Want to know the secret to raising financially savvy kids? It’s simple, really. The hardest part is consistency. But once that’s mastered, the rest falls into place. And that’s a good thing because financially savvy kids are more likely to grow up to be financially savvy adults who will make spending, saving, borrowing, and investing decisions in a way that positively influences their well being.
The secret? Get money into the hands of kids on a regular basis and then let them make the decisions about what happens to that money…within reason, of course. It’s about real experiences with real money and can start as early as 5 or 6 years old with the introduction of an allowance program. The program will allow kids to “practice” money. And practicing money is how they’ll learn to be effective money managers.
Here’s how to set up the program to put your kids on the road to becoming saving savvy and money smart:
1. Figure out what your kids will be responsible for paying for with their allowance. Young kids can pay for trading cards, snacks, stuffed animals, toys. Tweens can add on movies with friends, electronics, CDs. And teens should be responsible for part or all of their cell phone, hair products, and entertainment.
The Consistency Component: When your kids ask you to buy something for them, your answer will always be, “Sure, you can have (such and such). Do you have enough money saved?” This is by far the fastest way to get them to understand the difference between needs and wants. That’s because when it’s their money on the line, the difference takes on a whole new meaning. And a bonus: having your kids responsible for their discretionary spending eliminates all purchasing power struggles. Once they understand you mean business, they stop asking and start saving.
2. Based on the answer to #1 above, decide how much allowance your kids will receive and when they will receive it. One rule of thumb is to give young kids half their age in allowance. As they get older and add on more responsibility, you’ll increase the amount. But don’t give them so much that they won’t look for opportunities to earn a little extra. We’ll get to that in step 4. The Consistency Component: Giving your kids their allowance on a pre-determined day is very important. If they’re working towards a purchase, they need to rely on consistent paydays. And even if they aren’t saving for something specific, it shows that you value their money enough to pay them consistently. Besides, you make a lot of decisions based on knowing you will be receiving money. It’s no different for your kids.
3. Make sure your kids know that you will not be advancing allowance money. Instead, teach them how to create personal financial goals. There will be a time for loans and interest. First, they need to learn the life skills of living within their means and setting goals. To offer encouragement as they learn to save money, consider matching them dollar for dollar. The Consistency Component: This is actually the hardest consistency rule for parents to follow. Research shows that 41% of parents who give their kids an allowance succumb to their child’s request for more money when they run out. Because of this, it’s important to keep the end goal in mind: to raise kids who are financially responsible. Don’t deny your kids the opportunity to learn this life skill because you’ve chosen to bail them out when they make poor choices.
4. Offer jobs your kids can do to earn extra money. The amount of money your kids receive for allowance should cover most of their discretionary spending, but not all of it. It’s important that kids learn the work ethic that comes from earning their own money. Set up a list of available jobs along with the amount you’ll pay and allow your kids to choose how they’re going to earn that extra money. They may even tap into their entrepreneurial spirit and start their own business. Encourage this as kids need to learn that being their own boss is just one of many career paths they have open to them. The Consistency Component: There isn’t one. Yippee!
5. Have your kids keep track of their income and expenses. The best way for kids to see patterns in their spending habits over time is to have them record the money that comes in and the money that goes out. An eye-opening activity is to choose a category of spending, say trading cards, and add up how much was spent buying the cards over the course of a month. Then multiply that number by 12. That’s about how much they can expect to pay in a year. It’s usually pretty enlightening. The Consistency Component: Yes, yes, yes. I know. Having kids keep track of every penny they receive or spend is a hassle. But it’s important, at least initially, to give them an idea of what kind of spender or saver they are. It’s hard to make changes if you aren’t aware that changes need to be made. There’s a phrase that says that it’s better to tell your money where to go than to ask it where it’s gone.
6. Teach your kids how to build wealth. The first step is to show them the power of compound interest. Use a kid-friendly program like KidsSave (www.kidnexions.com) to visually illustrate that small amounts of money earning interest, over time, can grow into big amounts of money. And when introduced to this fine concept, kids get giddy. Heck, adults get giddy. Tap into this excitement by helping them invest in CDs, bonds, mutual funds, and even individual stocks. The good news is, kids don’t need a lot of money to get started, just your help in setting up the custodial accounts.
The Consistency Component: Small consistent deposits over time take advantage of something called dollar cost averaging. You’ll buy in when prices are up as well as when they’re down. Over time it all “averages out”…in your favor. Consider setting up automatic deposits.
Note: Remember, any time money is invested, there’s risk involved. Teach your kids how to research their investments. Www.bankrate.com and www.fool.com are good sources. Also remember that slow and steady wins the race. And this race doesn’t end for decades. So even though some days they’ll watch their investments go up and other days watch it go down, over time, they’ll end up ahead.
Now, when kids starts managing their own money, beautiful things begin to happen. They begin to take their purchases seriously which leads to looking for good deals and waiting for sales. They often become reluctant to spend frivolously since their money is so much more important than your money. And even though they’ll make mistakes along the way, you’ll teach them that mistakes are simply great learning opportunities. The lessons and skills they will learn will help build the financial foundation so necessary to be able to take advantage of the opportunities and overcome the challenges that are waiting for them, out there, in their future. And that’s a good thing.
Karyn is co-founder of Kidnexions, an educational company specializing in kids' money and elementary mathematics. She has a BA in Child Development, a Masters of Arts in Education with a Specialization in Elementary Mathematics, and a multiple subjects teaching credential. Her passion is designing real-world lessons that resonate with kids and their interests. Karyn is the creator of Nifty Numbers and Math Medley Family Math Night kits which were designed to build strong family-school partnerships and get parents involved on an academic level. She is currently working on her third Family Math Night kit. www.kidnexions.com