Child and Money.

Rich Parenting , Poor Parenting ! 

From small allowances for young children to bank accounts and credit cards for college students, parents have many questions and various beliefs about how to try to teach their children about money. Like most parenting issues, the key to success is to have a clear sense of purpose about what you are doing and to involve your children in the decision-making.

Let’s do this chronologically. With preschool children, don’t even bother. Just pay for things as you go along. The issues are too abstract for most very young children to grasp. In fact, I wouldn’t begin to address “paying” children until at least age 8.

Allowance 

The word “allowance” would seem to imply that the money given to the child will allow the child to make purchases. Is it in fact “free money”? Can the child really spend it on anything? Should the child have to save some of it or give some of it to charity, two things that parents often see as part of teaching children about money? Of course, all this gets tied into the big question: How much to give?

The answers to all of the above vary according to the age of the children. In the beginning, (whether you start at 8 years old or earlier), my suggestion is that a small amount of money should be given with no strings attached just to allow children to begin to experience the sense of having their own money. Don’t give it with lectures. Just say you are giving them some amount  each week that they can spend on whatever they would like.  It’s interesting to observe this unfettered opportunity and note differences among children. Most will spend the whole amount on goodies of one sort or another. Some will actually hold onto some, even all of it.

Negotiate Some Financial Responsibility at Age 10

As the children get a little older, probably about 10, this is a good time to begin to negotiate financial responsibility.

Ask them how much they think they need or should receive. Again, parents are often surprised when children don’t ask for unreasonable amounts of money. Then, again, some have no clue.

How much you actually give will be influenced by a few factors, including family finances, your own spending pattern and awareness of what your peers are doing.

It is much better than to simply take away from what you are giving. That teaches a child nothing except that you have negotiated a financial arrangement that isn’t really honest. What I mean is that to tell your child “Here’s $5, but I’m making you put $1 in the bank,  really means you are simply giving the child a $4 allowance!

With so much media attention given to tragedies, children are more conscious than ever about the misfortune that befalls many in the world around them. There are lots of wonderful stories of children contributing to fundraising causes. It is so much more meaningful for your child to offer to donate part of his allowance out of his own desire to help someone. Or you can simply narrate your incidence of helping someone around you. 

But don’t force giving. If you model it and explain the values embedded in it, most likely your child will be charitable at some point in his life.

Teach them to Live on a Budget

Around 12 or 13, I think there should be a substantive change in the concept of allowance. This should be the beginning of meaningful lessons about managing money. Now is the time to actually work on a budget with your child that includes essential items such as clothing and entertainment.

There are many challenges faced by parents at this stage. Are you really going to allow your child to make her own decisions?

What are you going to do if she spends too much in one area and lacks money in another ? 

Once again, these issues need to be addressed ahead of time. If you are going to retain some control, discuss this upfront and workout a process for giving approval. But don’t control too much.

The expectation should be that your children will make mistakes (we do) and you want them to learn from their mistakes rather than try to prevent them.

Should children invest? Yes ! 

As you can see, the process of teaching children financial responsibility often forces parents to address their own financial responsibility… or lack of! Which leads me to my favorite money issues and what I believe, in the long run, is the most important part of teaching children about money: Investing.

Yes, you should get your children into the stock market. The earlier the better. Preteens and teens can be enthralled with the idea of becoming a millionaire, which is relatively easy to achieve if you invest earlier in life.

It is a shame most schools don’t teach this, although virtual investing competitions are growing rapidly. But there’s nothing like owning a stock such as Hot Topic, where your daughter may buy her favorite clothes, or Electronic Arts, a video game company. The most crucial part of your parenting should be teaching them how to use money to make more money.

So it is my hope that parents who take the responsibility of teaching their children about money matters seriously will be forced to address their own money issues first. Remember, children will model what they see more than what they are told.