Teach Kids About Money by Setting a Good Example

When should you start teaching kids about money? Now.

Good money habits start in childhood. A survey from the bank HSBC found most people who described themselves as "active savers" started young: 57 percent said they had been saving since they were children and 51percent started after getting their first job. More importantly, 73 percent said it was their parents who taught them the value of saving money.

And the best way to start teaching, the experts say, is to set a good example. Take a look at your own finances so you're not telling your kids to do as you say, not as you do.

"A lot of people don't realize they're teaching their kids about money all the time," says Justin Sinnott, vice president and financial consultant at Charles Schwab & Co. "I don't know there's any magic starting time."

But even parents with bad finances can teach good habits, if they set an example by paying down debt and saving.

"The sooner you can start emulating those good financial habits yourself, then your kids will start," Sinnott says.

You can start talking to your kids about money while they're very young, but you have to factor in the child's maturity.

"My 2-year-old, if I give her a quarter, it's a shiny object and a choking hazard," Sinnott says.

However, you can start working money into everyday conversations and everyday tasks, such as going to the grocery store, he says. He refers clients to Schwabmoneywise.com, a financial education Web site run by Schwab.

The first lesson kids must learn about money is the difference between spending it on things they need and things they want, and how money is a limited resource. At age 5 or 6, you can show them the different prices of items and explain how you may have enough money for one, but not another. That can lead you into a discussion about budgets, Sinnott says.

"You can do light budgeting with kids as young as 5 or 6," he explains. "If they want a toy from the store, talk about how you pay for that."

When you think they're ready, you can start kids on an allowance, so they can start spending their own money. Financial planner Rick Kahler, of Kahler Financial Group in Rapid City, S.D., started his two sons at 5, with gradual increases until age 10. Then, they can do optional chores to earn more money, says Kahler, the author of "Conscious Finance" (Foxcraft Inc., 2007).

Allowances can be good teaching aids, experts say, because they teach children to spend within their means -- as long as the parents don't give in to requests for extra money.

"I think one reason my kids have begun to learn to save is that we are consistent about not giving them extra money," Kahler says in an e-mail. "Saying no to kids' pleas isn't easy, but it is one of the most important money lessons we can teach them."

In fact, he says, not getting an allowance as a kid taught him he had to work and save for things he wanted.

Sinnott suggests using an allowance advance as a way to teach kids about credit. If your child wants a toy that costs more than his or her allowance, you can complete the amount, and use the receipt as an IOU against the child's next allowance. That teaches that anything bought on credit must be paid for eventually.

Paying for chores is another way for kids to supplement their allowance, and it teaches them that money must be earned. But some experts argue whether this act can encourage a sense of entitlement. Not all chores are equal, says Julie Murphy Casserly, president of JMC Wealth Management, Inc. in Chicago.

"It needs to be things that are for your benefit as a parent, not them cleaning up their own room which they should be doing regardless," she tells ParentDish in an e-mail.

On the flip side, you have to let kids control their allowance and spend it any way they want to, as long as it's legal, Kahler says. It was hard at first to watch his sons blow through their allowances, but they eventually learned to put things off and save for them, he says.

When kids start school, you can start talking to them about your work, how you invest money and show them your paycheck, says Casserly, author of "The Emotion Behind Money: Building Wealth from the Inside Out" (Beyond Your Wildest Dreams, LLC, 2008).

"The more you can expose them to things, the more normal they think it is," she says.

Don't wait until your child's first job to have a discussion about things such as taxes and payroll deductions, the experts say.

A first job, however, is a good conversation starter for many financial topics, Sinnott says. It also can lead to discussions about saving for college and retirement. It is never too early to start kids saving for both, experts warn.

Once kids hit their teens, they become old enough for part-time jobs, and it's time to have another conversation about who will pay for things such as clothes and whether a portion of their paycheck will go to college savings. Parents need to come to a clear agreement of who pays for what, Kahler says.

And don't give in to requests for a credit card -- it's a minefield, experts warn.

"If children don't have their own income to pay for the credit card, then you are just creating a monster," Casserly says.

The major credit card companies offer alternatives, such as stored-value or prepaid cards, which will give teens the convenience of plastic without the free rein. Another plus: Some cards, such as Visa Buxx, are designed specifically for teens and have budgeting and financial education websites for kids and parents.

There are many financial education resources available online. Many business groups became alarmed in the 1990s, when savings rates in American homes dropped to record lows and debt hit historic highs, so they started education campaigns to help parents and teachers bring up money-wise kids.

• The Northwest Mutual Foundation and the Council for Economic Education run TheMint.org, a financial education site with areas for parents, kids and teachers. The parents' area offers a guide broken down by age group with suggested activities. Even more importantly, it has tools so parents can judge if they need some remedial financial education, too.
• The American Institute of Certified Public Accountants' Web site has a section on how to teach kids about money, with multimedia and teaching tools.
• The AICP's Feedthepig.org Web site is meant for 25- to 34-year-olds, but the lessons about saving are simple enough for teens and college students and the presentation by a talking pig will amuse them while they get the savings message drilled into them.

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