How to Teach Your Kids About Money

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The single most important step in raising a money-wise child is simply for parents to be money-wise adults themselves. And that's where so many well-intentioned moms and dads seriously drop the ball.
Look, we all know that kids are sponges. They don't do as you say, they do as you do. Kids study your every move, and unfortunately I see plenty of parents imparting some pretty awful financial moves.
I will never forget the time I sat down with a class of eight- and nine-year-olds and asked them what their greatest fear was. I didn't even say money fear -- just plain old fear. One of the children stepped right up and flatly told me her biggest fear was that she would end up having to support her parents. I was of course stunned by this and asked why she felt that way. She said she constantly heard her parents arguing at night and her mother telling her father things like, "If you don't stop buying all those expensive electronic gadgets we are going to end up in the poor house. And then who will support us?" But what truly scared me was when I asked the other kids if anybody else felt like this, nearly every one of them seemed to have a similar story.
Parents, I know you want the best for your children. So you should realize how much that means making sure you've got your own financial act together. Children who watch parents do stuff like ring up huge credit card bills buying goodies and vacations they can't afford tend to dig the same financial holes themselves as adults. Whatever you may say to the contrary, a child who sees bills pile up unpaid is getting a damaging lesson in managing money -- one they may struggle all their lives to overcome, just as the children of folks who don't eat right or exercise enough so often grow up to suffer through variations on those same bad habits, even when they've been "taught" to know better.

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Spoiled Rotten
Even those of you with a good grip on your personal finances can still screw up your kids if you spoil them. Many people seem to have convinced themselves that showering their kids with everything they want is good parenting. I see this a lot with divorced families; both parents are so guilt-ridden they lose the ability to say no to anything their kid asks for. Then when that kid is out in the real world on a low starting salary, she has no sense at all of financial restraint and thinks she still has to have everything right now. So what does the kid do? Simple: charge, charge, charge. Suddenly, that kid you love to death is buried in $5,000 or $10,000 of credit card debt.
Not only that, but I find it weirdly fascinating how nervous many parents are nowadays about living within their means. What's weird is that they appear to be less nervous about the risks of living outside their means, than they are about the perceived shame of living inside them. It seems like keeping up with the Joneses has never before been so pervasive in our culture, nor so compulsive.. You know what I'm talking about. Your kid comes home from school and says she "needs" a cool new brand of jeans because "everyone" has them. And even though you can't afford it, usually without a second thought or peep of protest, you get in the car, go to the mall, and dutifully drop $100 for a pair of jeans to join the closetful of jeans your child already has.
Let's face it. You're not just trying to navigate your kid's sense of peer pressure, you are also dealing with your own peer pressure. You're worried (I guess) that if you don't buy everything for your kid, the other parents will think less of you. Your need to keep up is as bad as your kid's.
My advice: stop caring! And stop spending money you really don't have to impress people who are probably just as stretched as you. You are all kidding yourselves. So why not get real and start thinking more about your actual financial well-being, and the money lessons you want to impart to your kids, rather than worrying about what everyone else thinks? Heck, if you take this new approach you might even end up a trendsetter; other parents in your circle are probably feeling just as stressed as you feel. If you take the first step towards a financially sane life I wouldn't be surprised if you soon find plenty of parents following your great example.
Just remind yourself of what is truly important: Your first focus, obviously, should be on raising a child who has a strong sense of self-worth that has nothing to do with material possessions. That's a child who is going to have what it takes to thrive as an adult. And, make no mistake, an important component of that effort is how you deal with money when they are young. If money is used around your house to confer worth or value -- for example, as a means for you or your child to feel "popular" or "hip" -- then your child will be that much more likely to develop a very poor sense of self-esteem and inner strength. They will grow up thinking that they have to buy their happiness, and buy their popularity.
Don't you owe your kids more? I know it's hard to make the tough money decisions and teach your kids what is right rather than what is easy. But the payoff for all of you will be priceless.
Five Good Habits to Instill In Your Children
Let's talk about how you can raise confident and happy children who possess a healthy approach to money.
1. ATM ABCs...
If you could get inside the heads of toddlers or young children today, their original understanding of money might be as the prize in a kind of game involving ATMs. Whenever you find a machine, you put your magic card in the slot, punch in a few numbers and voila! money pops out. Cool!
Quite innocently, parents are totally messing with their kids by exposing them to this "game" without providing any context. It seems to me that when a child reaches four or five years old you have to start explaining how the game really works. A full-blown lesson on the American banking system isn"t necessary, just a few brief, clear messages explaining why you're able to make ATMs "give" you money on command. Likewise, the next time your child asks why you have to go to work, I want you to respond along these lines: "I am fortunate because I get to go do interesting work and earn money, so we will be able to buy things that we need." That answer not only begins to introduce the idea that money is earned, not a part of a game, but it also puts money in a positive light. It drives me crazy when I hear parents tell their kids: "I hate having to go to work instead of staying home with you, but I have to go make money." With that answer you have managed to teach your kids to hate work and to hate money. Not what you really intended, right?
2. Shop Talk
A great many of you need to instill some mall discipline in your kids. The key to this is to set parameters for each trip, organized around a pre-determined reason or objective for the excursion. Taking children to the mall without this kind of planned focus is a ticket for disastrous impulse buying. And just think what message that sends to your child.

