My kids ask me to buy something for them just about every day. Sometimes it’s a small request, like a lollipop, and I think, “Why not?” Sometimes, though, they ask for something larger that blurs the line between a “need” and “want.”
For example, last year my 7-year-old son asked for a $200 electronic device for his birthday. While I could find the money to pay for it on a special occasion like that, I questioned whether I should buy it. Like many parents, I want my children to have things, yet I also want them to understand money and to become fiscally responsible.
The Big Secret
Neale Godfrey, a co-author of Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Kids (Fireside, 2006), says, “There is nothing inherently wrong with children wanting and getting material things. What matters more is how they get them. If children are allowed the opportunity to earn money and taught how to budget, they can and should be able to buy many of the things they want, and enjoy them. Fiscal responsibility isn’t just about saving all your money, it’s about finding balance.”
Parents’ biggest error regarding money and kids is that they don’t raise the subject. Godfrey says, “Parents believe they are protecting their kids by not discussing money, but instead they do them a disservice by turning money into this big secret. Then when their kids are off to college, parents wonder why their kids aren’t more financially savvy.”
But while parents may be silent, kids hear plenty about money elsewhere. Rudy DeFelice, founder of Kidworth, a money-management website for kids, says, “Kids are surrounded by social media, music, and commercials that are teaching them about rampant consumerism and relentless consumption. Kids get the wrong ideas about money and spending.”
Here are some of the ways to introduce kids to the basics of money management:
Kids are ready to start learning money basics around age 4. “When children see parents buying things like groceries, parents have an opportunity to narrate that money is a medium of exchange. When using a credit card, explain how it works. Otherwise kids think it is a ‘magic card’ and don’t understand that the bill needs to be paid at the end of the month,” says Godfrey.
For children to understand money management, they need their own money. Executed correctly, an allowance is an excellent teaching vehicle. DeFelice says, “By giving children power over their money, they actually make more mindful decisions.” One guideline suggests children get $1 per year of age per week ($10 a week for a 10-year-old).
Whether an allowance should be tied to doing household chores is debatable. What’s more important is that parents and children agree up front about what expenses it will cover (movies, lunch, clothes, etc.). Parents must be consistent about allowance; giving a child money in addition to it defeats the purpose. Godfrey says, “In the real world, people don’t just give you money; you work for it. When parents just give their kids money for no reason they do them a disservice and create a false sense of entitlement.”
If a child feels her allowance isn’t enough, suggest she complete additional chores or get a job outside the home.
Once children have their own income (through allowance, gifts, and outside earnings), they’re ready to set financial goals. They should divide their income into three categories:
- SPEND: To enjoy immediately (movies) or save short term (special clothing, electronics)
- SAVE: For long-term goals, from a computer to college
- SHARE: Kids should be encouraged to share their resources with causes close to their hearts.
Deciding what percentage to put in each category is up to individual families, but experts suggest allocating at least 10 percent for long-term savings.
For young children, budgeting can be as simple as having three clear jars labeled “Spend,” “Save,” and “Share.” Older children may enjoy having their own bank accounts. Another option: set up a free account on Kidworth. DeFelice says, “Given the opportunity, kids get very excited about earning money, saving, and smart spending. By teaching them to set and achieve financial goals, parents are helping their children to live richer lives.”
- For youngsters: Bunny Money, by Rosemary Wells (Puffin, 2000)
- For older children: Easy Economics, a Visual Guide to What You Need to Know, by Leonard Wolfe (Wiley, 2011)
- Biz Kid$: A public TV show geared to middle and high school students. It teaches financial education through comedy, and profiles young entrepreneurs. Go to the website for local show times.
- Secret Millionaire’s Club: Educational webisodes that feature investor Warren Buffet as a mentor to groups of kids
Randi Mazzella is a freelance writer from Short Hills, and mom to three children.