Financial education for kids

Patrick McNally Academy, Finance 101, Insight Investing Articles, Investing & Planning, Kids & Young Adults, Life Events, Risk Management

When it comes to teaching kids about money, the best piece of advice I can give is… the sooner the better.

Up until they start earning a living, and sometimes well beyond that, kids are apt to spend money like it grows on trees. This article will help you put your children on the road to handling money responsibly.

Long before most children can add or subtract, they become aware of the concept of money. Any four year old knows where their parents get money - the ATM, of course. Understanding that parents must work for their money requires a more mature mind, and even then, the learning process has its wrinkles. Once they learn how money works, children often display an instinctive conservatism.

Instant gratification aside, once they learn they can buy things they want like, candy, and toys, many children will begin hoarding every nickel they can get their hands on. How this urge is channeled can determine what kind of financial manager your child will be as an adult.

It's important to work on your child's financial education early on, cause once they're teenagers, they are less likely to heed your Yoda like advice. Besides, teens are just too busy doing other things - like spending money. When your kids are young, managing small amounts of money helps them prepare for the day when the numbers will get bigger.

What’s the best way to teach your kids about money? Pay them.

There's a strong argument that an allowance is the best way to teach a child to handle financial responsibility. There's an equally convincing case that nothing could be further from the truth.

In either event, before they get an allowance, a child should be old enough to count money. The key to a successful allowance is structuring it right from the beginning.

Make it clear to your kids what kinds of expenditures the money is for, and that they are expected to save some of it. Some experts think parents should not link the allowance money to household chores, and that children should be expected to help out around the house and in the yard because they are members of the family, not because they are paid. But that's your call.

Yet with kids over eight or nine years old, giving an allowance doesn't preclude paying them for specific chores, especially the occasional type that you might otherwise pay outsiders to perform, such as mowing the lawn or washing the car. Why not keep the money in the family?

Some parents complain that giving their children allowances puts the parents in a position where their kids are often begging for raises or advances. Remember, allowance is supposed to be a teaching tool, and negotiation skills are an important part of that, which they're going to need for dealing effectively with friends, teachers and, eventually, their bosses.

So instead of grimacing when your kids hit you up for a raise, decide when the time is right and then engage them in fruitful negotiations. How long since the last raise? Will new expenditures be covered? Are more responsibilities expected?

The biggest decision on allowances is how much- a decision affected by personal values, family income and common sense. Don't let your kids pressure you with an amount based on what their friends are getting: Any normal kid will bring in high figures.

One way to encourage your children to develop sound money discipline is to make savings a condition of their allowances. So try to account for this when deciding on a weekly or monthly figure.

What if your kid doesn't like to save? Try the carrot - and then the stick.

This, of course, means setting a budget - and deciding what to do when children run afoul of their own guidelines.

One answer is to place savings into a locked box. But since this doesn't teach restraint and you won't always be around to oversee savings deposits, there are more instructive ways to make the point. You can use specific percentages and split up the money into a few different jars.

 If you’ve been teaching them from an early age, older children shouldn't have trouble understanding the concepts of long-term and short-term saving. If not, illustrate the concepts by using goals, as with a new video game a month from now versus a bicycle this summer.

Once children reach the age of 9 or 10, it’s time to learn about banks. Quantitatively adept children of this age can understand the concept of interest rates. Until they're old enough to handle a checking account, children may take withdrawals as cashier's checks or money orders.

The best way to encourage sound spending habits is to model them. When planning a trip to the grocery store, get your children involved in making a list and sticking to it. This will teach them to avoid the bane of all savers: impulse buying.

For big-ticket items like appliances, show them how to do the research: reading articles and reviews, phoning stores to see if your choices are in stock, negotiating with salesmen on price, going to several places to see what's available and comparing prices.

Now let’s talk about older kids. With credit-card offers coming as fast as party invites, college freshmen need some guidance.

The typical college freshman is burdened enough by school responsibilities, homesickness and self-doubt. To keep tomorrow's freshmen from suffering the additional stress brought on by a first checking account, start them off sooner, as early as their junior year in high school.

Initially, keep it simple, avoiding frills and extras like overdraft protection; they need to experience the reality of bounced checks to understand record-keeping responsibilities.

Many college freshmen today have credit cards, and if your kid is to be one of them, then this, too, has a learning curve that is best experienced under your guidance.

Before your kids acquire their credit cards, they'll need a lesson in how to use plastic responsibly. Point out that this is where most people get in trouble, and illustrate your point with interest tables that show the damage that average nearly seventeen percent annual interest, compounded over the years, can do to their savings potential.

Also, tell them that credit is a privilege, not a right, and that if they abuse it, they will lose their ability to get more.

After teaching your children the hard money lessons, show them the rewards of financial self-control.

Once your teenagers get a grip on credit, introduce them to the flip side: investing. Since your teens may have too much money collecting no interest in a checking account, the best way to start is with a money-market account on which they can write a few checks.

From there, introduce them to simple, set-term investments like savings bonds and cd’s. Though returns from these will be low, they serve an important lesson and will build their confidence about investing. From there, introduce them to the stock market and the bid wide world of stocks, bonds, and mutual funds.

Some of the stock investing games available on the Internet are a fun and educational way to introduce a teenager to stocks, and don’t require real money.

Once you get your child to understand the ups and downs of the stock market, you've probably accomplished all that you can reasonably hope for. Then, if he or she wants to put some money into individual stocks, set up a trust account for him or her with a discount broker.

Remember, that seeds planted early bear fruit later. Take the time to educate your kids early about money, it will serve them well the rest of their lives.