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.

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

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.

Spending It Now

Whatever isn't set aside for saving can be used toward other things, such as buying magazines or going to the video arcade. If your child decides that he's going to spend his money, he needs to make informed shopping decisions. He shouldn't rush out to buy that CD on a Tuesday if there's going to be a sale on CDs the following day. Tips on spending wisely are discussed in Savvy Shopping Strategies for Kids.

Kids may not readily see the need to become a good shopper, so it's up to you to explain that finding bargains is a way for your child to stretch her spending dollars. Instead of buying one sweater, a particular sale may allow her to buy two for the same price as one. She's getting more for her money in this instance.

Your child also might not be familiar with certain money terms. However, developing an understanding these terms is important for him to become a wise spender. Here are some things you may need to explain to younger kids:

• Bargains. Just because something is on sale doesn't mean it's a bargain; it's only a good deal if it's something that needs to be bought (something allocated in his budget). And it's only a good deal if it really represents a cost savings when compared with a similar purchase that's not labeled a “bargain.”
• Brand names. Kids are bombarded with ads on TV and even at school. They can recognize that the golden arches mean McDonalds and that the swoosh means Nike. Brand names are used by companies to capture consumer loyalty, and it's fine for your child to want to buy a quality item that also is a brand-name item. But it's not always a brand name that is the best buy. Store-brand socks purchased at Kmart, for instance, may be of equal quality to those with the Footlocker label on the side. Prove it to your child by buying a pair of each socks and then seeing how well they wear over time.
• Expensive. Young kids have no idea what things cost. They may know that $50 is more than $25, but what does $50 really mean? One way you can show your child what the value of that money means is to compare it with another item of equal cost. For example, if he wants to buy Next Generation, a monthly magazine on video games that costs $5.99, explain that the same money can buy a ticket to the movies (except in cities where ticket prices have soared).

How can you get your child to become a bargain-hunter? Get her involved in the hunt! If your teenage daughter is looking for a new pair of shoes, try several different approaches on how to comparison-shop. Use your local newspaper as a reference material to search for advertised sales (typically Wednesdays' ads are heavy in sales). Or, make a shopping trip a learning experience by accompanying her to the stores. Point out prices and note how they compare to prices in other stores for similar shoes. Or, use alternative shopping places to find bargains. Teenage girls love to shop in thrift shops to find retro clothes and other bargains. Likewise, kids of all ages may enjoy garage sales and flea markets for the many bargains they can offer.

You can teach your elementary school child the power of bargain-hunting by making a game of it. Challenge your 10-year-old to put together a weekly grocery list for the family using a set dollar amount. For example, say that you allot $100 for weekly groceries for purposes of this game. See what your child puts on the shopping list. Remind him that he must include not only Oreos and Coca Cola, but also milk, orange juice, and lettuce. Be sure to discuss when it's advisable to substitute store brands for brand labels as a way of saving money without sacrificing flavor, quality, and so on. Also critique his list—the good and the bad—by pointing out what bargains he has found or what he has left off the list that should have been included.

Variations on this game include these:

• Give your child the menus for the day, and tell him how much he has to spend for your family's food (for example $20 or $25). Then let him look through local newspapers to find the best prices for the items on the menus.
• Give your child the dollar amount he can spend on meals for the day. Let him put together the menus for that day, based on the bargains he finds in the newspapers.

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.

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