My 13-year-old son recently went on a school trip to Washington, D.C. Before his departure, I sat him down and talked about his trip budget. Since he would be responsible for his own lunches, I gave him $20 for each day of the trip, which I felt was generous and would allow extra for souvenirs and the requisite gift for his sister (her request, not mine).
I wondered if we should put the money in separate envelopes so he’d have one for each day, but he assured me that would be unnecessary. He had it all under control.
After his first full day in Washington, our boy phoned home in tears. He’d spent half of his money treating his friends to IMAX tickets at the Smithsonian. My husband and I appreciated his generosity, told him we loved him, but also made it very clear that he was on his own for the rest of the trip.
We encouraged him to load up at the free buffet breakfast and divide the remaining funds by the number of lunches.
He survived the trip without resorting to eating ketchup packets, but it is clear that our ongoing conversation about all things financial is far from over.
Start the conversation early
“Talking to kids about money helps them make decisions about time, resources and energy,” says Wil Smith, a certified financial planner at Crown Wealth Management in Costa Mesa.
Smith is the father of two boys, ages 3 and 5. He’s been talking to them about money since they were old enough to understand and is quick to point out that it’s never too early to start. “Just have the discussion,” he says.
Begin by making money “tangible,” Smith recommends. He pays his kids for doing small jobs around the house with dollar coins and keeps a careful list of their savings and expenditures. It’s much easier for a younger child to understand the cost of something if you can count out “30 monies,” Smith says. As his kids grow, he’ll move from talk of “monies” to quarters, dimes, nickels and pennies. Teaching young children to recognize the value of coins encourages math skills and helps them begin to comprehend value.
When I was a child, my father gave me the job of wrapping coins from our change jar into paper rolls from the bank. I did the same exercise with my own children, showing them how to make 10 stacks of four quarters each before lining the coins along my finger and sliding them together into the brown paper tube. We all know from experience that it takes a lot of quarters to add up to $10.
Spend, save, share
Young children also benefit from learning to set goals. When my kids were in preschool, I followed the advice of a fellow parent and set up three jars labeled “spend,” “save,” and “share.” I encouraged my children to divide any income into these three jars. They saved for big items like Lego sets and Breyer horse barns, spent a little on smaller toys or candy and donated money to their public school, the Alzheimer’s Association and our local cat rescue society.
“Saving for something big is a terrific way to learn how to delay gratification,” says Andrew Policano, director of the Center for Investment and Wealth Management at the Paul Merage School of Business, University of California Irvine.
“Start in kindergarten,” he says, “and keep following up. Knowing how to delay gratification is one of the most important skills to teach a child.”
Want vs. need
In our digital age, temptation is everywhere. My kids don’t even have to leave our house to shop. Whenever I’m presented with an app or website selling the latest coveted doodad, my standard answer is, “Sleep on it.” Nine times out of 10, the burning desire has been reduced to ash by morning. If the want just won’t go away, I ask my kids to think about what theywill have to give up to spend the money. I wonder if they really “need” this doodad.
The website MoneyAsYouGrow.org, set up by the President’s Advisory Council on Financial Capability, suggests beginning to teach our children the difference between a want and a need as early as possible.
Everyday life offers myriad opportunities to work on this. A trip to the grocery store or mall is a ready-made classroom. Loop your children into a conversation about necessities and extras. We need food for dinner, but we want ice cream for dessert. Beginning around age 6, these shopping conversations can begin to touch on the idea that money is finite. Discuss your grocery budget and encourage kids to help clip coupons and compare prices. Speaking frankly about the cost of brand-name items vs. store-brand items is another way to talk about value.
Make money tangible
Ron Lieber, author of “The Opposite of Spoiled: Raising Kids Who are Grounded, Generous and Smart About Money,” recommends introducing kids to “the fun ratio.” This idea, based on a suggestion by scientist Mary Matthiesen, asks children to estimate the number of hours of fun per dollar they will gain from any “want” purchased. The “fun ratio” for the pricey Lego Mindstorms set that has been gathering dust in my son’s closet is very low when compared to the “fun ratio” for the $20 soccer ball that gets a solid workout on a daily basis.
Continue the quest to make money tangible and finite by using clear visuals. Draw a pie chart depicting the family’s income and expenses. Color slices for food, shelter, education, utilities and savings. Be sure to include categories for charity and fun, even if they are small. Ask older children direct questions such as, “How much do you think we make per month?” Ask them to give their own estimates of mortgage or rent payments and the cost for utilities and groceries. Are their answers more or less than the actual amounts? Their answers can be used as a springboard for a more complex discussion.
Your mental script
“Let the kids see your struggles,” Smith says, but create a mental script that is healthy. “We don’t have the money,” was the blanket answer given by Smith’s parents to all requests. He found it hard to break this pattern later in life and had to work to “carve room” for giving. But once he did, he began to realize that you are never “too broke to make a difference.”
My own mental script includes the phrase “feast or famine.” My father was a sign painter and artist and often worked for cash. When he had the money, he spent it. On some birthdays, I received store-bought dresses and fancy dolls, and on others all my gifts were homemade.
In my early 20s, I lived the same way, earning and spending in a wild cycle of binge and bust. By 30 I was in debt, with little savings and no long-term plan.
I married a man who’d been contributing to an IRA since he was in his teens but had a hard time treating himself to even the smallest of luxuries. Together my fiscally conservative husband and I have worked hard to rewrite our scripts. We hope our children will be able to harness their financial power, live within their means, be good to themselves and others and diligently save for the future.
