KIDS AND MONEY

Teaching the tykes

Keep it fun, and focus on basic values like self-reliance and self-control.

By Robert Lowes
Senior Editor

Lexington, KY, pediatrician Katrina Hood and her internist husband, Greg, are teaching their daughters—ages 6 and 4—some pint-sized lessons about money.

Little Taylor and Clarissa Hood are learning that two nickels equal a dime. That pitching something into the grocery cart means paying nickels and dimes to the store. That if they clean their bedroom and feed Dart, the family dog, they get their allowance. Getting them to clean is a struggle, but Dart manages to get fed. "He reminds them," says Greg.

The Hoods hope their girls, as well as 1-year-old Connor, will become financially astute adults who live within their means and save enough for retirement. Unfortunately, too many parents fail to school their children about money, and lessons neglected at age 6 become apparent at 18.

This year, 68 percent of high school seniors flunked a quiz about credit cards, savings, and other money management subjects commissioned by the Jump$tart Coalition for Personal Financial Literacy. What's worse, scores have been declining since the quiz debuted in 1997. Not surprisingly, Jump$tart, Federal Reserve Chairman Alan Greenspan, and others advocate more formal financial education, beginning in elementary school. By the time your child is in fourth grade, he should be able to define a credit card as well as draft a simple budget, according to personal finance educators.

However, until financial ed becomes as common in school as driver's ed, parents must teach their kids about money. Fortunately, books, games, and Web sites can equip parents for this job. Equally comforting, the core principles are hardly esoteric: You're preaching self-reliance, planning, prioritizing, delayed gratification, even generosity.

Experts say if you make the lessons fun and hands-on, kids will eventually get the hang of handling money. Someday, their stock portfolios may outperform yours.

Seize the teaching moment when it arises

One reason kids flunk quizzes about personal finance is that parents don't talk to them about it, says Neale S. Godfrey, co-author of Money Doesn't Grow on Trees (Fireside, 1994). This taboo-like silence, she says, can yield painfully hilarious results.

"A friend told me about a cross-country car trip with his family," says Godfrey. "His 4-year-old son was always the last to leave any restaurant on the road. The father finally asked his son why he brought up the rear.

"The boy pulled some change out of his pants pocket. 'I pick up the money that you leave behind on the table,' he replied. No one had told him about tipping."

Godfrey urges parents to turn everyday consumer experiences into teaching moments. When you buy generic corn flakes instead of the more expensive brand-name product, tell the tyke in the grocery cart why. Better yet, turn shopping into a game. Godfrey suggests challenging a youngster to find an item below a certain price—$2.00 for 100 paper plates, for example. If the child brings back 100 paper plates for $1.75, she keeps the difference.

Board games with a financial theme also can set the stage for money talk. Monopoly familiarizes kids with buying, selling, and handling cash. Payday challenges players to pay their bills and still have money left at the end of the month.

Of course, you must weigh the trade-off between fun and education. A game called Cashflow for Kids (available at www.richdad.com ) aims to teach kids 6 or older about assets, liabilities, and financial independence—in other words, living off investment income as opposed to a salary. Laudably, the game doesn't make winning dependent on bankrupting opponents—not exactly an essential money management skill. However, a 6-year-old's eyes may glaze when you explain what a certificate of deposit is. As one child who tried Cashflow said, "It's a game that comes with a lecture."

The how-tos of allowances

Play money has its place in financial education, but kids learn from real money, too—especially when it's their own. For most young children, the money they manage comes from an allowance.

Should the child have to perform chores in exchange for an allowance? Some say No; divorcing work from allowance communicates that household chores are family duties. "You wouldn't want someone growing up thinking he should be paid for taking out the garbage," says Carol Wilson, a financial planner in Salt Lake City.

Neale Godfrey, however, advocates wedding work to allowance, to keep little ones from getting spoiled. "Your home should be an incubator for real life," says Godfrey. "Let kids understand that you get money by earning it."

Most parents seem to side with Godfrey. Of those who regularly give their children money, 74 percent link it to a condition such as completing chores or getting good grades, according to the American Savings Education Council.

A simple way to set an allowance is paying a base rate—50 cents or $1 a week—for each year of the child's age. An allowance should be big enough so a child has money to save and give to charity as well as spend, says Godfrey.

To calculate a realistic allowance, talk with your child about the expenses it might cover. (At this point you're into budgeting. More about that later.) The two of you may decide, for example, that the allowance should make it possible for the child to go to a movie once a month.

Paying an allowance in small denominations can sharpen a child's money skills. "I give my daughters different combinations of coins, so they come to recognize them and understand the exchange rates," says Greg Hood. To make it easier for children to divvy up their loot between spending, saving, and charity, dispense singles instead of $5 and $10 bills.

Saving, spending, and sharing wealth

Only 52 percent of parents with kids ages 11 to 17 report that they teach them how to budget, according to the ASEC. Not only must kids learn to ration their dollars, insists Neale Godfrey, but they should do so as soon as they're buying Pokémon cards—not at 11 or older. "I tell kids that a good budget enables you to pay for what you need and save for what you want," says Godfrey.

She recommends a system of savings, charitable offerings, and spending. Savings gets broken down into short-term and long-term, spending into living expenses such as school lunches and discretionary expenses such as snacks. Calculate a percentage of the allowance for each category, and then plug in the amounts.

Childhood savings usually begin with a piggy bank. Make sure the first experiment in thrift is within the child's reach. "Have her save for a toy that will require her to put aside money for two weeks," says Godfrey. "Praise her when she achieves this, and then make the time frames longer and longer."

Some parents use matching funds to encourage their children to squirrel away money—as employers do with 401(k) plans. "I used to match 50 cents on the dollar," says Knoxville gastroenterologist Sarkis Chobanian, a father of two.

Kids need to learn a deliberate approach to spending as well as saving. Godfrey captures the art of consumerism in a catchy acronym: MESS. M stands for making a list, E for evaluating what's a necessity vs. a luxury, S for shopping the ads to get the best deal, and the final S for sticking to the shopping list (rather than buying on impulse).

Invariably, kids make mistakes, such as splurging on a computer game that caught their eye, only to find themselves short at week's end. If an overspender asks for an advance on his allowance, say No. "Granting an advance teaches instant gratification," says Carol Wilson. "Let a kid experience the consequence of his decision."

Finally, encourage charitable giving. If you attend religious services, let your 5-year-old put the family offering in the collection basket. Set up a separate piggy bank for gifts to nonprofit organizations that your child can appreciate, such as Unicef. Never mind that the weekly gift is only 50 cents, says Godfrey; your child is developing a lifetime habit of generosity. "All of us are part of a greater community," she says.

Online help for basic $$ lessons

The Web abounds with sites devoted to teaching children about money, but most are geared to kids 12 or older. A notable exception is Wise Pockets World ( www.umsl.edu/~wpockets ), aimed at those in grades three through six. Created by the Center for Entrepreneurship and Economic Education at the University of Missouri-St. Louis, Wise Pockets uses simple stories, colorful graphics, and activities to delve into saving, spending, even credit cards. Visit both the teachers' and parents' sections for ideas and materials that will enrich your child's financial education.

Sense & Dollars ( www.mpt.org/senseanddollars ) presented by Maryland Public Television, is designed for middle and high school students, but younger students would probably benefit from many of its interactive exercises and games.

Robert Lowes. Kids and money: Teaching the tykes.

Medical Economics

2002;14:25.