children and finance

A Recipe for Youth Financial Literacy

John Lanza — Tue, 18 May 2010 14:02:46 +0000

Imagine someone handed you a chef's hat and apron and dropped you into a trendy restaurant, directing you to "fuse elements of French and Thai cuisine." Problem is, you've only watched cooking shows and, at best, you've sliced the occasional carrot to help your dad with a stew.

This is essentially the state of financial literacy today. Folks aren't being taught the skills necessary to become financially literate. They are tossed a hat and an apron and are expected to just figure it out. This is a recipe for disaster. Financial Literacy, like becoming a top chef, can only be achieved by developing skills over a period of time...a long time.

So much effort is directed at our young adults in an effort to fix poor habits. The people involved in those efforts are doing amazing work, but imagine if more or most of those amazing efforts were focused where they really need to be: building good financial habits in our younger kids.

There's a dichotomy in place regarding youth financial literacy. People almost always agree that my passion for teaching young kids about the value of money is the direction we need to head, yet most decide not to take this road. Parents delay teaching — or even talking about money — until their kids get older, and financial educators most often focus their efforts on teens and young adults. So why should we teach kids, even preschoolers, about the value of money? Because kids can understand a lot more than you think BEFORE they reach kindergarten. The PTA (Parent Teachers Association), NCEE (National Council for Economic Education) and CUNA (Credit Union National Association) all agree. In fact, CUNA has an entire set of resources (Thrive by Five) dedicated to helping parents teach their preschool kids about money.

I'm constantly trying to think of ways to get my message across. After reading Julie Rains' post on basic financial planning, it dawned on me that it would be revealing to match up the key components of a solid ADULT financial plan with the key aspects of youth financial literacy. Not surprisingly, it turns out that the basics of an adult plan include behaviors that kids can learn at a young age. I pulled just a few relevant topics from Julie's post and noted how kids can begin to learn these skills through a basic program that can be started in or just before Kindergarten.

1. Pay yourself first!

By giving kids an allowance by the time they are five and mandating that they save at least a portion of that money, they can help build this most basic skill. My personal experience suggests that somewhere between four and five is a good time to start an allowance, depending on the maturity of the child. We use a three-jar system to allow them to Save, Share (charitable donations) and Spend Smart. (Note that we don't just label the jar "Spend," but rather we wanted it to be about more than just spending. We wanted our daughters to eventually become smart consumers.)

2. Save for your retirement (matching).

We use the Allowance Magic program (full disclosure, I sell the book on my site) and the system incentivizes saving by allowing parents to "match" some percentage of allowance saved. For example, when our daughters put a dollar in their Save jars, they get an additional quarter. How much you match is your choice. By the way, the book is short but detailed enough to get you all the way into the teenage years.

3. Live within or beneath your means.

By embracing financial literacy and teaching it to their kids, parents can realize their own deficiencies and make adjustments. A great by-product of starting a program with our kids has been to improve my own thinking about needs vs. wants, making smart spending choices, and paying myself first.

4. Save for major purchases.

Goals, goals, goals! If your child really wants something, have him/her draw a picture of the item (or print it from a website), write how much money it will cost, and paste that on his/her Save jar. You can even go a step further and note how many weeks of allowance it will take to achieve the goal. Using goals to teach savings makes it tangible, and learning about goal setting is important for later achievement.

5. Give money to charity.

It's a good idea to mandate that a portion of the weekly allowance be plopped into the Share, or charitable giving, jar. Then look for opportunities to give this money away that's tangible for them. For example, our school collected money for Haiti relief, and our daughter was able to empty her Share jar into to collection jar. The more tangible the application, the better.

I am hopeful that this will help convince a few more parents that teaching very young kids these basic tenants can help ingrain these habits early, so that they (or others) won't have to break bad habits later.

Let's give our future chefs more than just a big hat and an apron!

Guest Post Blurb:

John Lanza created the award-winning DVD, "The Money Mammals: Saving Money Is Fun," and penned the new children's picture book, Joe the Monkey Saves for a Goal. Both are available at www.themoneymammals.com. John lives in Los Angeles with his wife and two daughters. Read more by John at his blog, Kids and Money:

This article is from John Lanza of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Financially Educate Your Children

Nora Dunn — Thu, 09 Oct 2008 01:42:49 +0000

You have the power to create and mold your child’s financial imprint. It is through your own actions, discussions, and attitudes towards money that your children will develop habits — both good and bad — that will carry them through and last a lifetime. They won’t learn it from anybody else; finances are not taught (at least not thoroughly enough if at all) in schools, and nobody else is going to show them how to succeed in life and avoid the huge financial pitfalls that lurk around every corner.

So do your child a favor and give them a huge helping hand! Here are a few ways you can help them create a healthy relationship with money:

1. Don’t Bribe Them With Money

By offering money as a reward for good behavior, your kids will learn that money is an end, instead of a means to an end. Try rewarding them with tangible life-enhancing experiences which the money would buy, like taking them to the movies, or out for a family lunch. Better yet, you can reward good behavior with things that don’t require money like having a sleepover with friends.

2. Go With the Flow

If your child wants to count the coins in your purse, let them. Use the opportunity to help them understand what each coin is worth and their relative value. You may even help them identify what each coin can buy (if anything). If they receive birthday money, then talk about the benefits of opening a bank account. As money works its way into your child’s life (and it will), use the opportunity to talk to them about it.

