Like Sponges

Kids watch, see and hear everything that goes on and then copy it.  There’s an old expression: “The kid’s a chip off the old block.”  Among other things, it means a child is acting in a way that is remarkably similar to the way a parent might act.  The point is that since kids learn from everything we do, we need to be aware of the messages we’re sending them about money.

Here are two examples to help bring home the point:  If a young boy watches his Mommy pull out a credit card to buy a brand new big-screen T.V., it’s a message to him that it’s okay to spend for big ticket items with credit.  If a young girl watches her Daddy redeem coupons and compare prices at the grocery store, it reinforces the message to be thrifty.

Messages Come In Several Ways

Learning how to save money, spend or use credit is therefore something we teach our children all the time.  Most messages will be indirect or accidental like those above.  Our kids will watch and learn from us as we take on life’s chores.  Other messages will be more direct.  They’ll be communicated through our words as we engage our kids by explaining our goals, values, desires and wishes regarding money.  Often, the direct and indirect messages will work in tandem, but they can also work at cross purposes.  We may tell our kids never to use credit, but if we follow up with deeds that do the opposite, we end up giving them a mixed message that confuses the issue.

Start Early

Since children are so easy to teach and ready to learn, take advantage of this fact and start them early on a savings plan.  If you do nothing else, have them put a portion of any cash gift aside and hang on to it for a rainy day or for a large purchase.

Talk To The Kids About Money

Avoid making money a mystery to kids.  There is a fine line between instilling kids with fear and providing information that empowers them.  Giving children too much reality, too soon, can create unnecessary anxiety.  On the other hand, giving them too little reality, too late, can create wishful or magical thinking.  While you want to avoid reinforcing ideas like “money grows on trees”, the tendency is to protect and shield kids from life’s harsher realities and assume they’re not old enough to understand.  While that’s true to a point, you can often simplify a difficult situation and still provide a sense you’re in control.  When children sense you’re in control and understand there are rules that govern a particular situation they feel safer.

For example, if Daddy suddenly loses a job, try to explain what that means to the family.  You might tell your kids that you and Daddy both work so that you can save up money and buy all the things the family needs.  If you’ve explained this beforehand, this will come as no surprise.  Now, talk about losing a job.  You can explain that since Daddy lost his job, he’ll now get some help from the government to pay for things, but it won’t be as much as he earned in his job.  This means the whole family will have to cut back on certain expenses until he can find new work.  If you’ve set up an emergency savings fund, you should also mention that you’ve long been planning for a situation just like this.  Giving your kids the basic details, providing a sense that you have planned for a situation, and telling them you are taking steps to get it under control will go a long way to reassure them.

Decisions Matter

You can’t expect a child to understand priorities, unless they have experience making decisions in money matters.  Rather than scold a child at the store for wanting something they’ve just seen, have them help you make up the shopping list at home.  By being a part of the list making process, they’ll have a better sense of the priorities when you all go out to shop.  As they become more practiced, they’ll also help you remember the things you forgot to add to the list and that will save time and gas on unnecessary trips back to the store.

Where it makes sense, let your children choose between alternatives.  If there’s a better reason to go one way or another on a particular shopping decision, explain why to them.  Suppose you need cereal.  Rather than settling on a cereal that’s mostly sugar, give them a choice between two healthier cereals you know are better for them.  You can explain why too much sugar is bad and then show them that your healthier options contain less (just point at the side of the boxes and have them read the numbers).  Now, you’ve offered them a choice and you’ve taught them something about eating healthier foods.

When it comes to saving money, help your kids decide how much, how often and what to save (so long as it works for you).  For example, before giving your child an allowance, ask them what part they plan to save and what part they plan to spend.  By asking questions and offering suggestions, you can lead them in the direction you want, without taking away their power to come to a decision on their own.  If they can’t make up their mind, you can always help them understand the consequences of the various options involved.  This is a conversation that may require some patience on your part, so try to minimize distractions when you’re ready to talk.

Start A Savings Habit Early

The sooner your child starts saving, the sooner he or she will be on their way to building a brighter future.  Psychologists and educators know that the early years are critical for childhood development.  Don’t lose this precious opportunity to teach your kids the values about money that will serve them the rest of their lives.

What About An Allowance?

As parents, we often wish to give our kids the things we never had.  At times, this can make denying them money very difficult.  If you never had an allowance as a kid, should you give one to your child?  To me, the answer depends on how you define the word allowance.  I believe any money you “give” to your kids should be distinguished from the money they “earn”.  If you are providing an allowance, I suggest making it dependent on doing certain chores and perhaps acting within a set standard of behavior.

Money rarely comes free in life.  Yes, we get some money without working for it—for example for birthdays or holidays, perhaps by winning a jackpot, or by inheriting from a relative.  However, these occasions are the exception, not the rule.  It’s best to teach your kids that money is something they need to earn, rather than something they are entitled to simply because they happen to breathe the same air that you do.

