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?
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10 comments:
When I was saving for my son's college, I took him with me to the bank to take out a CD with some of the money I'd saved. (Interest rates were better back then.) He asked about CDs and I explained that the bank would give us more money just because we agreed to keep it there for a longer period of time. You could see the light bulb go on in his brain and after that, every so often, he'd bring out a handful of his allowance to me to put into the bank so he could get more money for it. I think the key is for kids to witness their parents making smart money choices.
Love that story Kathy - you included him in the experience and discussed his questions. Winner, winner! I'm a big fan of anything we can do as parents to facilitate making that financial light bulb go on about good money habits as early as possible. Sometimes just having your kid tag along for a seemingly innocuous financial errand can make a lifetime of difference.
I particularly like the idea of a parent loan for big ticket items. We also have a phase called "Parent's scholarship" which is parents giving a study loan to the child.
My kids' weekly allowances are based on every 9-week report card. $2 per "A", $1 per "B", $0.50 per "C". $50 bonus for straight-A's. Weekly allowances are automatically paid on my on-line banking account system; directly from my checking to their savings accounts. Get better grades, get more money... It's worked like a CHARM. My oldest is still valedictorian of her class (she's a high-school junior). I don't work for free, do you? Why shouldn't kids get A LITTLE MONEY for their efforts? For us, it's been a great INVESTMENT IN THEIR OUTLOOK ON EDUCATION.
Ellen, thank you for sharing your pay-for-grades system. It's always a very lively topic! Its true effectiveness can be very tough to measure, since without a large controlled experiment, you can't tell whether valedictorians and other high achieving students were influenced one way or the other by payments or just internally driven. A neat idea to consider is paying for study habits along the way vs the final outcome. Here's more on why based on a Harvard study: http://blog.famzoo.com/2011/03/ten-financial-pearls-pay-for-studying.html#pay-study
I never got an "allowance" . I got a summer job in June after turning 16 in May. Thank the good Lord my parents taught me a work ethic! I have never understood why a child should be given an allowance. I retired at age 50 with $411,000 in my employees saving acct. Single parent with two kids....always worked full and part time....never borrowed a dime. Did not draw a full paycheck for 18 yrs! Saved 16% of pre-tax salary and was matched with Co. Contribution of 6%.....early compounding! Teach this to your kids instead of overindulging them with an allowance!
Thank you for your comments Elaine and kudos to you for your solid personal finance skills. If an allowance is really just handing over the budget for something that parents are already buying on a kid's behalf - like your clothing before you turned 16 - then it's simply valuable practice managing a budget, not an entitlement or indulgence. It's hard to learn any skill without practice and guidance - budgeting is no exception. Giving a kid a budget-based allowance and teaching a solid work ethic need not be mutually exclusive. Until kids are fully self-sufficient, you can do both. The power of compounding over the long haul, automatic saving into tax advantaged accounts, getting the match are all awesome habits too - see bullet 7 in the post.
I wish I'd started earlier! My daughter is about to head off to college. Any emergency training plans available?
I don't think it's ever too late to start teaching your kids about personal finance, and variations of all 7 of the items above are relevant to college age kids as well. If I had to pick just one for an older teen, I'd pick #7 - i.e., having your daughter contribute some of her summer or part time earnings to a Roth IRA, offering some sort of parent match if you can, and investing the contributions into an index fund for the long haul. It hits a lot of the critical themes of personal finance - setting aside savings, taking advantage of matching, handling a job, leveraging tax advantaged accounts, and investing for the long haul. Good luck!
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