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How to Raise Money-Smart Kids

By Elizabeth S. Lewin and Bernard Ryan Jr.

Reprinted from the Your Money Magazine, Volume Sixteen/Number Six - October/November, 1995, with the permission of the authors and Consumers Digest Inc. Copyright 1995 by Consumers Digest, 5705 North Lincoln Avenue, Chicago, IL 60659. All rights reserved.


Kids and money is a hot topic. In fact, school districts are scrambling to add financial education to their curriculums. But the best place for kids to learn about money is the same as it's always been: at home.

MONEY IS A DIFFICULT, OFTEN TOUCHY, SUBJECT. Add kids to the equation and most people blanch. And because no two kids are alike in their attitudes toward money and many parents even disagree about finances, teaching children how to manage money turns into an emotional debate that most parents would rather avoid. Unfortunately, this avoidance can leave kids without the solid foundation they need.

Denise Chouinard of Watertown, Conn., is the mother of a 14-year-old daughter and 11- year-old twin boys. Her family is typical when it comes to the issue of money--they all differ in their opinions and attitudes: "My husband and I disagree about allowances. He says the kids shouldn't be paid to do chores. But I think chores are an incentive. Anyway, not even the twins are alike when it comes to money. Joshua expects to be paid for everything he does, but he can't save. He spends it in bits and pieces as fast as he gets it. But Jason's a saver--very conservative. He saved up $50 for his Nike shoes recently. Erica is good, too. She's now baby-sitting regularly. She hates it, but she likes the money. She's paid for some of her clothes and bought some gifts for friends on our family vacation out of her savings."

But regardless of these differences, the Chouinard family is ahead of most--the kids are already earning their own money and taking on some financial responsibility. Unfortunately, most kids lack a clear concept of how to manage money. And, in most cases, it's because no one has taken the time to teach them. The Joint Council on Economic Education examined youngsters' understanding of monetary concepts and found that kids, as a group, are appallingly ignorant. A heavy majority of high-school students, the Council observed, "couldn't define profit." Yet, a New York retail consulting firm predicts that teen-agers between the ages of 13 and 17 will spend $89 billion this year, with $34 billion of that amount coming from allowances. It seems clear that the only lesson most kids have learned about money is how to spend it.

What accounts for this lack of education in our society? "The money scene in many households is horrendous," says Anne Ziff, a family therapist in Westport, Conn. "What should be cool, calm communication becomes complex emotional anxiety and also a source of manipulation. Parents are often at opposite poles, and children get mixed messages instead of good financial experience." The result? In order to avoid the emotional strain, most of us duck the chance to teach our kids how to manage money.

Yet the lessons we dread are simple. For kids, money management can be divided into four basic principles: earning, spending, saving, and borrowing. The key to teaching kids is to start early using clear, practical examples. And, as your kids grow, so should the lessons and responsibilities.

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Earning Money. Anybody old enough to spend money should get an allowance from the family funds. Probably by kindergarten, certainly by first grade.

Why give an allowance? For one big reason: To help your youngsters learn how to manage money. An allowance is not to relieve you of paying for some of your children's wants or needs. It is the best and most hands-on method of teaching your children how to spend and save. By using their own funds, their limit becomes real and tangible to them- -they only get a certain amount each week, rather than having your seemingly infinite wallet--and it will quickly become obvious that they can't have everything they want.

One of the biggest misconceptions about an allowance is that some parents cannot afford to give their children "extra" money. However, if you look at an allowance from a different angle, every parent can afford it. An "allowance" is basically money that you're going to spend on your child anyway, just given in a different form. Instead of paying for things at the time your children want them, you pay them an allowance and let them decide how to spend the money. The ultimate goal of an allowance is to teach children to distinguish between needs and wants and to prioritize and save--a difficult lesson that will be needed throughout life. You can look at an allowance in three ways:

1. Hands Off. Take it from Grace W. Weinstein, columnist for Investors' Business Daily and author of Children and Money: A Parent's Guide: "An allowance is the single best learning tool. Kids need to handle it themselves, making their own mistakes." Once you've given an allowance, walk away from it. The money is no longer yours, therefore you no longer control it. It is now up to your child to decide how it should be spent or saved.