Whether you give you’re child a gift of money or an allowance, or whether they earn money from a job on their own, the best thing you can do is to have them regularly put aside a certain portion of their “earnings” into savings.  The younger they are the better.  Over a lifetime, this strategy is the surest way to pay for college, pay for a wedding, pay for kids, buy a car, buy a home or live comfortably in retirement.  For a calculator that shows the effect of compounding interest on savings see this one at BankRate.com (there are instructions for entering information at the bottom of their page).

Double Up

A terrific way to reinforce the idea that savings is good is to double up on your child’s efforts.  In other words, for every $1 they save, you add $1 yourself.  Before setting up a matching plan like this, it’s best to spend some time thinking about what system will work for you and your child, while staying within budget.  However, by boosting your child’s efforts in this manner, they’ll see their account balance grow much faster, and that will go a long way toward reinforcing their decision to save.

Open A Savings Account

Check with your bank and see what options are available for young savers.  Many banks will waive fees that apply to other accounts to encourage saving—after all, they want those same young savers to grow up and think of them for all their banking needs.  When your child is old enough to read, they are old enough to have their own savings account.

As your child starts to save, make sure to take them with you to the bank and have them make the deposit.  Also, make sure they keep a savings book with a tally so they can check the balance and watch it grow.

Set Guidelines

Though you want your kids to have the power to make decisions, you also can do them a favor by helping them set clear savings goals and guidelines.  In many cases, they just won’t realize the consequences of spending or saving more, so feel free to do what you can to reinforce the messages you think are most important.

For example, say your child is regularly putting aside 25% of everything they earn or receive as a gift.  At some point, they’re going to want to spend some or all of it, so be sure you’ve had discussions about spending ahead of time.  Here’s where your own experience can come into play.  You might tell them they can only spend up to half of their savings on a single purchase so they will still have an emergency leftover reserve—something you feel is critical.  Or you might tell them up front that if they ever choose to spend their savings down below a certain point, you will suspend your contribution to match their savings until they’ve brought the account back up on their own.  This way they learn there are real consequences to frittering away their money.

Teach Kids To Avoid Impulse Buying

Impulse buying is something to be avoided, either as an adult or as a child.  Inevitably, the items you purchase on impulse often cost more per unit, add more to your shopping bill, and satisfy only as a short term fix.

Our urge to splurge is driven by a variety of factors.  Sometimes a bright or colorful display at the mall can tip us over the edge.  Other times, we learn of a new product because all our friends start getting one and convince us it’s cool.  We might also see a new ad on TV or the internet that grabs us.  Or we might stand in the checkout line at the grocery store and stare at something that looks, smells, or tastes really great.  That’s especially true if we happen to be hungry, which is why so many stores have a friendly clerk browning some delicious smelling food in a pan.

Kids are great letting you know when they’ve maxed out on patience—that’s usually when the whining and crying starts.  To avoid tantrums often created by those impulse items too good to resist: (1) Eat with your kids before you shop.  If everyone is full before you all go shopping there will be less to tempt you at the store.  (2) Use the list technique above, the one where you get your kids to help make out a list in the first place.  (3) When the time comes, remind them they helped make out the list and item they now want isn’t on it.  (4) Here, comes the tough part.  Do not give in to their insistent pleas.  The firmer you are about this when a child is younger, the sooner they’ll learn that a tantrum is a waste of their time and energy.

A list is a great device for staying on track whether you’re a kid or adult.  When you pick up an item at the store, make sure it’s on the list before putting it in your cart.  A list is your best defense against the pitfalls of impulse shopping.

Set A Clear Rule About Credit Cards

Should a child ever have a credit card?  Take a good look at yourself before agreeing to let your child have a credit card.  Do you pay off credit debt each month?  Have you used your credit cards responsibly?  Are you in serious credit card debt, right now?  Can you give your child good advice about credit, advice you follow yourself?  Though this is a topic I plan to return to on another day, in my mind it is a truly rare or unique circumstance when any child needs a credit card.

If your kids are in their teens, have started driving, or are leaving home to go to college, it may make sense to have a plan in place to cover a spending emergency.  Though the first thought may be to turn to credit, it might be better to give your child a prepaid Visa or Mastercard to hang on to—the ones sold with the other gift cards at most grocery stores.  A second option could be traveler’s checks.  One advantage of traveler’s checks is they can be replaced if lost or stolen.  The bottom line is this:  Unless you or your child has the income to support paying it off every month, the best and safest long-term financial strategy is to avoid using a credit card if at all possible.

Sooner or later, you’re kids are bound to say one of their friends just got a card.  For this reason, start in long before this ever happens and explain why saving is better, how it costs so much less to make a purchase with cash in the long run, how you never have to worry how you’re going to pay the bill, etc.  Essentially, you want to plant the seeds so they grow up with all the right values and will know how to respond when they’re given the choice to buy on credit.

Start Now

Whether you’re ready to hear it or not, you’re kids start learning the language of money from the get-go.  Don’t be surprised by it.  Instead, take the opportunity to teach them while they are still young enough to listen.  Children taught the value of saving will carry that gift with them throughout their lifetime.  This is your chance.  Seize it!

By Bob Anderson

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