Most financial experts agree that parents should start teaching kids about money at an early age. Most also agree that parents aren't doing enough to help their children understand issues relating to money.
The Joint Council on Economic Education surveyed a group of high-school students and found that the great majority of them had very little understanding about money-related issues, including profit and loss as they apply to business, investment opportunities, and credit.
Some experts feel that parents avoid teaching children about money because they're uncomfortable with the very topic. While money should be a tool we use in daily living, it often becomes a thorny and emotional issue. Anne Ziff, a family therapist in Westport, Connecticut, gives her view on why many parents do not successfully teach their children about money.
Don't Go There
Watch out that you don't overwhelm younger children with too much financial information at one time. Start slowly when teaching your kids or grandkids about finances and get into more complex matters as they get older. Too much too soon can discourage children from wanting to learn about finances at all.
The current prevailing philosophy concerning allowance seems to be that kids should get an allowance that is not tied to doing chores. Chores should be presented as an obligation of all family members in order to keep the household functioning smoothly.
“The money scene in many households is horrendous,” Ziff says. “What should be cool, calm communication becomes complex emotional anxiety and also a source of manipulation. Parents are often at opposite poles, and children get mixed messages instead of good financial experience.”
It's never too early for Money 101, and the lessons should begin at home. Most schools do an inadequate job with financial education if indeed they include it at all. Kids should start learning about money as soon as they're old enough to understand the concept that money gets us what we need and want. Kids should also be informed about why they have a social responsibility as affluent Americans. Most kids, experts feel, are ready to begin learning at about age three.
Parents should use clear examples to teach their children about money concepts. Some of those concepts include the following:
- Earning money
- Saving money
- Borrowing money
- Spending money
- Budgeting money
- Checking accounts and checkbooks
- Credit cards and credit card debt
Parents can start teaching kids about checking accounts and checkbooks, for example, by explaining how they write checks each month to pay the bills. When children are older, they could help to balance the checkbook. If your kids already are older and you're not satisfied with their level of financial know-how, there are books and Web sites that can help.
Although there's constant and ongoing dispute concerning the role of allowance in teaching kids about money, most financial experts agree that giving an allowance is better than not giving one. Whether or not you tie it to chores is up to you, but you should keep the following allowance tips in mind:
Although it's good to let your child make her own decisions about how she'll spend her allowance, make sure to give her some up-front guidance about spending and how she can get the most from her money. Point out, for instance, that a less expensive shampoo and conditioner will work just as well on her hair as the more expensive ones.
- Be clear about how much the child will get for allowance. This is directly tied in with the next tip.
- Be clear about what she'll be responsible for buying for herself. To figure out how much allowance she should get, decide what she'll need to buy with the money, and total up how much those items cost. For instance, if you're already giving her $7 every week to go to the movies, count that money as part of her allowance, and make it clear that she'll pay her own way from now on. Go through the same process with everything that you decide she'll pay for herself, and total up the cost of those expenses to figure out how much allowance you'll give her.
- Once you both understand what she's responsible for buying on her own, stand back and let her make her own decisions about what she'll do with her allowance. If she overspends on a sweater and doesn't have money for the movies, she may learn a valuable lesson about planning her spending.
- Set up rules in advance about borrowing. If she encounters an unexpected expense and needs more money before her next allowance, use the situation as an opportunity to teach her about borrowing and interest. You don't have to charge much interest, but let her know that it costs money to borrow money.
- Pay on time. If you don't hand over the allowance when it's due, you're telling your kid that it's okay to be late with your financial obligations.
Adding It Up
An investment club is a group of people with similar interests and outlooks, who research the investment pros and cons of various stocks, then use their pooled resources to buy those stocks that members feel will give them the best returns.
If your kids are older and you want them to know more about money matters such as investing, take them along with you when you visit your financial advisor or accountant. Ask them to join in your dinner discussion about the latest news on Wall Street, or the 401(k) that's just been instituted at your place of employment. Or encourage them to start or join an investment club.
More than half a million Americans have already joined these clubs, in which members contribute a certain amount of money each month. The money is pooled, and then invested in stocks approved by the members. Investment clubs have formed in some schools, and others are set up and operated over the Internet.
If you're financially savvy about money, chances are your children will be, too. Teaching them early on to be financially responsible will save you—and them—a lot of headaches and trouble down the road.