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2. Chores for Pay. Many parents believe that their kids should complete chores in order to receive their allowances--they don't want their youngsters to view an allowance as an entitlement. However, experts like Ziff don't buy that. "Children should understand that doing chores is part of membership in a family. In healthy families, all members contribute and all contributions are valued," she explains. "The grownups don't get paid for doing family chores--why should the kids? And a share of the family income is an entitlement, just as food, clothing, and shelter are entitlements to any family member."

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3. Compromise: Hands Off/Chores. With this approach you give children a basic allowance, but attach no responsibility for household chores. Instead, make sure you provide regular employment that will allow your kids to earn additional money: raking leaves, washing windows, mowing the lawn, washing the car, or doing heavy-duty cleaning in the cellar or garage. Musicians Valerie and James Denn of Wimberley, Texas, use this approach for 8-year-old Taylor. "He can use his allowance as he wants," says his mother, "and he earns money selling our tapes and CDs at gigs. By the time he was 6, he could make change, and he gets to keep 10 percent of what he sells. He's quite a salesman." The 8-year-old's understanding of monetary value is demonstrated by his skill at finding Game Boy games, which retail at about $30, in a local pawn shop for $10.

Only you can decide which approach--hands-off, chores for pay, or compromise-is the best for your children and your family. But whatever you decide, it is important to remain consistent.

How Much Allowance? To decide this, put several factors together: your children's age, how much their friends are getting, where you live--kids in Iowa enjoy a lower cost of living than kids in Connecticut--and how much of the total amount that you spend on your children you want them to start taking responsibility for. Talk with your friends who have children the same age, put the factors together, and experiment. You can always make adjustments later. You don't want your kids to be frustrated by too little or overwhelmed by too much.

Spending Plan. Should you have your kids make a budget? No. Instead, avoid that hated b-word and begin a spending plan. Help your children put a spending plan into effect the day their allowance starts. Make it clear that we all must be constantly aware of where our money comes from and where it goes. As you set up the plan, use your own list of expenses as an example--specially the ordinary items, such as groceries, gasoline, video rentals, birthday presents, laundry, and cleaning. Explain how some goods and services are needed and unavoidable and cost close to the same amount each time--gasoline, food, and shelter. Then explain how other goods are simply wanted and their costs can vary--a clever but inexpensive birthday gift instead of a more costly item, or a video once a week rather than three times a week.

Talk these expenses through with your children to decide what kind of spending they can be comfortably responsible for as you begin paying an allowance. But, as you assist your children in making a plan, it's important to remember not to dictate what they should do with an allowance. Instead, allow your children to tell you how the money will be spent-- even if, as 8-year-old Taylor's mother says, "Sometimes I have to bite my tongue."

Write It All Down. When constructing the spending plan, be sure to list everything your children are to be responsible for--in order to avoid confusion. School lunches? After-school snacks? Video rentals? Movies? Also, build in flexibility by adding a little cushion for what you didn't think of and for surprises--an unexpected birthday--party invitation, or a slumber party with the kids chipping in for pizzas. The cushion is valuable because surprises are inevitable, and it helps kids learn about choices. And, don't forget savings. Help your children decide on a sensible .amount to save each week--at least 10 percent of their allowance or total income.

Finally, encourage your children to donate some part of their allowance to charity or a good cause on a regular or occasional basis. Learning that money can do good things for other people is a useful lifetime lesson.

As your kids get older, their allowance and responsibilities should increase to prepare them for independence. When helping your older kids draft a spending plan, include some bigger-ticket items: clothing (maybe start with only one category, such as shoes or accessories), sports equipment, film and processing, or vacation spending money. You'll be surprised by the amount of responsibility your pre-teens can build into a spending plan. And mistakes? While it's certain that they'll make a few, it's also certain that they'll learn from them. And it's better to make small mistakes now than larger ones later. This is part of the reason for a weekly allowance.

