David Lerner Associates: How to Teach Your Kids About Money
Schools have certainly changed a lot since the song School Days was written over 100 years ago, but one thing that hasn’t changed is the fact that there are still very few schools that teach children about personal financial management. In fact, just 14 states require students to take a course in personal finance, according to a survey by the Council for Economic Education.
“This makes it important that parents teach their children sound money management principles at home,” says David Lerner Associates Branch Manager Michael Cody. “This is one of the most important educations children will receive, and it’s never too early to start.”
When to Start
Cody says that some kids as young as three years old can understand the concept of using money to buy things they want. And by about six or seven, many children can grasp what it means to earn, save and even invest money. “This may be a good age to start giving your children an allowance,” says Cody.
There are two main schools of thought when it comes to allowance. The first is simply giving a child a certain amount of money each week with no stipulation that the child perform any work in order to receive it. The second is basing the allowance on the performance of a defined set of household chores.
Some experts say the second option is preferable to the first. “By earning their allowance, instead of just getting the money handed to them automatically, kids begin to understand the concept of value,” says Cody. “In other words, working and expending effort on something — whether it’s household chores or whatever you decide is appropriate — can result in financial rewards.”
Regardless of which allowance option you choose, it’s critical that you are consistent in paying the money to your child every week (or however often you decide to pay). “I’ve talked to parents who say, ‘We started giving Johnny an allowance, but several weeks went by and we forgot to pay it to him, and now it’s just kind of hit or miss.’ This sends children the exact opposite message you want to send, which is that consistent effort on their part will result in consistent rewards.”
Offering Spending Guidance
It can be tempting to try to dictate what your kids do with their allowance, but many experts caution against this. It’s better, they say, to give your children wide discretion in determining how they spend their money.
“It’s usually OK to offer guidance and suggestions, especially with regard to helping children balance decisions about how much money they should spend, save, invest and give away,” says Cody. “But giving your children responsibility for making most of these decisions themselves helps teach them financial responsibility at an early age.”
One possible exception is insisting that your children set aside a percentage of their allowance to save and to give away. For example, if your child receives a weekly allowance of $10, you could require that $1 (or 10 percent) be set aside for savings and $1 (another 10 percent) be set aside for giving. “This helps instill in your children the values of thrift and charity,” says Cody.
Also, don’t underestimate the importance of setting a good example for your kids in the area of financial management — or in other words, practicing what you preach. When they become young teenagers, start involving them in some family financial decisions. For example, you could show them what your budget is for your upcoming vacation, and then let them help decide where you’ll go and what you’ll do based on how the plans fit into your budget.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC.