7 Practical Tips for Raising Money Smart Kids
Have you ever wished that someone taught you more about money as a child? The sad reality is that many students graduate from college with a degree but unable to manage their money. Here are some tips to educate your children about money so they can better handle their finances in the future.
1. Run your own family credit union.
It’s a great way to teach kids about accounts, balances, interest, paychecks, automatic saving, matching contributions, and more — all in amounts and time-frames that kids can actually appreciate (unlike, say, the interest rate on your current IRA account — yawn). You can run your bank with pen and paper, a spreadsheet, or one of the many online solutions available.
2. Make a budget-based allowance.
Instead of giving your kids an allowance amount that’s arbitrary (e.g., a dollar per year of age) or based on a comparison to the kids next door, give them an allowance that is based on a very simple budget. In other words, make a list of the typical things you would expect your kids to buy for themselves over a period of time (plus how much you would expect them to save and give), and calculate an allowance amount to match those clear expectations. As your kids mature, extend the budget to cover more and more areas of spending like clothing. This approach helps insure that an allowance is a personal finance teaching tool rather than an entitlement.
3. Bill share with your kids.
Teach your kids about regular bills and how to pay them on time. Set up a simple family billing system to charge your kids for their monthly share of a cell phone plan, online entertainment, gaming subscriptions, or any other recurring family expense.
4. Mandate a teen emergency fund.
Stuff happens. When it does, you invariably have to cough up some unexpected dough to deal with it. That’s what emergency funds are all about. The sooner your kids learn to maintain that cushion, the better equipped they’ll be for managing life’s inevitable financial bumps. Require your teen to maintain a separate emergency account and set aside savings until it reaches several hundred dollars. When that first parking ticket hits, your teen will be ready to deal with it responsibly rather than relying on you to pick up the tab.
5. Cover the bargain price, not the premium price.
Tell your kids you’ll cover the cost of the bargain or used version of an item. If they want the premium or new version, they’ll have to pick up the additional cost from their own savings. If your kid finds an item cheaper than your target price, let her pocket the difference. It’s a great arrangement for building comparison shopping skills and keeping entitlement at bay. You might be surprised to find how much your kids enjoy the challenge of finding a good bargain.
6. Make a parent loan for a big ticket item.
Teach your kids how to manage loan payments by arranging parent financed loans for big ticket items like laptops or smartphones. Direct a portion of their allowance, chore or job payments to paying off the loans each period. By making regular payments over an extended period of time, not only will your kids appreciate the cost of expensive items more, but they’ll take better care of them too. Win. Win.
7. Start a “Family 401k” program.
Individuals are more on the hook for their own retirement savings than ever before. Your teen has copious amounts of that one commodity that makes saving easy: time. As soon as your teen earns that first paycheck, open up a Roth IRA for her, offer to match some or all of her earnings, and invest in something smart like index funds.