Most kids arrive at the ‘real world’ with little or no financial training. Think about it. The schools or college rarely teach any courses about how to manage personal finances and many parents are living a financial tightrope struggling to pay their bills throughout the year. It’s no wonder that generation after generation of kids struggle with money management. One of the greatest gifts a parent can give a child is the gift of the best education for which they can qualify. Higher education is proven to produce, on average, higher lifetime incomes. One of the second best gifts a parent can give a child is a strong foundation in money and personal financial management. If you’re not sure where to start, here’s a simple guide:
Step 1. Start young. If you want a reminder of just how smart your kid is, hand her your iPhone and watch her mesmerize you with her skills. Given the right incentives, kids are just as smart at learning money skills. First, I’m not a fan of paying children an allowance for such things as cleaning their room, making their bed, taking out the garbage or clearing the dinner table. These are responsibilities each family member shares. Once they are old enough, I am in favor of giving them money-making activities such as cleaning windows, washing the car, digging the garden or babysitting and pay them for their ‘work’. Your goal is to have them make the connection between work and money. As they get older and can accept more responsibility, give them bigger opportunities to make more money. Research suggests that parents will spend an average of $241,000 to raise a child to age eighteen. This is for parents earning between $60,000 and $100,000 per year and does not include the costs of college! It includes a broad range of expenses including healthcare, child care, food, clothing, housing and transportation as well as discretionary children’s activities like summer camp. If you’re going to spend the money anyway, why not use some of it to teach children about how to manage money?
Step 2. Establish some money ‘rules’. Here’s a great opportunity to teach lifelong lessons in money responsibility. When you pay them for their activities, have them deposit the money into various ‘accounts’. I like to use the ‘jar’ system. Get four jars and label them (actually, have your children label them):
- Give Jar (10%). The most successful people I know are big givers. They give to their church or synagogue; they give to their communities; and they give to charities. Reaching out and helping others makes you feel better about yourself. Allow them to choose how to give this money away.
- Save Jar (10%-20%). This is where you help them set some longer-term goals like saving for a bicycle or saving for a car or a mission trip…things that will take more effort, time and planning.
- Invest Jar (10%). Here is where your child just might amaze you but they’ll need your help to get started. You can either open an account in their name with you as custodian or open it in your name but let them know it’s for them. A good place to start is a discount broker such as Charles Schwab (www.Schwab.com) or Scottrade (www.scottrade.com). Let your child pick a stock of a company they love such as McDonalds, Disney or Coke Cola and show them how to read about it, buy it, and follow it on-line. Reinforce when they drink a Coke that they own part of the company!
- Spend Jar (60%-70%). This is the money they get to spend on things they want. As they get older, this can include money for purchasing clothing (yes, you get to approve their purchases!) and entertainment (movies, dating, eating out).
Step 3. Set goals and a budget. Start with simple goals and ones that are easy to accomplish. You want your children to experience success early and often. An example might include saving for an Xbox game with you offering a ‘matching’ bonus for reaching the goal. As they get older, the goals should become more challenging such as saving for a car. Budgeting should also start out as a simple exercise. Start by consistently funding all of the jars in the amounts indicated.
Step 4. Set monthly ‘Power Reviews’. Your child will need feedback on how she is doing. Find reasons to praise her for what she’s accomplished and together decide how to make ‘course corrections’ as needed.
Step 5. Allow them to fail. Failure and success are two sides of the same coin. Virtually all success is built on some amount of failure. Don’t ride in on your white horse and save your children every time they fail. If they run out of money because they spent frivolously and now don’t have money for gas, let them walk! You’ll find they are fast learners and it will be a lesson that will serve them well their entire life.
Yes, I know this is an effort on your part, but it’s one that will pay major lifetime benefits. Oh, and one final step…the best lesson for your children is to watch you handle your money well. You can use these same steps to build your own money skills!