We know kids can't pick up good money management skills by osmosis, so it should go without saying that they can't do it in a vacuum either. Kids need to actually handle real money to get the hang of doing it. And, the earlier they do so the better. Children as young as four can start learning how to divvy up available funds into different categories. Remember, part of what you are doing is instilling in your kids a savings habit -- a habit they will carry through adulthood. The system I like best is to divide funds as they become available into four categories: long-term savings, short-term savings, spending and sharing or charity. Ten to fifteen percent of the funds should go into long-term savings, 20-25% into short-term savings, 10% to charity and the remainder goes to spending. This division of funds should apply to all of the money your child receives, whether it is her allowance, a gift, found or earned from a part time job or business.
I also encourage you to reward your children for a job well done. If they've done a good job using their money wisely, slip them a little extra "interest." If they've been saving for a big item and doing a really good job of it, give them that extra cash to push them over the edge (not literally!). You can set up a "bonus" system, where you periodically review your child's "performance", including everything from doing his chores to his grades to his savings rate. Treat it as you would treat an employee review. Though you shouldn't give money specifically for doing chores or getting good grades, it can be very motivating to receive a little extra cash just for being an all-around good kid. This should be a positive experience, so focus on the stuff your kid has been doing right, maybe mention that he could work on a couple of other things and then congratulate him for turning into such a great person. I'm getting teary-eyed just thinking about all that positive karma.
The separate funds should be kept in a special, conspicuous place. It can be a piggy bank, envelope or a jar. Whichever container you choose should be something that your kids can easily see on a regular basis. You want them to watch those savings grow or the spending stash deplete. It is human nature to love collections of things, and this is particularly true of children. They will be inspired to save more by watching their savings jar getting fatter over time. I also suggest that you make the container itself interesting. Have your kids paint a jar, decorate an envelope or make their own piggy bank. It is not only a fun way to spend a rainy afternoon, it also shows your children that their money is important and deserves to be treated as such.
Once your children have saved an appreciable sum of money, you will want to open a savings account for them. Technically, children can't own property, so opening a savings account for a minor is not as straightforward as opening one for yourself. These options are worthy of a separate column, so I will leave that explanation for another day. If you are ready to open an account for your child and you simply cannot wait for that column, you should speak to your lawyer, banker or accountant to determine the best option for your family. I can direct you to Young Americans Bank. It is a bank for people under age 22 and offers a wide variety of financial services for the school aged crowd.
Next week, we'll talk more in depth about each of the four money categories.
Ms. Kletzman is a former family law attorney who is now a financial writer. She also has a web site that teaches parents how to teach their children good money management skills. Ms. Kletzman is the author of two money saving tip books entitled "101 Ways to Improve Your Bottom Line" and "80 Ways for Kids to Improve Their Bottom Lines".
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