Whenever they want something all they have to do is go to the mall and Mom or Dad will whip out the credit card. How do you expect your child to ever learn the value of money when you spend it like that? One of the best ways to teach moderation and the difference between wanting and needing is to sit down with your child before you go clothes shopping for the new school year. Before you ever set foot in the mall, have a clear game plan: we are looking for three sweaters, four shirts, and four pairs of pants. Period. And if your kid has a few favorite stores, I suggest you insist they case each store before any purchase is made. That way, you'll avoid buying everything you need at the first store and then having your kid walk into the next store and claim they will "just die" if they can't also have this or that item. The idea is for them to take a look at everything that's available and then make choices based on the parameters you've set with them.
In today's brave new world, of course, you also need to come up with an online shopping strategy. Because of the incredible convenience, I see way too many parents buying for their kids via their PC or Mac without thinking. You're sitting at dinner and your son mentions a new video game he wants. Then an hour later, when you are at your computer finishing up on some work, he appears at your elbow and suggests you just buy it online. So you do.
Take a look at your credit card statement and add up how many purchases are those "easy" online transactions made simply because your child asked at an opportune moment. Scary, huh? It's time to set some limits. As I explain below, gifts are to be reserved for truly special occasions. Anything beyond those special occasions needs to be financed by your child. Part-time jobs (for teens) are crucial money management lessons for kids.
3. Bill of Rights
In addition to setting the right spending examples with your kids, you also need to teach them the mechanics of managing money. Let them begin to learn by "helping out" when you pay your bills. When a child is a pre-teen or young teen, let him or her even write out a few bill checks for you to sign (or handle the clicks on your online bill-pay). Again, there doesn't need to be a lecture here, nor is your goal to make your child feel the weight of all your financial responsibilities. But it's a good first step in showing them what it takes to live. Trust me, a child who receives $5 or $10 for allowance is going to get quite an eye-opener when they see that the gas & electric bill was $300 during the winter months, that the cable is another $40 or so every month, and that your cell phone (one of life's most basic necessities in their worldview) costs $50 a month.
Speaking of cell phones, when you decide to give your child one, don't pass up the opportunity for a great financial lesson. Even if you are simply adding a child to an existing plan, let them know what their "share" of the bill is. I would recommend that you increase their chores and responsibilities around the house to offset the cost of their phone. Again, you are not denying them; you are taking advantage of a natural way to teach them that nothing is free. And any excess minutes they run up need to come out of their own allowance, or be worked off with extra jobs around the house.
4. Gifts Are Not a Given
I don't care how wealthy you may be, or how much joy you get showering your kids with toys and gifts. You have got to show some restraint. It's good for them, and for you too.
Gifts should be for an occasion. A birthday. A holiday.

An important milestone. If you simply buy everything your children wants, you are not only taking away the "specialness" of gifts, you are setting up your kid to be a financial wreck. The children who get everything they want at 12 become the 22-year-olds with huge credit card balances they can't pay -- simply because they grew up not understanding moderation and living within one's means.Don't feel guilty about scaling back the spending. It's not about saying, "No, you can't have that pair of jeans." It's all about saying, "Why don't you put them on your list for Christmas, or for your birthday?" And hey, if they absolutely must have something N-O-W, please let them "earn" it with a job or project around the house.