3. Allowances: Stick to the Plan

If you give your child an allowance, be exact and consistent with the amount and timing of each payment. This will get them used to timing and managing their income stream, as they will need to do when they later have jobs and careers.

4. Allowances and Pocket Money: Pay Yourself First

The best way to get your kids into the habit of paying themselves first is by doing it right from the beginning. Discuss long-term and short-term savings, and encourage them to put at least 10% of their allowance either in a bank account or even a piggy bank. The piggy bank option will require additional discipline (on their part) not to delve into it for candy, and could go two ways. On one hand, irresponsibly accessing their long term savings (maybe they are saving up for a video game) may affect their ability to reach their goals; a great lesson to learn — the hard way — early on in life. Then again, using a bank account instead may take just enough of the impulse urges out of their hands to help them achieve their goals and feel the satisfaction of getting that video game after saving up for it.

5. Put a Positive Spin on It

Even if you don’t have a positive attitude towards your own money matters, don’t allow your children to inherit this unhealthy disposition. Don’t let them associate money with anxiety or stress. Instead, teach them practically how money can help achieve their goals and get the most out of life through avenues like creating financial independence, creating a better world with charitable contributions, and even giving it to loved ones. Again try to stay away from the idea that money is an end or is happiness in and of itself; instead show how money can be a conduit to positive things.

6. Talk About It, Lots!

Money is not a taboo subject, even though we may have been raised to believe it is. If you aren’t comfortable telling them how much money you personally have in the bank (either because you believe you are not a shining example or because you simply don’t want to), then that’s okay. But when your child asks why you can’t go to Disney World, this is an opportunity to discuss the household’s budget, the cost of living, vacations, and entertainment. Involve them in the family finances, and they will learn to take ownership naturally — a skill that will take them through life.

Money Milestones

Involving your kids in the family budget when they are only three years old may be a bit of a stretch. Instead, consider these money milestones as a way of incorporating finance education seamlessly into their lives.

Coins

When your kids start to become curious about pretty coins and money in general, educate them as to the value of coins and what they can buy. It also makes a great lesson in math: start with pennies as building blocks, then introduce higher value coins as their numerical repertoire increases.

Bank Account

As soon as pocket money and birthday gifts start adding up, take them into the bank to open an account. There are lots of child-friendly accounts out there, so make sure you actively involve them in the process. They will derive great pride from having their own account. This is when you start to discuss the concept of earning interest on savings.

Budgeting

Now that they have a bank account and the ability to save up for things, it is time to start budgeting. If they receive an allowance, hopefully they are already paying themselves first and putting away at least 10%, as with money received as gifts.

They are also probably talking about toys they want (like video games). So help them budget for it! With pen and paper in hand, help them construct a budget by determining how much their toy costs, figuring out how much they currently have, and calculating how long it will take them to save up for it. Seeing the plan on paper may encourage them to save more than just 10% towards their goals, depending on how motivated they are. Again, this is a great exercise in applicable math.

Extra Income

Let’s say your child is now motivated by their budgeting goals, and eager to reach them sooner. You could consider paying them extra pocket money for additional chores performed (they call this “overtime” in the working world, and it is outsourcing for you!), or help them if they want to earn money entrepreneurially. Teach them good business principles if they come to you wanting to open a lemonade stand, and help them to launch their enterprise successfully, starting with a solid business plan.

Investing

As your child continues to understand and appreciate the delayed gratification of saving and budgeting, and has a good handle on the interest their bank account earns, they may be ready for something more. Talking about various investments is the next step. A small lesson in big business and stock investments could turn into a game, as they follow the share price of companies they are familiar with, like Coca-Cola, or Disney.

Although having them invest their hard-earned pennies in the stock market is not recommended just yet, you could set up a mock investment account, and get them to follow the value of their money along with the stock (again, a great lesson in applicable math). Even if they forget about it for a while, a reminder a year or so down the road that they had “money” invested and what it is now worth may lead to a pleasant surprise about market growth; or conversely a rude awakening about market downturns.

Family Finance

As your child gets a good grasp on the above financial matters (they will likely be in their teenage years by now), it is time to involve them actively in the family budgeting and finances. Help them to understand what their own short term and long term goals are, such as the cost of higher education (even if you plan to pay for it), and eventually getting a car (or conversely what their alternative transportation options and costs would be), housing, and the cost of getting set up comfortably to live on their own (and hopefully, before the age of 35)!

When it comes to family vacations, involve them actively in the process, by working out with them the cost of various vacation options and funds available, and then decide together what the family would most enjoy doing. Budget together for excursions and souvenirs, and your kids will take ownership of the trip and learn to appreciate the experience so much more. Not only that, but they will be much less likely to try to guilt you into unreasonable expenditures since they already know what the budget is; they may even help other family members to stay on track!

You may not see yourself as the world’s best financial example. But this is no reason to sit back on your haunches and do nothing; in fact this will only increase the chances exponentially that your kids will follow suit! Instead, be prepared to come clean with your own mistakes, and celebrate your victories, in order to help your kids learn from you and start their own financial lives on the right foot.

This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: