How to Teach Your Kids About Money

Too often young adults learn about debt and the importance of establishing good credit the hard way--by digging themselves out of a hole. Instill the value of saving versus spending and you'll help your child grow up to be a fiscally responsible adult.

Instructions

Difficulty: Moderate

1. Examine your own attitudes and habits about money. Parents are good at preaching, but if you repeatedly waste money, that's what your kids are learning. If you talk about wanting a new digital camera and the next day you run out and buy one, you've sent the message that you can get whatever you want whenever you want it. If, on the other hand, you set up a savings plan to pay for a camera, your kids get a valuable lesson in deciding whether something is important enough to wait for. And when they see you socking money away for it, you've sewn the seeds of wise money management and delayed gratification.
2. Set a good example by creating a spending plan with your spouse. Show kids that setting up a budget doesn't have to be complicated. First, pay yourself: Put aside money to meet your financial goals (savings, emergencies). Then pay your bills. Now divide up what's left to cover food and other necessities--and don't spend more than that. See 226 Set Up a Budget and 228 Design a Savings Plan.
3. Invite your children to participate in financial discussions. When kids are old enough, go ahead and show them how your income gets divvied up into mortgage, food, taxes, bills and clothes. Talk about your own goals--eliminating debt or saving for big-ticket items like a new car, college or a vacation--to prompt contemplation of their own savings goals.
4. Give your kids a weekly allowance. This is money just for being part of the family and taking care of basics, such as picking up toys, making beds and not leaving towels on the bathroom floor. A dollar for every year of age is a good amount. Give kids total control over how they spend their allowance. The whole point is to let them learn from their mistakes.
5. Create opportunities for older children to earn additional money with jobs such as washing the car and mowing the lawn. This is the time to instill appreciation for a job well done and getting paid for your efforts. Teach them that they can get what they want through hard work--not because they are entitled to it.
6. Set up a checking account and give teens a lump sum of money to cover all nonbasic expenses--gas, insurance, clothing, shoes, entertainment, gifts, video games, eating out--for a month. Gradually build up to six months as they gain confidence and competence at living within a budget.

Tips & Warnings

• Give allowance as you would a paycheck: the same amount at the same time every week.
• When you go on vacation, give each child a set amount of money to pay for all the extras they want. They'll need to make their cash last the whole trip--and you won't have to hear "Oh, pleeeeeeease!!" See 406 Plan a Trip with Children.
• Teach kids that credit-card companies aren't their friend--they're in the business of making money. Credit cards can help you develop good credit and certainly are convenient. If you don't use them wisely and pay them off every month, however, you give control over your life to someone else.
• Help your children divide their allowance into longand short-term savings (about 25 to 35 percent) and charity (10 percent), with the rest for spending. They can pick any charity to support, such as a food bank, an animal hospital or whatever touches their heart.
• Kids who feel entitled often have parents who taught them they can have whatever they want whenever they want it. Say "no" and stand firm: They'll still love you and will learn the value of delayed gratification.