Educating children for economic survival can be very difficult, especially in a society where most adults don’t even know how to survive or thrive economically. Instead, most adults go through life making financial mistake after financial mistake that leaves them unable to save money or even pay the bills.
This problem begins in childhood because most children learn little or nothing about money. They grow up thinking “money is something I ask Mommy and Daddy for” and “Mommy and Daddy will always be there to take care of me,” and they keep that attitude all their lives. Instead of taking control of their finances and achieving economic independence, these people end up transferring their dependence to the government or their employers when they grow up.
These are the people that have no savings; they live beyond their means and often have large amounts of debt that they can never pay off. How do you keep your children from falling into this trap? Obviously, the answer is to teach them how to handle money.
Teaching Children about Money
Educating children about money is extremely difficult because kids often have little or no conception of what money is or how it works. Since they don’t work, many children simply cannot understand money’s true value or the power it holds over our lives.
It’s easy for an adult to see an amount of money as groceries, a mortgage payment, this week’s phone bill, or that trip to the beach I want to take next summer. It’s hard for a child to conceive of money in such a way because it often has little bearing over his or her existence. After all, a child generally doesn’t have to worry about putting a roof over his head or figuring out how to pay this month’s power bill. Instead, most children view money as fun; the twenty-dollar bill that Grandma hands them means a new doll or a video game. It doesn’t mean anything else to a child.
Unfortunately, many parents cannot look at money from a child’s point of view, so they end up sabotaging their efforts at financial education. When you tell a ten-year-old that half of the money his grandmother and grandfather gave him at Christmas has to go into a savings account, you are giving the child the wrong lesson in finance. The ten-year-old simply sees the mean grownups taking his or her fun money away and doing something he or she cannot comprehend with it. To make matters worse, you are equating saving with sacrifice and no fun in the child’s mind. He’ll grow up thinking that saving is something that scrooges and spoilsports do.
This brings us to the first and perhaps most important piece of advice for childhood financial education. Make sure that the lesson is age appropriate and that the child really understands what’s going on. If the child doesn’t understand, you will be wasting your time or sending the wrong message.
Think carefully about any financial education and make it age appropriate. A child under twelve or thirteen years old probably won’t understand what a savings account is or how it works. Having a child under that age participate in a structured savings plan is probably a waste of time.
Teaching Children How to Save
A better strategy for younger children is a plain old-fashioned piggy bank or a glass jar. Have the child put all of his or her spare change in the jar or bank every day and watch it grow. Then, when enough money has accumulated, let the child have some fun with it.
If your son wants to go to McDonald’s, tell him he will have to save up enough money to buy a Happy Meal on his own. Then say we’re not going to McDonald’s until you have enough cash to buy a Happy Meal with.
Tell the child to accumulate spare change in the bank, and don’t be afraid to give him or her some spare change to work with. If the child learns that money can accumulate over time, he or she will get the lesson.
When the child is older, you can point out that “Mom and Dad have a piggy bank too; it’s called a savings account. Now that you are getting older, maybe you should get one too.”
But don’t be in a rush to set up a savings account for children, and don’t insist that young children save for grown-up goals. If you want to do that, do it separately from the kids until they’re old enough to understand it.
How to Use an Allowance to Educate Children about Money
An allowance is a great tool to teach kids about money with. Unfortunately, many adults fail to use it properly because children know how to manipulate them.
The best way to handle an allowance is to simply give the child a set amount of money each week and give them no more. This can be difficult to do because kids are experts at manipulating parents. They know exactly which move to make in order to get Mom to reach for her purse or Dad to reach for his wallet.
If parents stick to an allowance, the child will learn that money is a finite resource that runs out sooner or later. He or she will begin to learn how to save and budget in order to preserve the allowance. The child will also learn to avoid such destructive behaviors as impulse buying. This will not occur if Mom and Dad are always willing to hand the child money whenever he or she asks.
There are some ways that a parent can prevent this from occurring. One good strategy is to simply not carry cash with you when you’re out with the kids. Instead, use a debit card or checks for the purchases, and when the child asks, say, “I’m sorry, I don’t have any money.”
Another is to not carry any small bills when you are out and about with the kids. Instead, bring larger bills, such as $100s. That way you won’t have a dollar or coins to give the children every time they ask. The kids will learn that if they want to buy extra stuff, they’ll have to bring their own money.
You should also follow the basic allowance rules:
- Pay the allowance in cash.
- Always pay the same amount of money each week. Never give more or less.
- Make the allowance and any money the child earns for work around the home separate.
Once you put the children on an allowance, make it clear to them that they will have to start paying part of their way when you go out. If you go to the zoo, tell them you’ll pay for the tickets, but if they want a soda or a bag of popcorn, they’ll have to pay for it.
Chores and Work
One difficult area to deal with is that of chores. It’s my general belief that parents should not pay children to perform routine, everyday chores because it keeps children from learning responsibilities. Children need to learn that everybody has responsibilities and that there are some tasks you will have to perform regardless of pay.
Paying a child to perform routine chores such as folding laundry, taking out the garbage, cleaning his room, or making the bed encourages the child to think that he will get paid for everything. Worse, it gives the child an excuse not to perform those duties—he will simply pass on allowance this week.
A better strategy is to pay children for additional work or extra chores, such as mowing the lawn, raking leaves, or shoveling snow. Offer to pay the child for such activities, but only if it really a choice. Later, when he has his eye on a new video game, remind him that he might be able to afford it now if he’d taken the initiative to do the extra work.
Educating Children about Debt
Debt is a difficult concept even for many adults to grasp. So how do you teach a child about the dangers of debt? A great way to teach children about debt is to loan them some money.
Wait until the child has spent all of his or her allowance and comes to you for some cash. Ask the child how much she or wants, and tell him or her that you will provide it, but it’ll come out of next week’s allowance. Make sure you say it’s a loan. Then give the child the money and go back to what you are doing.
Next week on allowance day, give the child his or her normal allowance minus the money borrowed. Then explain the concept of debt to the child, and tell her that’s what happens when you borrow money—you spend the money you should have next week. “If you borrow money, you’ll always end up with less in the future.”
It’s a simple lesson but a vital one in today’s world where debt is the biggest threat to economic survival. Don’t be afraid to repeat this lesson several times, because it’s an important one. Children need to understand that debt is destructive and that borrowing money can lead to disaster.
As the child get older, make the lessons more complex, and don’t be afraid to introduce financial instruments such as debit cards or checking accounts to them. After all, the children will be using those things for their entire lives, so they should be familiar with them.
Debit Cards as an Education Tool
A good way to educate an older child about money is to buy him or her a prepaid debit card then say, “That’s your month’s allowance on there. You won’t get any more, so spend it wisely.” The debit card will give the child a specific amount of money that he or she can spend. More importantly, he or she will have to monitor spending through an account online.
As with the cash allowance, you’ll have to step back and let the child make a few mistakes. Try not to step in, because any painful lessons the child learns will be the best economic education possible. Remember, you’re educating your children for economic survival. There’s no way you can achieve that without having them suffer the consequences of spending decisions. Right now, it’s only a video game; in twenty years, it may mean foreclosure on their house. In the end, it is better for them to learn those lessons now; the last thing you want is for them to learn those lessons in twenty or thirty years, when poor financial decisions can have dramatic repercussions.