By Jenna Goudreau, Forbes Staff With bagged lunches and crisp clean notebooks, kids everywhere are heading back to school to brush up on their math, English and geography skills. One lesson they won’t get in the classroom, however, is arguably one of the most important for their future success: How to smartly and responsibly handle money. That is a course we leave to parents, who do not get a lesson plan.
“Parents do great teaching kids good manners and how to be safe, make their beds and be culturally savvy,” says Mary Hunt, personal finance expert and author of recently released Raising Financially Confident Kids. “But so very often parents neglect the most important thing of all—to prepare them to be financially astute.”
Hunt says teaching good money skills can be a blind spot for parents because so many feel financially inept themselves. “Parents have this notion that because they are in debt or not saving enough, they have no basis to teach their children about money.” They’re wrong, Hunt says. Teaching financial literacy is like teaching any language. She provides a breakdown of how to talk about money, make use of everyday learning opportunities and provide kids with hands-on experience, so they can learn firsthand.
How To Talk About Money
When do you need to begin thinking about teaching money skills? “You start the moment you drive home from the hospital,” says Hunt. Kids are more likely to do what you do than do what you say, so right from the beginning it’s important to model healthy financial behaviors and talk often and calmly about money.
The first lesson kids must learn is that money has value, and when you spend it, it’s gone. When children are young, Hunt suggests always using cash when you’re with them rather than credit or debit cards. “Cash is very visual, clear cut and not confusing,” she says. “Credit sends a mixed message to kids.” Otherwise, they might have trouble grasping the concept of spending and believe that a magic card gets you anything you want.
Another important conversation is the difference between needs—necessary expenditures–and wants—the just-for-funs. Hunt believes parents should reinforce through words and actions that it’s important not to spend more money than you have. One good way is to keep the just-for-fun purchases in check by not giving in to a child’s every request or going overboard yourself. However, Hunt warns against saying, “We can’t afford it.” For a child, that translates to “we’re poor” and worries them. Instead, she suggests saying, “We choose not to spend our money that way.”
Allowance Ground Rules
While allowance can be a controversial topic for many parents, Hunt believes that giving children allowance is one of the best ways for them to learn how to handle money on their own. She suggests starting at age six and recommends $1 a week for their age ($6 a week for a 6-year-old and $15 a week for a 15-year-old). Start off with a weekly allotment and then extend it to bi-weekly for pre-teens and monthly for teens. That way, they’ll be continually challenged to plan and make it last longer.
Hunt says parents need to make it clear to the child what their responsibility is. Explain that the house, car, food and utilities are what parents pay for, and the child should consider their allowance personal spending money. Also, explain how you expect them to manage the money. Hunt recommends the following split: 40% goes toward spending; 40% toward short-term savings, like a new bike or toy; 10% toward long-term savings, like college or a car; and 10% toward giving. For young kids, labeled jars work to separate the money. Once they’re older, you can set them up with bank accounts that mirror the disbursements.
When kids have their own money, Hunt says, “It’s important they make choices and then live with the consequences.” That means: This is their money to do with as they please. If they spend a month’s allowance in the first week, too bad. Do not give them a loan. The point of the allowance is to teach them how to save for what they want. By experiencing negative consequences firsthand, they’ll learn to make smarter choices.
Top Teaching Opportunities
Routine tasks and chores can be great opportunities to show your kids how to handle money. Hunt recommends involving children in grocery shopping to help them understand planning, saving and finding the best value. Take them to the store and let them hold the list to demonstrate the concept of purposeful shopping. Point out the different pricing structures and brands. Ask them: Is it a better value to get 20 ounces for $4 or 40 ounces for $6? They’ll learn value and get to practice their math skills. However, Hunt cautions against taking children window-shopping or over-exposing them to stores, which may encourage consumerism and impulse buying.
The bank can be another good field trip. Even though most modern banking is done online, Hunt says it’s important to bring kids to a physical branch to show them how it works. Let them watch you make a deposit, or sit down with a bank manager and encourage the child to ask questions. Hunt says age 10 is a good time to help them open a savings account, teach the concept of interest and allow them to manage and track its progress online. Once they’re old enough to get a job, they need to have a checking account and debit card.
Many other teaching opportunities will present themselves naturally. As a way to teach the mechanics of credit, open up a credit card offer and walk your child through what it means to delay paying, carry a balance and pay interest. Use a first paycheck to explain taxes and apartment or house-hunting to explain the concept of a mortgage. “Keep teaching your kids new and more complicated concepts as they get older; they’ll understand,” Hunt says. “It’s our job as parents to give them roots and wings, so they can survive and thrive in the real world.”