Kids and Money: 5 Keys to Teaching Kids Money Management Skills
by SixWise.com

One of the best gifts you can give your children is a strong foundation when it comes to money. True, we all strive to start our kids off with a leg up -- a savings account, a savings bond, some money to pay for college -- but there's something that's just as important, more important really, than the money itself: The knowledge of how to manage money to their advantage, for their entire lives.

Imagine the advantage you would have today had you been money savvy from your childhood on up. Your kids, knowing how to effectively spend and save their money today, can have a better quality of life tomorrow.

Kids and Money: The Sooner, the Better

So when is the best time to start teaching your kids about money? The sooner, the better. In fact, more than 70 percent of parents believe educating kids about finances should start no later than 1st grade, according to a survey conducted by Northwestern Mutual, a Milwaukee-based insurance company. That's when most kids are 6 or 7 years old.

Many experts say that if your child is old enough to ask for candy or toys, they're old enough to start gaining some financial awareness. Even as soon as they learn to count you can start teaching them about the concept of money using pennies and dollar bills.

But don't despair if your kids are in their teens and you haven't had the "money" talk yet. For you, NOW is the best time to teach your child about money.

That's because teaching children about money is beneficial no matter what their age. As Joline Godfrey, a social worker who founded Independent Means, an organization that teaches children how to manage money, says, "It's developmental, not chronological. You can treat your 15-year-old as a 5- to 8-year-old, teaching them the basic knowledge of financial literacy. It's like learning a new language."

Tips to Teach Your Kids About Money Now

Many parents experience great anxiety when it comes to talking to kids about money. But you don't need a background in financial planning to give your kids foundational financial knowledge that will stay with them into adulthood.

And it won't come a moment too soon. Alarmingly, "In 2001, more than 120,000 young people under the age of 25 filed for bankruptcy," says Neale S. Godfrey, chair of the Children's Financial Network, "If children don't learn solid money skills at home or at school, then they are on the path to a lifetime of financial instability."

Tip #1: Make Money a Part of Daily Life
Involve your kids in the daily aspects of money. When you go to the grocery store, let them see the price tags on their favorite foods and the final bill at the register. Show your kids totals on your credit card statements and involve them in your monthly bill paying. See if they can help you figure out how much money you'll need for food, utilities or a special purchase.

Tip #2: Give Your Kids Allowance, but Not Too Often
Most experts agree that giving kids an allowance helps them to build money awareness -- quite simply, if they're going to learn about money then they need to have some to work with. But giving kids a weekly allowance may defeat the purpose for two reasons:

• There's no incentive to plan: If your child spends his entire allowance in a few days, he knows he only has to wait until the end of the week for a fresh supply.
• They're too small: Since the weekly allowance is typically small, kids still have to ask parents for money for other things. It's then hard for kids to see that money often has to be spent on necessities and not just "wants."
  

This is why a monthly allowance, a larger amount that your child must manage, is often times more beneficial.

Tip #3: Give Your Kids Choices
This ties in directly to Tip #2. Your kids must have the authority to make choices with their money, just as they'll have in the real world when they're older.

David Paller, a certified financial planner, says, "The worst mistake a parent can make about money education is to not teach them [children] about choices." Kids must understand that, along with having money to spend now, they need money to save for short-term goals, money to invest for long-term goals, and money to donate to charities or others in need.

It can take some work to get kids to think about saving money, but tools like the award-winning Money Savvy Pig piggy bank are a fun way to get kids, even those who are really young, to grasp this concept. The Money Savvy Pig -- there's also Moohla the Money Savvy Cow -- has four chambers, one for each of the "money choices" that children have when they earn or receive money:

• Save
• Spend
• Donate
• Invest
  

It's an ideal piggy bank for any child because they have total control over where their money goes. The piggy bank is translucent, so they can watch, and you can monitor without making them feel controlled, as their savings grows and shrinks based on their own financial decisions.

The bank will naturally open up money discussions between you and your child as you discuss which chamber should be used for things he'll want in the future, for things he wants now and for helping other people.

Tip #4: Teach Your Kids About Responsible Spending and Long-Term Planning
Once a child is given control over their own money, let them spend some so they can learn the consequences of their choices. For instance, your child may have been saving money in his Money Savvy Pig for a bicycle. He then may decide that a pair of $150 shoes catches his eye, and spend his savings on that, more readily attainable, item instead.

Let him. Don't try to convince him to "save" his savings -- when he hits you up later for the bicycle because his savings is spent, that is the time to explain that he'll now have to wait even longer for his bicycle while he saves up the money once again.

Sooner or later -- as long as you don't bail him out -- your child will understand that he must prioritize the items he wants and have some discipline in what he buys in order to reach those longer-term desires.

Tip #5: Be an Example for Your Kids
As in all areas of life, kids will echo your habits, attitudes and feelings about money. If the monthly bill-paying ritual is a stressful even for you, chances are it will also be for your child.

Show your kids by example how careful planning and making responsible spending choices makes your financial situation run much more smoothly. Also show them the consequences of things like credit card debt and high interest rates, and explain how to avoid them. Share with them your own long-term goals and demonstrate how you're planning for them financially. Explain to them that part of your paycheck from work goes to paying taxes, part goes to necessities and part is for saving and spending right now.

We know finances can be hard for parents, too. Most everyone can benefit from The Top 10 Ways NOT to Throw Your Money Away in 2005 for some great tips to stretch your own dollar this year.

Sources

Money Skills Best Taught at Early Age

Financial Literacy for Kids

Make Your Kids Money Savvy

Why Allowances Don't Work