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5. Give 'em Credit
You must educate your kids about how credit cards work before they go to college. That way they won't fall prey to all the credit card offers they will be assaulted with during freshman orientation. I can't tell you how many thousands of young adults tell me their money problems began in school: they fell for the card offers and started charging away without understanding the ramifications of what they were doing.
That's where you come in. Make them card savvy when they are young and you will literally save them thousands of dollars in interest payments that they'll know how to avoid.
You have a few options in how to give your kid credit. If you have a good FICO score of at least 720, I recommend that while you child is young you simply add their name to all of your credit cards as an authorized user. Obviously you are not to give them your credit cards, or in most cases even let them know you have done this. But by doing so, your good FICO score will become theirs as well. Then when your child hits 13 or so, I think it is time to give them a debit card tied to an account you set up for them. Each month you deposit a set sum in the account and discuss with your child what expenses are to be covered under it. And because they can only charge up to the amount in the account, they are going to learn a lot about money management the first time they try to use the card at the mall and it is turned down. (A crucial tip, though: make sure the account at the bank is set up so they will not be covered by a bank overdraft policy; you want them to simply be turned down if they try to charge beyond their balance.)
I would also encourage you to encourage them to stick with a debit card while in college. Yes, I know this doesn't help them build a FICO score, but if they are on your cards as an authorized user, they're already doing that. And for heaven's sake please do everything you can to steer your kid away from jumping at the credit card offers they will be enticed with during college. As I said, thousands of young adults have told me this was how their financial life took a really bad turn right out of the gate. They just charged away in school, and then when they hit the real world they had a ton of debt and a lousy FICO score. It's better if they wait until they are out of school to get their own card. With an income and the solid FICO score they've accrued from your credit cards, they should be able to get a good deal then -- and be mature enough to use it wisely.
Once again though, remember that your child's financial future largely depends on your financial reality today. You can't teach them what they need to know if you yourself are financially irresponsible. I know you may be 20 or 30 or 40 years older than your children, but that doesn't mean you are any more mature than they are if you have no respect for money. If that's the case, you need to grow up fast before you ruin your chances of raising a financially secure child.
Allowances Have Got to Go
If it were up to me, I would disallow allowances. Or at least the version of allowances that are popular these days. When I ask young children why they get an allowance, they just shrug and tell me because their brother or sister does.
Or because their parents give it to them. Folks, this is ridiculous. That's simply not what an allowance should be about. An allowance is your first opportunity to teach your children to respect money -- to teach them that money is something that must be earned. So, for starters, I want you to ditch the word "allowance" and change it to salary. Yep, you read that right. Why not teach your kids the concept of earning money from work?
Here are some guidelines to help you think through your new salary strategy:

The work determines the salary. I think it is backwards to tell your kid what their salary will be before they even do the work. Why not sit down at the end of each week and discuss what they think their salary should be, based on the work they actually did. It gives you both a chance to talk about what they did well, and what could be better.

Just keep it simple when coming up with the chores. And try to make this a fun process; ask your son or daughter what jobs they think would be a great way to help out around the house. Folding laundry? Delivering the laundry to the right bedrooms? Setting the dinner table? You get the idea. This is not punishment. And keep the payout small for young children. A dollar or two a week is plenty for a young child.

When you have a teenager you might also use the salary/chore conversation as an opportunity to introduce the concept of taxation. You can agree to pay more for their work, but you will also ask them to repay you 10 percent of their earnings to cover basic livings costs. Now of course 10 percent of their salary isn't really going to cover much, but the idea here is to teach them what the real world is like.
Pay on time every week. Make it a ritual. Saturday morning, Sunday night, Monday after school -- whenever you decide, just make sure it's a definite routine -- exactly like a paycheck. And payment is only to be made if the chores were actually done. That said, with young children, don't wait until the end of the week to tell them they won't get their salary because they didn't do the work. Check in during the week and encourage them to stick to the agreement, so you will be able to pay them. You want this to be a positive rather than a negative learning experience.
Lengthen the payout period for teenagers. When your child hits 13 or 14, extend the payment period to once every two weeks. At 16 or so, switch to a monthly pay period. This requires your child to start managing their money over progressively longer time spans. The goal is to get them comfortable with budgeting over a month. The kids who don't know how to budget and live within their means are usually the ones who end up saddled with thousands of dollars in credit card debt in college.
Encourage employment. Look, when a 15-year old wants more and more money to feed a video game or high-fashion habit, the answer is not to increase their allowance/salary. It's time for them to get a job. You will still keep paying them for the work they do around the house, but they are on the hook for all the goodies they want that go beyond their home salary.