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Teaching Your Child About Money Management

Let's say that your child has a fistful of dollars and is raring to go to the mall for the afternoon. Do you let him do as he pleases with that money? The answer depends on his age and what he has been taught about how to handle the money.

Financial Building Blocks

You can improve the teaching of money management to your child by bringing the School Financial Planning Program of the National Endowment for Financial Education to your child's school, Boys and Girls Clubs, or other places near you. This program is designed to bring financial literacy to America's youth.

When you start to dispense an allowance, you should couple that activity with guidance on how to use the money. If you don't, your child may waste money on frivolous things and be short on cash for the things he needs. More importantly, he will develop poor spending habits that will be hard to break as he grows older. One kid used to immediately spend all the money that came into his possession on whatever he wanted at the time—usually comic books and trading cards. Today, that kid is a highly successful professional who still spends his money without any restraint—now on antiques and motorcycles. He's constantly short of cash for the things he needs, and he even had to borrow money from his mother to pay his taxes.

This person needs to learn to gain control over his money. He needs to know how to save for the future while spending the balance wisely now. As with bad habits, good spending habits also last a lifetime.

Another kid had only a tightly limited allowance and learned to spend it very carefully. As an adult, she was able to use her good purchasing skills in developing a successful retail business. By buying smart for her inventory, she could offer customers lower prices to attract sales.

Schools generally do a poor job in teaching about money, so it's primarily up to you as a parent to educate your child in this area.

Planning for the Future

The future to a young child may mean the arrival of summer at the end of the school year; it's impossible to think about growing up, going off to college, and even moving out on her own. Still, the future is closer than she thinks. As adults, time seems to go more quickly than it did as a child—what seemed like years away now passes in the blink of an eye.

Your child needs to learn the importance of saving for the future, including these issues:

  • What she's saving for
  • What she has to put away to get there
  • How long it will take her to reach her savings goal
Piggybank on It

If your teenager is saving for a big-ticket item, such as a car or college, savings shouldn't be made by putting dollars bills in his sock drawer. The money should be invested so that he'll be able to reach his savings goal quicker. Saving and investing money are discussed in Teach Kids to Save Money for the Wish List, Teach Kids About Investing Their Savings, and Teach Kids to Diversify Their Investments.

For example, if your 11-year-old wants a Discman that costs $100, he should know that if he puts $5 a week toward this wish, it will take him 20 weeks (or about five months) to reach his goal. He can probably handle the math himself, but you'll have to encourage him to do it.

If your child sets a goal that would realistically take her years to reach, there's nothing wrong with agreeing to match her savings or contributing to her savings fund. After all, if your employer offers you a 401(k) plan, he probably matches (on some basis) what you put into the plan. For example, if your 10-year-old wants to save up for a video game that's going to cost $30, you might suggest that she save $2 each week for two months (eight weeks). She then will have saved $16, and you can pay the difference, which is roughly half the cost of the game.

Setting savings goals is explored in more detail in Teach Kids to Save Money for the Wish List. The important thing to note here is that your child should get the idea that saving is a part of being grown up enough to have money.

More on: Money and Kids

Excerpted from The Complete Idiot's Guide to Money-Smart Kids © 1999 by Barbara Weltman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit Amazon's web site or call 1-800-253-6476.


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