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Teaching your kids about money

Where money is concerned, Larry Smith and his wife, Cynthia, have tried to set a good example for their three children.

Though they own a spacious home and like to travel, the Aptos, CA, couple have eschewed luxury cars, designer clothes, and other high-life frills. They seldom buy on impulse, they pay off their credit cards each month, and they carry relatively little debt. Those money-wise habits appear to have rubbed off on their 13- and 10-year-old sons, both ardent savers.

It's a different story with their I6-year-old daughter. "No matter what we've tried, money has always run through her fingers," says Cynthia, who's convinced that genes have a greater influence than upbringing on a child's approach to money.

Many experts say that because of genes and upbringing, your kids' money behavior probably will mimic your own. Since you can't do anything about their genes, your best shot for helping them become financially responsible is to teach good money habits and practice what you preach. As the Smiths' experience shows, you might not be 100 percent successful-but two out of three money-smart kids ain't bad.

In 1997, a survey sponsored by the Jump$tart Coalition for Personal Financial Literacy, a nonprofit organization, found that most high-school seniors knew little about personal finance. On a multiple-choice test that covered credit-card use, taxes, savings, and the like, the teens answered only 57 percent of the questions correctly, on average.

That may well reflect an absence of solid financial teaching in the home. "Many parents just don't talk about money," says Carol Wilson, a financial adviser in Salt Lake City. "It's hard for kids to become good money managers if no one has taught them how."

Feed your preschooler some money basics

Wilson and others recommend an early start for money talk between parents and children. Your toddler begins learning about money from what she observes during visits to the store. When she reaches age 3 or 4, you should be explaining some of your shopping decisions: 'We're buying peaches today because they're on sale," or "We're using coupons from the newspaper to help pay for our cereal."

Let your child help you put items into the cart and unload them at the checkout counter. If he's always asking you to buy him a treat, give him a small amount of money each week (a dollar is enough, says Wilson) to make his own purchase. Direct him toward appropriate items he can afford. Then let him give the money to the cashier and receive the change. Even if he can't count beyond 5 or 10 at this point, he'll begin to understand how money works.

At home, teach your preschooler to distinguish among pennies, nickels, dimes, and quarters, and explain that each has a different value. Empty a coin purse on the floor and help her sort the coins into piles. Tell her how many of each kind adds up to a dollar. (She may be surprised to learn that a dime is worth more than a nickel, even though the nickel is bigger.) To reinforce the lesson, play "store" with your child, using her toys as "merchandise" and your spare change for payment.

Don't be surprised if she asks where the family's money comes from. If possible, take her to your medical office (or your spouse's workplace) and explain that you receive money for the work you do there. Even if you enjoy a six-figure income (information you probably shouldn't share with her yet), let her know that the family's money supply is limited and should be spent carefully.

Use an allowance to help your Child plan for expenses

By the time your youngster enters elementary school, he'll probably be lobbying for an allowance. Don't buy the argument, "All the other kids get one." According to a poll by Zillions, a children's magazine, only 43 per cent of 8- to 14-year-olds get an allowance. Another survey, by the authors of "The Kids' Allowance Book," showed that half of the youngsters in families it sampled got money for chores, birthdays, and holidays-or just by asking for it.

Kids who aren't on allowance don't have consistent income; it's difficult for them to set goals, budget, and save, because they don't know how much money they'll have each week or month. In fact, kids who get allowances do tend to save more, a recent Zillions survey found.

"An allowance is an excellent money-management teaching tool," says Carol Wilson. "Young children can be taught to save and budget for things they want to buy next week or next month. As they get older, they can work toward bigger financial goals, such as buying a car or subsidizing college costs."

Experts differ on when to start an allowance, how much to pay, and whether your kids should earn income by doing chores. Neale S. Godfrey, author of "Money Doesn't Grow on Trees" and "A Penny Saved," recommends an allowance as early as age 3. She believes children should receive a dollar for each year of age and be taught to apportion their money for spending and short and long-term saving. Godfrey also thinks allowances should be tied to chores, so that children see the connection between work and money.

Patricia Schiff Estess and Irving Barocas, authors of "Kids, Money & Values," say that by the time a child enters elementary school, he should start getting an allowance "large enough so some of it can be saved." They caution against linking the allowance to "chores, love, approval, punishment, and reward." An allowance has only two purposes: to help a youngster learn to manage money, and to let him share in the family's resources. Surveys show, nevertheless, that most parents who give allowances do tie them to chores.

How much allowance? One recent survey showed that youngsters age 8 to 9 average about $4 a week, while 10- to I 1-year-olds get about $5, and kids 12 to 14 receive $7 to $9 weekly. Many teens supplement allowance income with earnings from extra chores or part-time jobs. Parents can foster the idea of extra pay for extra work by posting a list of special chores, with proposed fees.

