity to learn counting?
By the age of 10, or so, children should have their own savings account at the bank. Most banks will still let you open a no fee (or low fee) account for your child. They sooner they can start learning about interest payments and about bank fees, the better.
Credit Cards and Teens
Helping your child get their first credit card when they are still at home and you can monitor the bills is a really good idea, if (and only if) you follow through with the monitoring and guidance. The most important lesson to teach them is that they need to pay the bill off in full, from their own money, each month. As soon as they start carrying a balance from month to month, they start incurring fees, and interest charges that will add up quickly. The only sensible way to use credit cards is to never carry a balance and they need to learn that right off the bat. If they are having trouble keeping within their spending limits, don't bail them out, they need to learn the pain of digging themselves out their own financial difficulties so as to avoid them in the future. You might have them use a secured credit card initially, so that they can't get in over their heads. You could also start them off with a debit card, but the danger of overcharge fees and the reduced fraud protection makes those instruments I advise avoiding.
Charity Begins Young
I also think it's important to teach children from an early age that they have a responsibility to give of themselves, either money or time, to others who are less fortunate. Even a toddler can be taught to drop a quarter in the collection plate at church. School age children can go trick-or-treating for UNICEF or can sell stuff (cookies, candy, etc) for school or club fundraisers. Letting children go door to door by themselves may not be such a great idea these days, but you can escort them or help them set up a table outside a grocery store or mall.
Frugal Tip of the Week: According to this list of annual sales, October is the month that school supplies and bikes go on sale.
Update [2007-9-28 15:20:7 by sarahnity]: Here's some further resources you can check out if you are looking for how to teach your children about money: