Back to Basics in 2010 Part 3: Kids and Money
One of the best practical skills we can give our children is showing them how to handle money. Our country's current economic problems will pass at some point, but the changes wrought by our shift to a global economy will reverberate for years, and will likely result in lower income for many people.
We'll have to teach our children how to handle money carefully, save prodigiously, and take responsibility for finding ways to increase their income when they need to.
Those who are truly prepared for this new economy will be mostly unencumbered by debt, and therefore free to make changes in their careers without being forced to find another job immediately because of all the payments they have to make each month. They'll have bank accounts to live off of when they need to go back to school for additional training in order to become more marketable. They'll be able to take time off to start a new business, or to keep a current business afloat by not taking a paycheck for a while. Financial flexibility is of prime importance in the global economy.
Even now, having money in the bank and minimal expenses is what separates those with choices from those tied to a job and living in constant fear of layoffs. By raising money-smart kids, we give them the tools to handle both prosperity and financial difficulty; in the rapidly changing global economy, there are plenty of both.
Teaching your children to handle money wisely takes years. You can't just give them a few dollars and take them to the bank to make a deposit every once in a while. Children need a regular supply of money that they've earned, and they need to learn to divide that money between giving, saving and spending.
Giving is something a child can be brought up to believe he should do. Whether you're a Christian who tithes or someone who simply believes in helping others, your example of giving is the most powerful tool you have in teaching your child to give. Saving is especially important in uncertain economic times. And spending is the area where kids can learn the most about handling money. If they never learn how to spend responsibly, they won't be able to give or save much anyway.
Before they can spend, children need a source of money. There's a long-standing debate among parents about whether it's better to give children an allowance or make them earn money through specific chores. That's a personal decision. The important thing is to make sure they have regular money coming their way, so they can learn how to use it. (Some parents, when laid off from their jobs, decrease or temporarily stop their children's allowances. While they may do that for financial reasons, I think it's a great idea just because it helps children understand the realities of life and the necessity of having money put aside for a rainy day.)
Once you've given your children a way to earn money, let them spend it as they wish, even if you don't like their choices. Remember, little kids will make little financial mistakes, but with your help they can learn from them, so they don't grow up to be big kids (i.e. young adults) who make big financial mistakes.
Do let them experience the consequences of their purchases. If your daughter spends all her money on the impulse purchase of a doll, and then sees the fancy kite she's wanted for a long time, don't buy the kite for her out of pity. Explain that she could have bought the kite if she hadn't bought the doll.
Sometimes children spend money on items that are obviously junk. Years ago, my son used gift money to buy a plastic basketball net designed to be anchored to the foot of his bed. I pointed out that it looked pretty cheaply made, but he had to have it. It lasted one day before breaking in normal use; the experience taught him to consider the quality of an item and not just the exciting illustrations on the outside of the box.
Telling our children these things tends to go in one ear and out the other, but letting them have the experiences gets their attention!
Another concept that will help our children become wise about money is delayed gratification, (something some of today's American adults have not experienced in years, if ever). It's one of the keys to financial stability.
Did you know that the average American household with a credit card carries a credit card balance of over $10,000? That's more than twice the average credit card debt households carried 10 years ago. If that average household wanted to pay off that balance, it would take over six years of $200 monthly payments to do so....and that's assuming the household never charges another dime. Not very likely, is it? Most families will keep charging, and can keep doing so until one of their bread-winners loses a job. Once their debt has reached the point where they're living paycheck to paycheck, unemployment (even for a few months) becomes their biggest nightmare.
At the root of our society's problems with debt (both on a personal and governmental level) is that many American adults are unwilling or unable to delay gratification. When you buy something on credit, you can use the item immediately, before you've paid for it. Being able to have whatever you want without paying for it is what leads people to drown in debt, because they get used to having everything as soon as they want it, even if they can't afford it. The more they buy this way, the sooner they become overwhelmed by debt.
We can inoculate our children against credit card addiction by teaching them to delay gratification. A prime training ground for teaching this concept is the grocery store. Don't let your child eat anything that you haven't paid for yet. Never open a package for him to snack from while he's in the cart, and don't let him eat grapes or other produce that hasn't been weighed. While the latter is stealing (he's eating something you can't pay for because it's gone), even eating cookies out of a package that will be scanned is sending the wrong message. You're telling him it's ok to enjoy something before buying it. Don't give him that impression. There are an awful lot of adults suffering from that delusion because they never learned this important concept.
Reinforce this as your child gets older. When he sees something in a store that he wants very badly, and he fears it may be gone before he can save up the money for it, you may decide to give him an advance on his allowance so he can buy it. That's fine, but don't give him possession of the item until he's paid you back in full: put it on a homemade lay-a-way plan. Make him work for it; it will mean more to him. Should he lose interest in it before he's paid you back, he'll learn that he has to keep his promises.
It's also important to teach our children the concept of needs vs. wants. We live in a culture of excess that has confused a lot of people about the difference between needs and wants. Our parents and grandparents who lived during the Great Depression of the 1930s understood only too well that needs are basic food, shelter and clothing. But nowadays, "needs" include iPhones, GPS in our vehicles, and a personal bottle of water or cup of gourmet coffee to take with us everywhere we go.
Teaching our children to distinguish between true needs and wants will go a long way toward helping them handle the financial demands of living in a world where work can be sporadic, and money has to be stretched between jobs.
One way you can help your child distinguish between a need and a want is to pay only for his needs as he gets older. Of course you'll put a roof over his head, clothes on his body and food in his stomach. But why should you pay for an iPod, video games or the expensive brand of jeans everyone else supposedly has? Let him earn money to buy those things for himself so he can decide whether they're really worth it.
Here's another good reason to make your children pay for their own "wants": children whose parents provide for their every need and their every want often grow up to be young adults who need money from their parents in order to survive. A research study at the University of Michigan found that American parents' financial assistance to their children ages 18-34 now averages $38,000, or about $2,200 a year. That hurts the parents' bottom line (not good when they're trying to save for retirement), but it also hurts the children, making them dependent on their parents long after they themselves have reached adulthood.
If you have trouble getting your children (particularly your teens) to understand the difference between needs and wants, you might want to send them on a mission trip to an impoverished area of the world. Helping those who have very little in the way of material goods can provide young people with perspective. On our church's annual mission trips to Mexico, one comment heard from the young returnees each year is how little the people have there, and how much we have here in the United States. It really opens their eyes to how fortunate we are, and to the existence of people elsewhere who really are in need.
Why not train your older children to keep a small expense book, where they can write down everything they spend? This is a good habit to initiate, because it's hard to get a handle on your money when you don't know where it goes. Every time your child wants something he doesn't have the money for, he can look back in his expense book to see where his money went. This will jog his memory about the toys he bought and quickly tired of, hopefully leading him to make better decisions in the future.
Even Benjamin Franklin kept an expense book. Here's his take on it from his autobiography:
....keep an exact Account for some Time of both your Expences and your Incomes. If you take the pains at first to mention Particulars, it will have this good Effect; you will discover how wonderfully small trifling Expences mount up to large Sums, and will discern what might have been, and may for the future be saved, without occasioning any great Inconvenience.
Good old Ben raised a related issue in his very next paragraph:
In short, the Way to Wealth, if you desire it, is as plain as the way to market. It depends chiefly on two Words, INDUSTRY and FRUGALITY: i.e. Waste neither Time nor Money, but make the best Use of both. He that gets all he can honestly, and saves all he gets (necessary Expences excepted) will certainly become RICH: If that Being who governs the World, to whom all should look for a Blessing on their honest Endeavors, doth not in his wise Providence otherwise determine.
You'll give your children a great advantage by training them to be frugal. The word "frugal" has negative connotations for some people, but even 200 years ago, smart people like Benjamin Franklin knew that being frugal is an asset. Let's clarify what frugal means: being careful with expenditures, not buying things you don't really need, and taking care of what you do have. It doesn't mean being cheap; in fact, people who only buy cheap goods usually end up spending more time and money replacing those cheap goods when they fall apart. A frugal person can recognize quality, and knows that a quality item lasts much longer than its "cheap" counterpart.
So, how do you teach your children to be frugal? Some ways have already been mentioned, such as teaching them to distinguish between needs and wants, and helping them to keep track of their expenses. You can also take them to garage sales and thrift stores, where they'll learn that it's possible to find what you need and have money left over for what you want if you know how to get a good deal on both. Searching out good deals becomes like a treasure hunt. Used book sales at public libraries provide them with armloads of books for a small price. Buying a bicycle at a police auction is cheaper and a lot more interesting than paying full price at a store.
Show your children that frugal can mean fun. Take them to public parks and nature preserves instead of expensive kid-hangouts like indoor play arenas. Make pizzas with them instead of picking up the phone to order out. Let them pick out DVDs at the public library (where choosing several doesn't cost anything) instead of the DVD rental store, where you'll have to put a limit on them if you don't want to break the bank.
Raising frugal kids also means teaching them the activities referred to in that phrase made famous during the Great Depression: "Use it up, wear it out, make it do (or do without)." We live in an increasingly disposable society and have been trained to throw out belongings when they break instead of fixing them. But we can teach our children practical skills so that they know how to fix clothing and household items, and how to make use of leftover food that would otherwise go to waste. These are valuable skills for all young people to have that will also give them additional ways to support themselves when they're between jobs someday.
I should point out that the final part of that Depression-era phrase, "do without," is pretty much heresy in our society. We're told that we have a right to this or that. We hear that we'll achieve happiness only if we buy a certain item. But we're never told that we'll survive if we do without something. Yet we who are so overwhelmed with possessions that we have to rent storage garages to hold them all could certainly benefit from doing without some of our belongings. If we can raise our children to understand that material possessions are not the point of life, and that we can do without that which marketers tell us we must have, they'll be on the path to financial freedom, of which frugality is a major stepping stone.
Remember, our children won't be able to rely on Social Security to support them in their old age. They'll also need a nest egg to cover their living expenses when they're between jobs. For us, saving is important. But for them, saving will be essential. Socking away cash will be one of the greatest skills your children can have in the new economy.
Here are some websites you'll find helpful for teaching your children about money:
The Mint
Sponsored by the National Council on Economic Education (NCEE) and Northwestern Mutual, this site is aimed at young people, and includes clear and to-the-point information for kids and teens on handling money and credit responsibly. Includes "Try-It!", a series of interactive challenges, activities and calculators spread throughout the site.
Practical Money Skills for Life
This Web site includes a free newsletter and pamphlets, games, lesson plans, calculators and even a "banking tutor" that will help you teach your children about money.
Money Instructor
Try a free limited membership to see how you like their interactive lessons and wide range of worksheets. Be sure to check out their "Informational Resources" link, which has many good (and free) articles.