Mastering Money

Summer Money For Kids

Well, here we are at summer time.  I can't believe that five months have gone by in the New Year already.  School is out for summer and this is an excellent time to teach your children about money and how it works.  What makes the learning process about money so unique is that it doesn't have to come out of a text book; the BEST money lessons come from LIFE lessons, so the "student" doesn't feel the traditional "pangs" of the typical learning process.

The first step is learning that money doesn't simply appear.  Something has to be traded for it.  Usually time and labor are the bartering tools for money.  If your children are too young to be slinging hash at the local diner, then I would suggest giving them chores to do around the house.  That may already be happening; however, in the summer, there are more things to do that don't normally occur during the rest of the year, such as mowing the lawn, tending to the flower beds, and washing windows, just to name a few.  Pay them for their labor and reward them for their level of performance.  They will learn the difference between doing a job adequately and doing a job superbly.

Young adults will begin to grasp the relationship between time and money.  Most people say "time is money;" I think differently:  money is time.  Simply put, we are trading our time for money and time is what we are sacrificing for the money we earn.  The earlier a person realizes this concept, the better prepared they will be when they get their first job outside of the home as they realize that the commodity of time is something that cannot be replaced, so that time which is given up for money is time that is gone forever.  Thus, the money earned for that time that is gone is precious and should be spent accordingly.

That brings me to the next step:  spending money.  Now that it has been earned and has an intrinsic value, the spending part will feel differently since the money has been earned by THEM.  Teach them to be charitable.  Perhaps 10% of their earnings can go to the charity of their choice; this will teach them that there are people in the world that are worse off than they are.  This is a great eye opener for the child that complains they have to work for their spending money.  The next thing is that they should save 10% of their earnings.  This will teach them that they shouldn't spend all of it and that an amount should be put away for a time when they can't earn it, such as when school starts again and they don't have the commodity of time to trade for money.

Some experts go out on a limb and suggest that children should pay for some necessities, such as toothpaste, so not only they see how much it costs, but also as a type of "tax" on their money.  After all, as an adult, we don't take home EVERYTHING we make since some of our earnings go to Uncle Sam.

This leads into setting priorities.  As children learn about the choices they have to make with their money, they will begin to set priorities since they have only so much to spend, they will realize they can't buy everything they want.  A great way to exemplify this would be on vacation.  Let your children decide whether they want to stay in a posh hotel or participate in a unique activity while traveling.  Let them see the cost of transportation on a trip, the cost of food and accommodations, and the cost of riding a llama in the Peruvian countryside.

The earlier we teach young folks about money and how it works, the better off they will be for life.  Understanding how money works is not just on the spending side, but getting a handle on how it's earned is of paramount importance.  Eventually the young person will see that they are merely trading their time for the things they buy, just like adults.

Teaching Children Personal Finance

On August 28th I wrote a blog about setting up an allowance for children as a tool to teach them how to handle money.  At the age of eight, through a life-changing event, I embarked on a journey of learning about money and how to properly use it because it was no longer plentiful.  Financial literacy is not taught in homes, and only recently has it began to emerge as part of the school curriculum.  If we don't teach our children, they will become tomorrow's bankruptcy statistics.

Here are some suggestions on starting down the avenue of teaching personal finances at home:

1. Begin by giving your child an allowance.  Your child should earn their allowance; this is NOT something that should be doled out indifferently.  For suggestions on how much to give, please check out my blog, Allowances as a Teaching Tool.  This will allow your child to handle their money; when it's theirs, they will tend to protect it.  Once your child realizes the allowance isn't an infinite amount, they will learn how to prioritize. 
2. A budget is the best way to learn how to prioritize.  First, your child should set a certain percentage of their allowance for charity and savings.  I suggest 10% of their allowance for each.  The remaining 80% is for them to spend in any way they wish; this will allow them to keep track of their spending as they are spending.
3. Running errands is the best way to show your children how much things cost.  Take them to the grocery store and let them see the price of common items.  Give them challenges, suggest they only have a certain amount to spend, and they have to put dinner on the table.  Let them figure out how they are going to purchase all the items, including ingredients.  Will this allow them to get other items, such as potato chips and Oreos (my favorite)??  Let them see the price of dry cleaning.  Let them see how much it takes to fill up the car, SUV, or whatever you drive, with gas. That should be a real eye-opener.  This will allow them to see how much it costs just to keep a household running.
4. While at the grocery store, make them compare prices.  What is the best buy?  Is it the best nutrition for the money?  What is the cost per ounce for the dishwasher detergent?  Is the cheaper brand the better of the choices?
5. Teach them about credit cards and what happens if you don't pay the balance.  Teach them about interest, what it can do to you and what it can do for you.  They will realize if they purchase things for which they don't have the funds, they have to pay more for them in the form of interest charges; if they have funds saved, they will earn interest on those funds.  Great lessons!!!
6. Explain the difference between needs, wants and desires.  They example I always give is:  One needs transportation, one wants a car and one desires a Porsche.  In America we tend to mow the lawn with a 747; we tend to over-buy our needs.  Teach your children perspective and to keep that perspective.  Congressman Sam Johnson said, "If we don't teach our kids the difference between an 'need' and a 'want' - Madison Avenue will."

I believe financial literacy is a life skill, just like reading, writing, good manners, and communication skills.  Teaching our children about the proper use of money will:

• Prepare them for unexpected events
• Prepare them for retirement
• Foster discipline
• Create more sense of delayed gratification in our instant gratification society
• Engender responsibility

Let me hear from you as your journey of teaching your children unfolds.

Allowances as a Teaching Tool

There was an interesting article in the Weekend Journal (the Saturday, Sunday edition of The Wall Street Journal) about all the decisions that go into setting up an allowance and for what items it should be used.

Many agree its best to pay an allowance as soon as the child understands that money is the vehicle that buys things, say around the age of three or four.  In many workshops I've conducted, the general rule-of-thumb is to give $1 per week for every year of age, so if the child is five, they receive $5 per week.

Now, one must decide what the child has to give up for the allowance?  Is it time?  How much time should that be?  Is the allowance for chores around the house?  Is the allowance for doing homework?

The next issue is just exactly what is the allowance for?  Should the child learn to give to charity?  If so, how much should that be as a percentage of the allowance?  Should the child save?  What about clothes?

Personally, I like the idea of $1 per week for each year of age.  I guess I've heard it often enough that it makes sense.  In a few years, we may have to worry about inflation; that $5 for the five-year-old may not be enough.  I also feel that the child needs to do some sacrificing in order to receive the allowance.  It shouldn't be given gratis.  However, it should NOT be for doing homework, as that is expected.  The allowance has to be earned in the sense the child has to sacrifice their time in order to receive it; that way they equate what they're giving up in terms of time in exchange for the dollars.

As the child gets older, their responsibilities grow, and so should their allowance.  Perhaps when they reach the age of seven and are invited to birthday parties, they can pay for the gift out of their allowance.  When they get to be teenagers they can start receiving an additional clothing allowance from which they can buy their own clothes, and learn to make decisions on those purchases.

I'd love to hear your thoughts and comments on allowances for children.  What worked in your household???