Helping Kids Learn to Manage Money

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By Richard Rodman

PTA Today, November 1992

It’s rare for children to hear their parents speak positively about money – how much is being saved for college, how well investments are doing or how their budget is working toward retirement. Indeed, next to children, parents fight most about money.

Since we know that children learn by imitating their parents, we owe it to them to teach them about money and finances in the best possible way.

We must reverse the trend of negative talk so our children can be financially productive and independent.

At the Ramsey, New Jersey, Financial Education Institute, we strive through seminars and workshops to teach children of all ages the specific strategies they will need to move forward in a positive financial direction. I would like to share just a few strategies for parents to share with their children.

Consider the following: According to a Texas A & M University study by James McNeal, children in the U.S. receive $9 billion a year from adults, with $4.48 billion in allowance and $4.2 billion in payment for chores or gifts for special occasions. A Gallup survey further reported that approximately one-third of parents give their children an allowance of $25 a week or more by the time they graduate high school.

However, only half of parents require their children to save any of their allowance! This is unfortunate, as an opportunity for life-long lessons has been missed.

Talking to Kids About Money

When should parents begin teaching children about money? They can start in a simple manner at nursery school or kindergarten age. Parents can speak about money denominations and identify them. By 1st grade, parents can introduce an allowance. The amount they give should be based on financial circumstances, but 50 cents to $1 a week is average. Most experts agree, it is best not to tie the allowance to chores completed, so it does not become the source of any conflict. Chores and family responsibilities should be talked about separately, and chores, above the norm, can be compensated additionally.

The allowance should be raised yearly. Also, give your children ideas about what they might want to buy with their money as well as items you expect them to pay for. Possibilities include snacks outside the home and miscellaneous entertainment. The ultimate goal is to have your children be able to manage their expenses by the time they graduate high school.

Other lessons in these early years should include learning about inflation, giving tips at restaurants and buying items in a cost-efficient way. Regarding inflation, frequently mention what various items used to cost, so children understand the concept of inflation over time. Lessons about buying food in larger amounts or buying clothes on sale will serve children well in buying items cost efficiently.

You can introduce the idea of a savings account by about the 5th grade, the last year of elementary school in many towns. Some banks will accept small deposits without large fees and some won’t. If a parent belongs to a credit union, that is a possibility as well.

If the child has accumulated enough money, you can open a money market fund. Twentieth Century and Fidelity are two mutual fund companies that will open small accounts. Usually accounts are set up with the parent as custodian under the Uniform Gift to Minors Act, and you can easily designate this on the application.

As your child reaches junior high or middle school age, you may want to start talking about college and/or other long-range necessities, such as jobs leading up to college. It is also a good idea to include your child in general family conferences about money, but be sure to do so only in those talks that will be positive or about planning. The idea of this is to convey the concept that large purchases are discussed and planned for and that money truly “doesn’t grow on trees.”

Matching Children’s Savings

Another idea during these pre-high school years might be for parents to match amounts of money that children save, thereby giving added incentive to accumulate funds. The same thing that motivates parents to save motivates their kids – a sense of control. Some children may even enjoy the sense of independence they get from buying items that their parents will not pay for, such as electronics systems and designer clothes.

When children start high school, it is time to teach them about where to invest money. Be specific and align yourself with a strategy that you feel confident will work well, given your child’s goals. We highly recommend no-load (non-commission) mutual funds in implementing any strategy. We feel that the research is easier, the diversification greater in order to protect against losses, and the initial costs much less. Besides this, no-load funds are professionally managed.

You can research mutual funds to find ones that have increased in value 10 years in a row because of superior management of their portfolio. Anyone can do adequate research by putting in the time and energy.

We suggest that the child do the initial research with parent joining in after this is done. (You will learn more than you thought!) Many libraries carry Lipper Analytical Services or the Wiesenberger counterpart to assist you. Both services offer information on the goals and objectives of funds as well as their previous track records.

In addition to teaching children what to invest in at this stage, we suggest opening a checking account with a monitored ATM card. This is an automated teller machine card with many locations. Withdrawals are made with many locations. Withdrawals are made with a special card and a secret c ode. Obviously, you should monitor your children’s use of the card. When used properly, it teaches responsibility.

You may also want to consider a family credit card, provide children pay their own bills, of course. In addition, you should talk about after-school jobs and college, including them in any and all decisions.

The value of your child starting to save today and continuing for the rest of his or her working life is extremely important. If you do a good job today in teaching your child to save, the rewards to the child affect them forever. The following lesson is one which, if taught well, stays with the child forever.

The story involves two brothers. Frick and Frack. Frick starts investing early and saves $2,000 per year, but only for six years, and then he stops but does not withdraw his money for the next 30 years. Frack, on the other hand, waits six year to save and invest but then continues at the same rate ($2,000/year) for 30 years. Who winds up with more money assuming the same return, Frick or Frack? Logic says it’s Frack, but it’s not, it’s Frick! The power of compound interest for a longer period of time (even though money was invested for only the first six years) enables Frick to do better over eh next 30 years. The penalty for waiting six years for Frack to start investing was too much to overcome, even though he invested every year for the next 30 years! (At a 12 percent average annual return, Frick wound up with $534,612 to Frack’s $540,585.) The moral of the story Start Today!

A child’s financial life has two stages: education and implementation. IF you educate and encourage your children about money at an early age, they can implement specific strategies while still in the nest, so that when they are on their own they will automatically have a systemized program to help them support themselves financially and live better in the years ahead.

By encouraging them, you are also helping them become more confident adults, ready to tackle more complicated areas of their financial lives as they arise. These include insurance, buying and selling cars, financing purchases, the value of good credit, budgeting, owning one’s own business, negotiating salaries, avoiding scams, and above all, running their financial life with ease.

Richard Rodman is president of the Financial Education Institute, 38 Lakeview, Ramsey, NJ 07446. 

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