Financially speaking, it's a tough time to be a parent. Many companies have frozen pay raises and bonuses while others have faced layoffs. So if you're feeling guilty because you cannot buy your child that video game system he desperately wants for Christmas, don't. In fact, now is the perfect time to teach your kids some valuable financial lessons.
Kids are surprisingly aware of what's going on in the world. And if they don't know that times are a little bit tough and that Mom and Dad are having to watch their spending, it's time to tell them. Sheltering kids from financial realities does them no favors.
A good grasp of personal finance is one of the most valuable life skills a person can have. In many ways, a long-term financial slowdown can be a blessing in disguise. It forces more families to make a budget and stick to it. It forces them to be conscious about how they handle money. That's good for kids. It shows them how the world is supposed to work.
Tell them the truth. Kids are perceptive. If you've been acting anxious and on edge lately, they've noticed. Rather than let them wonder why you are constantly talking about money, explain what's going on.
Obviously, you don't have to get into the details of your stock portfolio, but you can explain that what's going on in the economy means that some changes will have to be made at home. For instance, they may have to understand that the holidays will be leaner this year. Helping them understand what it all means will lessen the anxiety they feel.
Explain to them how much things cost. Kids don't have a very good grasp on what things cost. A great hands-on way to open their eyes is to take them on a "money tour" around the house. For example, kids might not understand that hot water costs more than cold water, or that bumping up the heat results in higher power bills. This exercise will teach them how they can conserve and thus help the family save money. You can also pile up all of the bills for the month and have them look at the amount on each one.
Realize that kids learn what they live. It may sound like common sense, but you are your kids' most influential teachers. When you ring up a barge-load of credit card debt, take out exorbitant mortgages or car loans and fail to save anything, that's what your kids come to see as normal.
Deprogram them. Kids are constantly bombarded with 40,000 commercials that the American Academy of Pediatrics estimates the average American child sees each year. What they aren't bombarded with is knowledge concerning how to manage money effectively. And while schools are increasingly incorporating money issues into the existing curriculum, the broader concepts of personal financial management still aren't taught. Frightening though it may be, some schools rely on free "educational" materials from the likes of VISA and MasterCard!
An allowance is a great teaching tool. You can find great ways to help your kids earn their allowances rather than just have the money handed over to them. A well-implemented allowance program can mimic many money matters that adults face every day throughout their lives. From recognizing the need to earn the green stuff to learning how to responsibly and intelligently spend, save, and invest their allowances, children can gain a solid financial footing from a young age.
A great time to start is when your kids reach the five-to-seven age range. Start them on some household chores, and explain to them that they will be paid for their work. Of course, the size of the allowance should depend, in part, on what sorts of expenditures and savings you expect your child to engage in and, perhaps, the amount of work you expect your child to perform around the house. I recommend paying $0.50 to $1.00 per year of age.
Start them saving and investing early. After they start earning allowances, have your kids save a significant portion (up to half) of their allowance money toward longer-term goals, such as college. As they accumulate more significant savings over time, you can introduce the concept of investing.
Reduce their exposure to ads. The primary path to reduced exposure to ads is to cut down on TV time. When kids are in front of the tube, have them watch prerecorded material. When an ad does sneak under the radar and set the kids to begging, address it. Explain to your kids that there's never a good time for frivolous impulse spending, but it's especially harmful when money is tight.
Find entertaining ways to teach good money habits. For younger kids, consider age-appropriate books like The Berenstain Bears Get the Gimmies. For late-elementary-school-aged kids, Quest for the Pillars of Wealth by J.J. Pritchard is a chapter book that teaches the major personal finance concepts through an engaging adventure story.
Another great opportunity to teach your kids about personal finance and get to spend quality time with them in the process is through board games. Monopoly and Life are two games that are very effective at getting your kids to think about the best way to manage money and plan whether they should spend or save.
Family shopping trips, whether for groceries or something else, are likely to be your kids' first encounters with spending. They'll see you make decisions based on what the family needs, watch you use coupons when possible, and observe how you pay. These trips are a great time to teach them lessons about money and the value of product research and comparison-shopping.
Take your kids to the mall and ask them to pick out three pairs of shoes that they really like without looking at the prices. Chances are that they'll come back with at least one expensive pair and at least one affordable pair. This is a great way to show them that just because they really like something, it doesn't necessarily cost a lot of money. Demonstrate how to identify overpriced and shoddy merchandise.
Introduce the right and wrong ways to use credit and debit cards. Those plastic cards in your wallet offer a convenient way to conduct purchases in stores, by phone, and over the Internet. Unfortunately, credit cards offer temptation for overspending and carrying debt from month to month.
Encourage older kids to get a job. Your child's initial exposure to the work-for-pay world can start with something as simple as a lemonade stand. Depending on age, he or she might do yard work for neighbors or offer babysitting services. And the fact that we're in a recession makes it all the more appropriate for older kids to "help out" by getting a part-time job, especially to fund unnecessary purchases like DVDs or cool clothing.
By holding down such jobs, kids can learn about working, earning, saving, and investing money. It also provides welcome relief for parents to not continually be the source of spending money. Working outside the home does raise some safety issues, so by all means be involved in ensuring that your child has a safe work environment.
Besides the learning opportunities it presents, there's another positive to the recession. It forces families to be more thoughtful about how they spend their time, and this often leads to the stunning realization that money really doesn't buy happiness.
Often, all those unnecessary things we buy for ourselves and our kids are simply distractions from the people we love. They send the message that it's necessary to spend a lot of money in order to have a good time. It's not, of course. The best things in life (friends, family, quiet evenings at home just being together) really are free. Sometimes it's good to be reminded of that.
Eric Tyson, MBA, is one of the nation's best-selling personal finance book authors and has penned five national bestsellers. His Personal Finance For Dummies (Wiley) won the Benjamin Franklin Award for the Best Business Book of the Year. He is also the author of Investing For Dummies and co-author of Home Buying For Dummies and Real Estate Investing For Dummies, among other titles. To learn more, please visit www.erictyson.com.
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