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How to Teach Your Kids to Manage Money
September 2010
Dave Ramsey's best-selling "Financial Peace Revisited" offers practical tips for
parents to help their kids learn how to work, save, spend and give
One of a parent’s most important roles—a role for which
many parents may feel inadequate—is teaching their kids about money: how to use
it wisely, and how to save it.
Managing even a modest amount of money gives young
people valuable decision-making opportunities. With proper guidance and through
the inevitable trial and error process, educating, motivating and empowering
children to become savvy spenders, savers and investors will help them keep more
of the money they earn and do more with the money they spend.
For most kids, investing decisions can wait. But
developing, at an early age, the discipline and restraint associated with saving
and spending can help them achieve financial success and avoid the pain of
burdensome debt and continuously having more month than money.
Recent statistics illustrate the financial difficulties
that many young adults face:
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19% of Americans between the ages of 18-24
declared bankruptcy in 2001 (USA Today)
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The fastest growing group of bankruptcy filers are
people who are 25 years of age or younger (U.S. Senate Committee on Banking,
Housing and Urban Affairs)
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In 2002, 68% of high school seniors surveyed
failed a basic financial survey (up from 52% in 2001), and only 10% scored a
"C" or better (Jump$tart Coalition for Personal Financial Literacy, 2002
Annual Summary
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Nearly half (49%) of college-age adults said they
believe they are more likely to become millionaires by starring in a reality
TV series than by learning how to budget and save wisely (Visa USA)
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83% of adults are unaware of the resources
available to help them teach children practical money skills (Visa USA)
Regarding the last bullet point regarding resources for
parents, the Internet is full of them (just Google the phrase “teach kids about
money”). There are also some very useful books on the subject, including
chapters 16 and 17 of Dave Ramsey’s New York Times best-seller, "Financial Peace
Revisited."
Here are some of the highlights:
Your children are watching you. According to
Jump$tart, 94% of children learn their money management skills, for better or
for worse, from their parents. “The most important thing we as parents can do to
teach our children,” writes Ramsey, “is to straighten up ourselves and show them
what we are doing and why we are doing it.”
Four money issues. Be intentional about your
money instruction, and build your teaching around four key areas of money
management: (1) work, (2) saving, (3) spending wisely and (4) giving.
Work. There must be an emotional and intellectual
connection between work and money. “Never use the word ‘allowance,’” warns
Ramsey. “Instead, pay ‘commissions.’ Life will not make ‘allowance’ for you, but
it will pay you want you earn. Work, get paid; don’t work, don’t get paid.’
Saving. Developing the discipline of saving is
one of the best ways to avoid the punishment of debt. It helps you plan for
making big purchases, and it helps instill the ethic of goal-setting. Since kids
tend to like games, make a game of it, advises Ramsey. “Simply divide the price
of the goal by the amount you plan to save each week to see how many weeks or
months it takes to ring the bell.”
Spending. People tend to spend differently when,
instead of borrowing, they spend the money they earned. “Spending is one of the
rewards of disciplined saving and working,” writes Ramsey. “It can be the
celebration of a goal reached. When spending occurs in this way, the child’s
self-esteem is maximized, because he or she did it. There is a sense of
accomplishment, of a job well done.”
Giving. “Giving is precious to watch when the
kids are young, and fulfilling to watch as they grow into adulthood. Giving
makes them less self-centered [and] brings your kids depth of character. Those
who never give become shallow, self-centered, and miserable adults.”
Age-appropriate money management. "Financial
Peace Revisited" offers training tips by age group.
For three- to six-year-olds, Ramsey recommends that
“commissions” be paid on the spot, immediately after work is performed.
“Children need to have instant ‘atta boys’ and money for work. This allows them
to make the emotional connection and they are more willing to do the chore next
time.” With respect to saving, the saving goals should be achievable in a
relatively short time period, so that the payoff for saving isn’t so far into
the future that it seems out of reach. “When they have saved and they buy it,
there is a sense of pride that will make you smile a lot more than if you simply
bought it for them.”
For ages six to 13, their ‘commission’ should be paid
weekly, based on a tracking system that lists their chores and what they will be
paid for each. Granted, many household chores are tasks that kids should do
because they are part of the family and at no pay—such as cleaning their room,
taking out the trash, etc.—but , writes Ramsey, “Paying for them gives you
teachable moments about money and helps make the emotional connection between
money and work.” On payday, says Ramsey, the kids’ should divide their pay among
three envelopes or containers: one for spending, one for saving, and one for
giving.
“Spending and giving at this age fosters problem-solving
skills as the goal setting can get really detailed,” Ramsey writes. He noted
that, for his kids, saving started to get serious at this age because he and his
wife would not buy cars for their teenagers or let them to buy a car on credit.
“Our first child started saving for her car when she was 10. By the time she was
14 she had picked out the kind of car she wanted.” By the time she was of age,
she had saved $4,500, which her parents matched. “She and I shopped for months
until we bought a really nice Mustang at below wholesale book for $9,000 cash.”
For kids who are 14 and older, budgeting can become even
more serious. Ramsey suggests that, money-wise, parents should treat kids at
that age “as adult as they are acting.” He recommends that “if you have them
ready and their temperament is correct, release their own budgets to them”—while
retaining parental veto power. “We opened a checking account for them with a
debit card. We then established what portion of our budget was going to their
clothes, entertainment, etc. Then we explained to them that, from now on, we
were no longer paying for virtually anything directly, but we would be giving
them X dollars per month to live on. If our daughter buys one dress and blow it
all, she can’t go to the movies. If our son eats at expensive restaurants with
his friends, no new clothes for school.”
Ramsey concludes his discussion of helping kids become
money-wise by noting that “you are teaching your children how to live life well
when you build their character and money management skills. Teach your children
how to handle money or they will come home and live with your forever.”
If you have been procrastinating in teaching your kids
about money, perhaps the vision of having adult children permanently camped out
in your house will be sufficient motivation to start investing some of your time
and mental energy into your young kids’ evolution to responsible money managers!
Hoopes,
Adams & Alexander, PLC, is a Chandler, Arizona, law firm offering services to
Phoenix-area clients in the areas of estate planning, entity formation,
commercial and real estate transactions, and civil litigation. |
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