What are my favorite practical tips for raising money savvy kids? Personal finance writer Karen Cordaway asked me that very question earlier this month. She was putting together a family finance piece for U.S. News that just came out today (4 Fun Ways to Teach Your Kids About Money). It features two of my seven favorites: budget-based allowances and parent-financed loans.
Here’s the full list:
- Run your own family bank. It’s a great way to teach kids about accounts, balances, interest, paychecks, automatic saving, matching contributions, and more — all in amounts and time-frames that kids can actually appreciate (unlike, say, the interest rate on a savings account at your favorite commercial bank — yawn). For an excellent book on the topic, check out The First National Bank of Dad by David Owen. (Works just great for Moms too, by the way!) You can run your bank with pen and paper, a spreadsheet, or using an online solution like ours or one of the alternatives listed here.
- Make a budget-based allowance. Instead of giving your kids an allowance amount that’s arbitrary (e.g., a dollar per year of age) or based on a comparison to the spoiled brats next door, give them an allowance that is based on a very simple budget. In other words, make a list of the typical things you would expect your kids to buy for themselves over a period of time (plus how much you would expect them to save and give), and calculate an allowance amount to match those clear expectations. As your kids mature, extend the budget to cover more and more areas of spending like clothing. This approach helps insure that an allowance is a personal finance teaching tool rather than an entitlement.
- Bill share with your kids. Teach your kids about regular bills and how to pay them on time. Set up a simple family billing system to charge your kids for their monthly share of a cell phone plan, online entertainment, gaming subscriptions, or any other recurring family expense.
- Mandate a teen emergency fund. Stuff happens. When it does, you invariably have to cough up some unexpected dough to deal with it. That’s what emergency funds are all about. The sooner your kids learn to maintain that cushion, the better equipped they’ll be for managing life’s inevitable financial bumps. Require your teen to maintain a separate emergency account and set aside savings until it reaches several hundred dollars. When that first parking ticket hits, your teen will be ready to deal with it responsibly rather than relying on you to pick up the tab.
- Cover the bargain price, not the premium price. Tell your kids you’ll cover the cost of the bargain or used version of an item. If they want the premium or new version, they’ll have to pick up the additional cost from their own savings. If your kid finds an item cheaper than your target price, let her pocket the difference. It’s a great arrangement for building comparison shopping skills and keeping entitlement at bay. I bet you’ll be surprised to find how much your kids enjoy the challenge of finding a good bargain.
- Make a parent loan for a big ticket item. Teach your kids how to manage loan payments by arranging parent financed loans for big ticket items like laptops or smartphones. Direct a portion of their allowance, chore or job payments to paying off the loans each period. By making regular payments over an extended period of time, not only will your kids appreciate the cost of expensive items more, but they’ll take better care of them too. Win. Win.
- Start a “Family 401k” program. Individuals are more on the hook for their own retirement savings than ever before. Your teen has copious amounts of that one commodity that makes saving easy: time. As soon as your teen earns that first paycheck, open up a Roth IRA for her, offer to match some or all of her earnings, and invest in something smart like index funds. Learn more here.
What’s your favorite raise-a-money-smart-kid tip?