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Make Savings Visible. Imagine the your very young child, say a 4- or 5-year-old, wants a particular toy. Rather than saying no, explain that "we're going to save for it." Cut out a picture of the item or draw one--even if you can't draw a straight line--and tape the picture to a jar. For a week or so, let your child put your loose change in the jar. When there's enough (you may want to add some folding money, if needed to speed up the process), let your child take the jar--literally--to the store to buy the toy. This is a practical lesson that will help children learn at an early age the importance of saving money. Then, as soon as the allowance begins, build a savings plan into the spending plan. Because your child has already experienced saving and its reward, a savings plan will not only be easier to include once his or her allowance starts coming, it will also make sense to the child.

What About Borrowing? Sometimes the built-in cushion or the savings won't be enough, and Taylor or the twins will ask you for an advance on next week's allowance. Whether or not you should give an advance is a controversial subject. Beverly E. Tuttle, president of Consumer Credit Counseling Service of Connecticut, says, "It just invites the attitude that has made America a debt society: Buy now, pay later. It runs counter to the notion of planning." On the other hand, life is unpredictable and you can't plan or save for everything. By giving an advance you can help teach your child about borrowing and interest.

If you do opt to allow your children to borrow money, you must make it a learning experience. For the very young, introduce the "visible IOU"--a glass jar in plain sight, marked IOU. He or she pays back the advance to the jar. Put the IOU jar beside the savings jar, so each time your child makes a payment, he or she is aware that the savings won't increase until the borrowed money is returned. And, charge interest. Maybe only pennies, but the borrower will get the idea--one pays a fee for borrowing money.

Balance Saving and Spending. Encourage saving, sure. But work it through the spending plan so your kids will realize that all saving is postponed spending. And knowing how to handle money means knowing when to hold onto it and when to spend it usefully.

Certified financial planner Elizabeth Lewin and Bernard Ryan Jr. are co-authors of Simple Ways to Help Your Kids Become Dollar- Smart (Walker).


  • Use specifics to make your point. Next the you're buying gas, point out the continually running meter as the tank fills. And, for example, when your first-grader is learning numbers, explain the process: "Remember last Saturday? It took 11 gallons and cost us $15.18. And then remember how we cut out some of those trips downtown this week? Because we drove less, it took only eight gallons when we filled the tank, and we saved more than $4." if your son or daughter actually participated in reducing your driving time over, say, a week, put some of the $4 you saved into his or her piggy bank.
  • Analyze allowance vs. chores. If you would normally pay an outsider for raking leaves or mowing the lawn, pay your child for doing the job instead. But don't set up dishwashing, bed-making, or taking out the garbage as tasks an allowance pays for. These should be part of the normal household responsibilities.
  • Don't miss a payday. Make the allowance as dependable as you expect your own paycheck to be--a regular amount on the same day each week. Never delay or miss a payment.
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  • Don't use allowance to correct behavior. If you need to hand out a punishment, never dock or withhold an allowance. That confuses both discipline and money-handling.
  • Help your child evaluate wants and needs. Make sure your children understand, even on the simplest terms, that some of the allowance is for things they need, just as some is for wants. For example, steer your 7-year-old into the habit of regularly buying his or her own toothpaste. Though a minor diversion of money from household spending to the child's allowance, it helps establish the basis for a lifelong understanding of managing money to achieve a sound balance of needs and wants.
  • Remember, time is long when you're young. If you're giving an advance on an allowance, don't stretch the repayment time. Two or three weeks is forever when you're 8 or 9. Also remember that the younger the child is, the shorter the time should be between starting to save and actually making the purchase--for preschoolers, just a few days. But for older kids wanting more expensive items, saving can stretch out longer.


Kids and Money: A Learning Guide for Children, Fidelity Investments. This kit, available free by calling 800/544-8888, supplies you with activity sheets for the kids and information on basic concepts; for preschool and up.

The Totally Awesome Money Book for Kids, by Adriane G. Berg; Newmarket Press; $10.95; 800/733-3000.

A Penny Saved: Using Money to Teach Your Child the Way the World Works, by Neale S. Godfrey; Simon and Schuster; $18.95; 800/223-2348.

Simple Ways to Help Your Kids Become Dollar-Smart, by Elizabeth Lewin, C.F.P., and Bernard Ryan Jr.; Walker Publishing Co. Inc.; $8.95; 800/289-2553.

Lifetime Book of Money Management, by Grace W. Weinstein; Visible Ink Press; $15.95; 800/776-6265.


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