Welcome back to the Kid’s Ledger, a section especially dedicated to cause my child future embrassment. I usually use this space to spin some tale about my child and then tie it loosely back into to some lesson about personal finance.
Patty Moore writes at Working Mother Life, a blog about managing a career while being a single mother. She covers a variety of topics including parenting, family finances, and work-life balance.
In today’s guest post, she offers useful advice and tips about how and when to introduce children to responsible money management.
In the time between the cradle and college commencement, your children must learn everything they need to know about money and managing personal finances if they are going to avoid the costly mistakes many young adults make. That’s a tall order and we know they won’t get that education in high school or college. It is up to you, the parents, to ensure they are equipped to make even the most basic financial decisions that will set them on the right course. Unfortunately, many kids learn their financial lessons through the school of hard knocks, which can set them back years on the path to achieving their financial independence.
The good news is, when it comes to money, kids want to be treated like adults and they are willing to learn what it takes to handle it responsibility. Sure, they will make small mistakes as they are learning, but better to make them and learn from them early, than to have them make bigger mistakes later when it really counts. But, kids need a great teacher – one who can instill them with proper values about money and show them how it can be managed to help them get what they want. In a way, teaching kids about money can be a lot easier than teaching them about the birds and the bees because it is more about demonstrating how it works and reinforcing good behavior each day.
Here’s how to raise your kids on sound money principles and habits they will carry the rest of their lives:
Starting an Allowance
The first opportunity to teach your child about the concept of money and that it doesn’t grow on trees is when you introduce an allowance. The best time to start your child on an allowance is when he or she is able to contribute to the household by doing some chores. From that point forward you can reinforce the concept that money is earned. A proper allowance should reflect their age and the extent of their contributions.
A $5 weekly allowance would be an appropriate starting point for a 12-year old who might be asked to sweep the patio and take out the garbage once a week. You can raise the allowance as more chores are assigned and pay them a bonus when they complete extra chores. By the time your tween becomes a teen, they could be earning $25 a week as long as the pay is commensurate with the amount of work they complete. By the time your child turns 16, they should be looking for a summer job or part-time work, especially if they want to be able to drive the family car.
Your child should be taught that with money comes responsibility, which means there needs to be some parameters for the use of their allowance. You could allow them to spend their money on anything they want if it is within reason. However, they should begin to learn about the concepts of budgeting, prioritizing and savings. If they spend all of their allowance each week on small things, they will never have enough to buy the big things they want, such as the latest video game.
This is the perfect opportunity to sit down with your child and talk about goals, budgeting and savings. Have them set a goal for something they would like to buy and help them work out a savings plan. They could save all of their money each week or they could set up a budget for how much they can spend and still save. You will be surprised at how motivated they become and how quickly they develop the discipline to achieve their goal. As an added incentive, you could offer to match a portion of their savings when they reach certain benchmarks.
Opening a Checking and Savings Account
When your child gets serious about saving and budgeting their money, it is the ideal opportunity to take them to the bank to open their own checking and savings account. As a tween, their accounts will be subaccounts under yours, but they will be in their name. You can monitor the account along with your child and use the opportunity to review their budget plan and their progress towards their goal.
A big mistake many parents make is to let their children learn about credit on their own, typically during or after college. The very best time to form sound credit habits is when they are teens. By then they should be used to using a plastic card if they have their own checking account. The next step is to introduce the concept of credit, allowing them to purchase items in their budget and then paying the balance in full each month with their earnings.
You can add your child as an authorized user which will allow you to set a credit limit and allow them to make credit purchases on their own. You can then schedule one hour each month to review their account, discuss their budget and their use of the credit card. When your child turns 18, he or she can open their own secured credit card account. Using a portion of their savings, it becomes the credit limit on a card they can use for any purpose. They make monthly payments which are reported to the credit bureaus, so they will be building their own credit. By the time your children enter college, they will have formed sound personal finance practices that will carry them through the rest of their lives.