To calculate an allowance, start with the expenses it must cover. Young kids might be required to pay only for treats; as they get older, you might have them budget for such things as school lunches, movie tickets, clothes, and transportation. A fair allowance should be enough to cover "needs," with a reasonable amount left over for "wants." (You and the child will have to negotiate the definition of "reasonable.")

At some point, your grade-schooler is likely to blow some or all of her money. Janet Bodnar, author of "Dr. Tightwad's MoneySmart Kids," offers a rule of thumb: Don't give more than you can stand to see your kid squander. Though the child needs enough freedom to make money mistakes and learn from them, don't hesitate to restrict spending on anything you deem unhealthy or inappropriate.

Another challenge you're sure to encounter: what to do when your kid asks for an advance. just say No, Carol Wilson advises. "She has to learn to anticipate needs-and to experience the consequences if she doesn't," says the planner. Other experts say advances can be appropriate under special circumstances, but not on a regular basis.

Have your teen try on a clothing budget

Family physician Bob Jones and his wife, Lorraine, have seen firsthand how allowances can teach kids about money. When each of their two daughters turned 13, the Joness established a clothing allowance. Based on spending histories, the Scottsdale, AZ, couple determined how much each girl should be permitted to pay for clothes for a year. 'We took them to the bank to open checking accounts," says Bob. "Then we deposited onetwelfth of each one's clothing allotment into her account each month."

The daughters had to budget for all their clothes, and balance their checkbooks. "If they messed up, we wouldn't bail them out," says Jones. He recalls one bounced check and a winter when one daughter did without a warm coat-a hardship, since the family lived in Wyoming at the time. To keep their money responsibilities from seeming too onerous, each girl received a separate allowance-$1 per grade level in school-for discretionary spending.

When each daughter turned 16, her clothing allowance was expanded to include all personal items. At this point, the Joness also provided each girl with a $3,000 used car (titled in the parents' names) and picked up the insurance costs. But the youngsters first had to qualify for the insurer's good-grade discount and agree to buy the gas for any non-essential driving.

"Things have worked out really well," says Bob Jones. "Our girls became thrifty. They scouted out clothing sales and cruised thrift stores. We listened at the end of each year if they pleaded for more money, but we never had to increase their allowance by much."

The Joness' daughters are now 19 and 16. The older saved paychecks from her summer job to buy a computer for college. Her sister, a high-school junior, will save her allowance "like a skinflint," says father Bob, to pay for a plane ticket to visit a friend. Jones is satisfied that his daughters have become responsible about money. "I didn't want them growing up thinking it grows on trees," he says.

Get your youngster in touch with the family’s finances

In addition to teaching your child to be prudent with his money, share with him often how you're running your finances.

When he's old enough (by middle school), explain that your income is divvied among living expenses, investments, your retirement plan, his college fund, and other obligations. Tell him how you're planning ahead for the cost of next summer's family vacation and the dream house you want to build in five years. Don't emphasize how much you have, but rather that you must manage your money wisely to meet financial goals.

For some hands-on experience, let your youngster help with paying bills. Though he can't sign the checks, he can write in the amounts and prepare the envelopes. Be sure to show him your credit-card bill, explaining how much extra you'll owe if you don't pay it off each month. Exposure to your financial responsibilities will help him see the need to hone his own fiscal skills.

Ideally, by the time your youngster reaches high school, he'll already have a bank account and will understand principal and interest. If he's really money-smart, he may be investing on his own, perhaps in a youth oriented mutual fund. (One example is the no-load Stein Roe Young Investor Fund, which has a minimum initial purchase of $2,500.) By the time he graduates from high school, he ought to know how to balance a checkbook, budget and save, and avoid credit-card debt.

Unfortunately, many young people don't know these things. Naive college students, for example, are easy prey for card issuers. If you've been unable to teach your teen these money-management basics yourself, you may need outside help. Many of financial adviser Carol Wilson's physician clients have sent their 17- and 18-year-olds to her for counseling.

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Fewer kids would need her services, Wilson believes, if parents would make them get part-time jobs and resist the temptation to give them too much. 'Jobs give kids a sense of accomplishment and expose them to financial realities such as paycheck withholdings and income taxes," says Wilson. "Young teens can start with odd jobs such as babysitting or lawn care, and move up to jobs with an hourly wage as they get older."

Want to know more?

For more on teaching kids about money, see:

"Dr. Tightwad's Money-Smart Kids," by Janet Bodnar (Kiplinger Books, 1997).
"Money Doesn't Grow on Trees," by Neale S Godfrey (Fireside-Simon & Schuster, 1994).
"A Penny Saved," by Neale S. Godfrey (Fireside-Simon & Schuster, 1995).
"Kids, Money & Values," by Patricia Schiff Estess and Irving Barocas (Betterway Books, 1994).
"The Kids' Allowance Book," by Amy Nathan (Walker and Co., 1998).