How to Raise Money-Smart
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.
LOOK FOR ANSWERS TO THESE QUESTIONS
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
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
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
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."
Beginning of Article
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
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
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.
Beginning of Article
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
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-
- 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.
Beginning of Article
- 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.
FOR FURTHER READING...
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.
Kids' Money Home Page