Giving children
allowances is a good way to begin teaching them how to save money and budget
for the things they want. How much you
give them depends in part on what you expect them to buy with it and how much
you want them to save.
Some parents
expect children to earn their allowance by doing household chores, while others
attach no strings to the purse and expect children to pitch in simply because
they live in the household. A compromise might be to give children small
allowances coupled with opportunities to earn extra money by doing chores that
fall outside their normal household responsibilities.
Piggy banks are
a great way to start teaching children to save money, but opening a savings
account in a "real" bank introduces them to the concepts of earning
interest and the power of compounding. While children might want to spend all their
allowance now, encourage them (especially older children) to divide it up,
allowing them to spend some immediately, while insisting they save some toward
things they really want but can't afford right away. Writing
down each goal
and the amount that must be saved each week toward it will help children learn
the difference between
short-term and long-term goals. As an incentive, you might want to offer to
match whatever children save toward their long-term goals.
Teach children
how to compare items by price and quality. When you're at the grocery store,
for example, explain why you might buy a generic cereal instead of a name
brand. By explaining that you won't buy them something every time you go to a
store, you can lead children into thinking carefully about the purchases they
do want to make. Then, consider setting aside one day a month when you will
take children shopping for themselves. This encourages them to save for
something they really want rather than buying on impulse. For
"big-ticket" items, suggest that they might put the items on a
birthday or holiday list. Don't be afraid to let children make mistakes. If a
toy breaks soon after it's purchased, or doesn't turn out to be as much fun as
seen on TV, eventually children will learn to make good choices even when
you're not there to give them advice.
Older children
(especially teenagers) may earn income from part-time jobs after school or on
weekends. Particularly if this money supplements any allowance you give them,
wages enable children to get a greater taste of financial independence. Earned
income from part-time jobs might be subject to withholdings for FICA and
federal and/or state income taxes. Show your children how this takes a bite out
their paychecks and reduces the amount they have left over for their own use.
Teenagers should
be ready to focus on saving for larger goals (e.g., a new computer or a car)
and longer-term goals (e.g., college,
an apartment). And while bank accounts may still be the primary savings vehicles
for them, you might also want to
consider introducing your teenagers to the principles of investing. To do this,
open investment accounts for them. (If
they're minors, these must be custodial accounts.) Look for accounts that can
be opened with low initial contributions at institutions that supply
educational materials about basic investment terms and concepts. Helping older
children learn about topics such as risk tolerance, time horizons, market
volatility, and asset diversification may predispose them to take charge of
their financial future.
If older
children (especially those about to go off to college) are responsible,
consider getting them a credit card. Most major credit card companies require
an adult to cosign a credit card agreement before they will issue a card to
someone under the age of 18 (as of February 2010, the Credit CARD Act of 2009
will generally require this for consumers under age 21). Ask the
credit card company for a low credit limit (e.g., $300) or a secured card. This
can help children learn to manage credit without getting into serious debt.
Also:
• Set limits on
the card's use
• Make sure
children understand the grace period, fee structure, and how interest accrues
on the unpaid balance
• Agree on how the
bill will be paid, and what will happen if the bill goes unpaid
• Make sure
children understand how long it takes to pay off a credit card balance if they
only make minimum payments
If putting a
credit card in your child's hands is a scary thought, you may want to start off
with a prepaid spending card. A prepaid spending
card looks like a credit card, but functions more like a prepaid phone card.
The card can be loaded with a predetermined amount that you specify, and
generally may be used anywhere credit cards are accepted. Purchases are
deducted from the card's balance, and you can transfer more money to the card's
balance whenever necessary. Although there may be
some fees associated with the card, no debt or interest charges accrue;
children can only spend what's loaded onto the card.
One thing you
might especially like about prepaid spending cards is that they allow children
to gradually get the hang of using credit
responsibly. Because you can access the account information online or over the
phone, you can monitor the spending habits
of your children. If need be, you can then sit down with them and discuss their
spending behavior and money management skills.
