10 Dec Help Your Kids Build Good Money Habits
15 smart ways to educate your kids to manage money
By Tanisha A. Sykes
During the holiday season, Jackie Taylor, an HR exec at Ernst & Young and a single mother living in central New Jersey, packs up her five kids, ages 7 to 14, and heads to Manhattan. The kids are full of glee because ’tis the season to give out Blessing Bags to those less fortunate.
Her whole family fills zip-top bags with some everyday essentials—including toothpaste, snacks, and a few bucks—and shares them with people in need. “Money has its purpose, but it’s not the only purpose,” says Taylor, whose philanthropic efforts include volunteering at Habitat for Humanity. “Through real-life situations, I am teaching my kids to be empathetic while allowing them to see how our financial economy works.”
A study from behavior experts at Cambridge University reveals that a child’s money mind-set is fixed by age seven, underscoring the power parents have in shaping the financial habits of their children.
“Instilling good money habits in your kids at an early age is going to help them to develop into adults who are going to win financially,” says Rachel Cruze, coauthor with her father, financial guru Dave Ramsey, of the best-selling Smart Money Smart Kids: Raising the Next Generation to Win with Money.
Teaching your children how to earn, save, give, and manage money sets them on a road to financial prosperity. Here are some smart habits that will stick with your kids for life.
Start with the basics. “I leverage partnerships with organizations like World of Money that provide technical information like the Rule of 72 [a shortcut to estimate the number of years required to double your money at a given annual rate of return], budgeting, money management, investing, and disciplined credit card usage,” says Taylor. Download free apps PiggyBot and Green- $treets: Unleash the Loot! to introduce fun ways to learn about money.
Take a trip to the bank. Help your children open a savings account, and encourage regular deposits. As the balance increases, teach them how interest grows and explain the importance of maintaining a minimum balance, checking the account online, and avoiding bank fees.
Introduce budgeting. Using an old-school budgeting method like the envelope system shows your kids that you’re intentional about telling your money where to go. “When I was growing up, I remember my mom pulling cash out of an envelope marked ‘Food’ and that’s how she paid for it,” says Cruze. “Explain to kids that a budget gives you more freedom because it gives you control over your money.” Financial Peace Jr. can help you teach your kids how money works. Everydollar offers practical advice on how to keep a budget balanced.
Show the relative value of the dollar. On a recent trip to China, Taylor took her oldest daughter to a factory where people were standing side by side making headphones using the same materials used to create the wildly popular Beats headphones. “The only difference? Dr. Dre wasn’t on the box,” says Taylor, who guesses that the off-brand headphones sell for a fraction of Beats Solo2 wireless headphones, which retail for $299. “When we’re at home, she sees that marketing makes a difference in the value of an item.”
Give cash to manage. On the next trip to an amusement park, hand your little ones $10 and dole out $20 to the older ones, then say, “This is the money you have to spend for the day,” says Taylor. Having ownership of the funds makes them think differently about how and when to use the money. Her kids bargain, sacrifice, and divide the funds to get the most out of their kitty. To parents like Taylor, that’s commerce in the making.
Open your books. “I don’t think we’re honest enough with our kids about what it really takes to live comfortably,” says Taunglea Ambroise, global business development manager at Hewlett-Packard in New York, and the married mother of a boy, 11, and a girl, 15. “We need to share how much we earn, how much houses cost, and how much the monthly utilities cost.” Otherwise, they won’t understand that the money you earn is taxed and earmarked to help take care of them.
Instill a strategy to save. In Ambroise’s household, there is a rule about monetary gifts for their children: At least 50 percent goes directly to a savings account that the children can’t touch until they go to college. Of the remainder, 40 percent is theirs to use and 10 percent is given to a charity. “We’ve done that since our kids were five or six, so now it’s a habit,” she says.
Empower them to give. “If you really want your children to use money properly, teach them to donate 10 percent of their income to a 501(c)3 nonprofit that addresses issues important to them,” says Sabrina Lamb, founding CEO of World of Money, an organization committed to teaching youth financial literacy. The donation could benefit the local church, a homeless shelter, or a boys and girls club, for example. To help your children donate with peace of mind, go to Give.org.
Pay an allowance. Let your children do a chore or two around the house. On payday, have a money meeting about which chores were done, then pay immediately. Have them break down their money into three categories: give, save, and spend. “Getting them into the habit of giving, saving, and spending makes them comfortable with money and sets them up for success,” says Cruze.
Teach a lesson in wants vs. needs. If your little cherub is dreaming of a reversible wind jacket from North Face, but your budget is more in line with Target, here’s your response: “If you really want the more expensive coat, you have to pay the difference,” advises Ron Lieber, author of The Opposite of Spoiled: Raising Kids Who are Grounded, Generous, and Smart About Money. “It teaches them where you draw the line while forcing them to make trade-offs.”
Require them to earn. By the time your kids are 15, they should have their first job. You can still pay for what they need, but certainly not everything they want. “Start small by having them walk dogs, babysit, or make flyers,” says Cruze. For those with a knack for selling household treasures, allow them to open an Etsy store. Working teaches kids independence and responsibility and gives them a bird’s-eye view of how to better manage their money.
Control the urge to splurge. When shopping with your kids in tow, stick to cash instead of using plastic and say “no!” Practicing restraint can help all of you fend off the impulse to rack up debt. “It takes patience and it’s not fun all the time, but it’s a pretty powerful legacy when money isn’t a stress point in your life, because you have control over it,” says Cruze, who doesn’t own a single credit card.
Teach responsible credit card usage. Ambroise’s daughter has a prepaid American Express card. “She can go out to lunch at her high school, so we fund her account $50 a month,” she explains. “While we pay the bill, she has the ability to manage how much she has and how much she can spend.” It teaches her to think before making a purchase and spend wisely.
Encourage entrepreneurship. “Children’s first instinct is to say, ‘I want’ and ‘Can I have,’” explains Lamb. “Turn the conversation back to them and say, ‘I need you to create a report on how you can earn this.’” This type of conversation is so important because it switches their mind-set from employee to employer and teaches them about long-term wealth building.
We all want to do the right thing by our kids, especially when it comes to instilling good money habits. “Do what comes naturally and what makes sense for your household,” says Taylor. “That’s where you impart the best lessons.” DW
Tanisha A. Sykes is a personal finance and career development expert and a seasoned journalist. Follow her on Twitter @tanishatips.