Help teens see the future
When talking to teens about money, the conversation is all about that future. “Start talking about compound interest,” Policano advises. Smith echoes this sentiment and suggests drawing a graph with a gradual upward slope to explain the benefits of long-term savings.
Keep the math simple by using 100 and an interest rate of 5 percent. If your child puts away $100 each year starting at age 14, she will have nearly $25,000 by age 65. Start saving the same amount at 35, and he or she will hit retirement with just $7,000.
The concept of earning interest on interest blew my son’s mind. Kids can get a real-life sense of this by plugging their own numbers into the compound interest calculator on the website investor.gov. If your child is still using the three-jar system of “spend,” “save” and “share,” now might be the time to add a fourth jar labeled “sustain.”
Invest early
Beginning investors have many choices. You might consider starting an IRA or Roth IRA for your teen. A Roth IRA has the added benefit of allowing the interest to grow tax-free. IRAs usually have a minimum investment level of around $1,000, so a high-interest savings account might be the first step.
If your son or daughter is interested in the stock market, you might talk to a financial planner, research brokerages on your own or use one of many online advice sites such as fool.com. These accounts will need to be set up as “custodial accounts” by a parent or guardian, but all the decisions can be made by the teens. Look for low commission rates so your teen isn’t spending too much on fees.
Independence is the goal
When talking about money with teens, the keyword should be “independence,” Policano suggests. “It’s all about balance. Understanding basic budgeting and how to save wisely for retirement can lead to financial well-being with the ability to not only have a quality life for your family but also have the ability to help others.”
As director of the Center for Investment and Wealth Management at UC Irvine, Policano has helped create a tuition-free summer financial-literacy program for underserved youth. In its sixth year, LIFEvest focuses on helping ninth-graders learn financial planning with the twin goals of college and career. Participants are encouraged to explore different career paths, research colleges where they might focus on these interests and create realistic budgets and financial plans so that they might apply to and eventually attend a college or university. The skills emphasized in the program are skills Policano believes will lead to a lifelong healthy relationship with money and are skills all teens should be working to master. Beginning in July, the center will offer a fee-based program for high-school students.
The beginning of ninth grade is a great time to start preparing your teen for college and life after college. By 14 or 15, many kids will have part-time jobs. That first paycheck will be a surprise unless you’ve already talked about taxes and Social Security deductions. Perhaps let them look at one of your paystubs. Talk about what you make per month and where it goes.
Though they will no longer be paid in dollar coins, it’s still important to keep money tangible. Put off debit and credit cards for teens as long as possible. If you must use a debit card, there are many apps that help track accounts and even create budgets. With sites like mint.com, our tech-savvy kids can check on finances daily using their smartphones.
Of course, the Internet brings up another topic for conversation. Kids need to know how to protect their identities and information when using online sites.
Warn them about credit cards
In my first months of college, I applied for and was given half a dozen credit cards. I remember how thrilling it was to swipe them through the register and walk out of the store with my immediate impulse gratified. I bought clothes and took my friends to dinner. When the credit card company was kind enough to send “checks” with my latest bill, I used those checks to buy books or pay rent on my first apartment.
Every month I paid the minimum payment, and every month, the balance was higher. Two words: compound interest. Used irresponsibly, credit cards are exactly the opposite of IRAs. As far as I’m concerned the subject of credit cards merits near constant discussion.
The credit card appeals to all that is needy, indulgent and impulsive about a teen and young adult. While a credit card can be a useful financial tool, it should never distract us from the idea that money is finite. You can “take advantage” of the credit card company by “borrowing” its money interest-free as long as you pay off your balance each month. While they won’t be able to get a credit card until they are 18, our kids need to understand early that the card should work for them, not the other way around.
Discuss saving for college
With all the discussion of college budgeting and finances, don’t forget to talk about budgeting for college itself. Be open with your kids about how much your family can afford to spend on college tuition and work together to research schools within your budget. Community colleges, public universities and private colleges provide a wide range of choices.
Look, too, at various financial aid options. The Free Application for Federal Student Aid is one of the most important ways a student can lower college tuition fees.
Because you’ve been talking about money for years, your kids will be well-versed in the language of finite funds, tradeoffs and long-term goals. While it is often impossible to attend college without some kind of student loan, looking for ways to incur the least amount of educational debt helps your child begin adulthood on firm ground.
Policano sums up this philosophy neatly: “It’s a matter of understanding that you should follow your passions, but do it responsibly so you have a means to support those passions.”
A few days after my son returned from his Washington, D.C., trip, we pulled into the gas station and I asked him to hop out and pump the gas. It was the first time I’d thought to do it, and he seemed pleased to perform this very “grown-up” task. I showed him how to unscrew the gas cap, swipe the credit card and make sure the nozzle was secure. We stood back from the fumes and watched together as the digital numbers climbed quickly into the double digits.
“Whoa,” he said. “Gas is really expensive.”
“It is,” I agreed.
Every day, we drive by at least three gas stations on the way to school. He’d watched me fill the tank for years, but he’d never noticed the cost. On this day, I’d put him in the middle of the action. On this day, money was a tangible thing.
My son is a spender, and my daughter is a saver. They are both frivolous and needy and generous and cautious in turns. I try as often as I can to let them make decisions about how to spend their money, and I applaud the good ones. When bad decisions are made (and they are), I wonder, “What do you think you’ll do next time?” I want my kids to have the ability to follow their dreams. I want them to have realistic goals and avoid the financial mistakes I made. Of course they’ll make their own mistakes, but I plan to stay honest, answer their questions and keep the conversation going.
