Kids and Money

by Paul Petillo

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The first thing everyone should know about money and kids is simple. They learn by watching you. Your attitudes about money and especially your child's ability to get you to spend it on them have the single most influential effect on your children.

I was at a baseball game quite some time ago and witnessed a typical scene with a kid, his dad, and money. The young player was not batting during the inning so he left the dugout, sought his dad in the stands and hit him up for $5. The father, without hesitation, reached for his wallet and gave his son the money. No please, No thank you. Simply Dad as ATM.

I wondered how the Dad would settle this with his son although I suspect that it was just another money lesson lost.

So once we have children, we seem to be bound and determined to do better by our kids than our parents did and in doing so, we miss many opportunities to teach our kids about money right from the beginning.

The first three things we need to do as parents is:

  1. Learn to say no. Young children are living in a short-term world where events are as easily forgotten as they are encountered.

  2. Understand how much money you actually have and do not spend money you do not have on your kids. This is sort of like buying love. Kids love parents most when they are fair and consistent. Being fair with yourself first will teach your kids that you understand your place in the world.

  3. Reward good behavior with small gifts so they understand the value of what they have done. I used to call at the end of the workday and ask both my wife and my toddler if he was good. The reward in his case was a 99-cent Matchbox car.

Kids, however, need to learn about money from the first time they ask for something at the store. The hardest concept you can teach a child is money management. The cost of what they want is hard for them to comprehend unless they understand that money given to them in the form of allowance is meant for these types of purchases.

There are three simple ways to determine how much allowance a child should get:

  1. Do you give yourself an allowance each week? If you don't you should and the percentage of that allowance against income should be the same for your child. Only, take it from your allowance. For instance, if you have twenty bucks to spend and it is 10% of your spendable income for the week, after bills are paid, give your child 10% of your allowance or $2. Use this dollar amount as a base.

    This is not payment for doing chores, however. Chores are done as a regular part of life at the home. Making the bed, taking out the trash, etc. is part of what it takes to run a family.

  2. Age is definitely a factor. Youngsters of two or three, who have no concept of money, are just as happy with a quarter. As they get older and their understanding of money increases, so should their allowance. More than just saying no at this age is the all-important saying, "I can't afford it" or "Mommy doesn't have money for it." If they suggest you just put it on the card, it is time to have a serious conversation with yourself and how you treat your wants and needs. But never pass up the opportunity to explain how money works.

  3. And speaking of wants and needs, once a child understands that his or her allowance falls short of their desires, it is time to instruct them on the fine art of saving. Be firm and hold your ground if they fall short of their funding. Offer other jobs such as helping with yard work or housework above and beyond regular chores that pay extra.

Grace W. Weinstein, columnist for Investors' Business Daily and author of Children and money: A guide for parents wrote that "An allowance is the single best learning tool. Kids need to handle it themselves, making their own mistakes."

This is where you as a parent come in. Children are a highly perceptive group. They learn by watching. They hear you talk about money and are often in tow when you spend it. They see you agonize over the bills, and even before they know why, they can equate money with your reaction to it. Do you buy what you want when you want it? They expect the same. Are you careful with your money? Expect that they will be as well.

Allowances can help develop those money saving and spending habits that will carry them throughout their lives. Just remember, kids are individuals. No two are alike, even in the same family. One child, despite your best efforts, might be a spendthrift, while another might be the exact opposite. Kids, just like adults, want regularity when it comes to allowances. Give the allowance at a specific time and be sure to be consistent. If it is something you pay them at the beginning of the week, give it to them every week at the same time.

Older kids might need clothing allowances, which can be placed on debit cards. This will teach budgeting, with any luck, but will not allow the child to spend more than they actually have. Limited balance credit cards work the same way.

Let them learn that the week is often longer than their money supply. It is an unavoidable life lesson.

The Joint Council on Economic Education examined youngsters' understanding of monetary concepts and found that kids, as a group, knew very little about money or how to handle it. 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.

This summer, kids will be working and earning money for themselves. This is an excellent time to teach them the value of savings before they spend it, much the way adults do with their 401(k) plans at work. When I was working for the first time, my parents took half my paycheck and set it aside. This proved to be quite the sizable nest egg, a lot of which went to financing an extended cross-country trip after graduation. Forced savings is the best way of teaching a child how to "pay themselves first." The remaining spendable money teaches them the value of a budget.

It is also a good time to explain the power of compounding and the rule of 72. It was Albert Einstein who discovered the rule and referred to it as "the greatest mathematical discovery of all time." It works like this:

Suppose your youngster deposits $50 from their birthday money in an interest bearing account. Suppose they earn (and there was time when you could earn this much, but for demonstration purposes) 4% interest from the bank. 72 divided by 4 is 18. So in 18 years, their $50 would double to $100 if they don't make any deposits. It can also be used to determine loans, such as:

If they borrowed $100 from you and you charged them 6% interest. 72 divided by 6 is 12. That would make the amount they owe you $200 in twelve years.

So it is important to remember that allowances are the first step in teaching a child good money management.

Odd jobs, paid at market rate, are the second way. Jobs, with a portion of the net income saved by the parents, are the best way to teach long term saving and real time value of money.

And you are the best example of good money management. Once a child is old enough to understand the value of the dollar, a parent should never miss the opportunity of talking about money, teaching them how it works and what it is worth.

Paul Petillo is the Managing Editor of at Email Paul at or call 503.313.5252

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