When you were a child, you probably tagged along while mom and dad went to the bank to deposit their paychecks, and watched as they counted out the cash they handed to grocery store clerks and gas station attendants.
But in this era of direct deposit paychecks, drive-though ATMs and "who needs cash when I've got a debit card?" mentalities, earning and spending money has become an abstract concept — and one that is tougher to teach to children.
Although 96 percent of American adults believe basic economics should be taught in high school, only 40 percent of American high school students are actually taught economics. Over the past two years, the number of states with personal finance education requirements has dropped.
Yet at the same time, kids are spending more money than ever. In 2002, teens accounted for more than $170 billion in spending, an increase of 38 percent from five years ago. Teens spend an average of $92 per week, and most receive money on an as-needed basis from their parents as opposed to getting a strict, defined allowance.
Parents need to take an active role in teaching their children about the value of money as well as the importance of budgeting and saving.
Game of Monopoly, Anyone?
Discussions about money and investing fall between sex and drugs as the least talked-about subjects with children under 18, according to a survey by Charles Schwab & Co. In fact, more than 53 percent of all respondents agreed that their parents felt talking about money was "too personal."
As hard as it may be, children need to be educated about money. It doesn't have to be difficult. Introducing financial concepts can start early with simple board games like Payday and the great American classic Monopoly, which can be a springboard for basic lessons in real estate, taxes and general finance. Playing these games together is a great way to get the entire family involved in a discussion about money and investing.
Beyond board games, it is important to be up front with your children about the family finances. Your kids should have a basic understanding of what your family can and cannot afford. Consider sitting down with your children and explaining what you earn and how much of it needs to go toward housing, food, utilities and other staples. This exercise introduces them to the basics of budgeting and helps them better understand the difference between necessary expenses and discretionary spending.
Structuring a Child’s Allowance
Allowances have been rising at nearly twice the rate of inflation with the average allowance for a child today being $11.79 per week. One of the biggest questions parents have when it comes to allowance is whether to tie the amount a child receives to the number of household chores they complete.
Most parents — a total of 59 percent — align allowance with chores, according to a survey by the American Savings Education Council. Although this teaches children to work for their money, it is a double-edged sword in that children, particularly teens, may believe they only need to be helpful when paid. I suggest that you do not tie allowance to regular chores as children need to learn to help out around the house, regardless of payment. Instead, parents may want to consider adjusting their children's allowance accordingly to make room for additional earning potential derived from special household projects.
Parents also struggle with the question of when to begin giving allowance and the amount children should receive. Ideally, you want to start paying an allowance once a child begins to understand the concept of spending and saving money, usually around the first grade.
Many parents are naturally inclined to give a child a very small stipend to keep them from spending foolishly, but that can prevent children from thinking long term about money. Children who only receive a meager amount each week are bound to spend it all, as it would take a long time to accumulate enough money to make a meaningful purchase.
One common practice is to give your child a weekly allowance equal to $1 for every year of their life, but this may not work well once your child is a teenager. Rather than taking one of these approaches, consider asking your child how much they think they deserve and how they plan to use the money they receive. This provides an excellent way to begin a dialogue about saving for special items and budgeting for weekly expenses.
Although encouraging your child to save a portion of their weekly allowance or give some of it to charity is a wonderful idea, it is best to not enforce these concepts as they should always be voluntary. Remember, children learn best by watching your example.
Getting Teens to Save
If you want your teenager to start saving money, play the match game and set up a family money plan for your children. Instead of just giving your child an allowance, commit to matching a portion of the money your children decide to defer to their savings. For example, you could match 50 percent of however much they save, so if they defer $4 per week to savings, you will add another $2, bringing their monthly savings up to $24 ($16 of their own money plus $8 of yours).
You can take this concept a step further by helping them divide their savings into separate pools of money for different goals. A portion could go toward short-term goals, such as going to the movies with friends, while another portion could go toward long-term goals like buying a new bicycle or a down payment on a car. The remaining amount could be used to invest for their future.
Keep in mind it is not the amount but the idea of helping them understand the value of savings. If your teen does not already have a savings account with your local bank, definitely open one so they can begin to accrue money in their own name.
Credit Cards for Teens?
The average college student graduates with three times as many credit cards and twice as much credit card debt as when they entered as a freshman, according to a 2002 study by student loan provider Nellie Mae. Therefore, before your children enter college — where they will likely be bombarded with opportunities to sign up for multiple credit cards — it is important to educate them about the perils of credit card debt.
As you do not want your children to view credit cards as the forbidden fruit, introduce them to plastic in high school. A great place to begin is with a prepaid credit card. Most major credit card companies now offer some version, and a great example is the Visa Buxx card.
The Buxx card works like a reusable, prepaid calling card, drawing money from an account exclusively set up for making purchases. Similar to a debit card, money is withdrawn from the account each time a purchase is made. After the card is activated, parents can adjust the balance over the telephone or Internet every other week or once a month. In addition, monthly paper statements and/or timely Internet updates allow you to monitor your children's spending to ensure they are not spending recklessly. Once your child has responsibly managed the prepaid card, consider a co-signed credit card with a low limit.
By educating your children early on about effectively managing their expenses, you will teach them a priceless lesson, which will hopefully prevent them from making costly mistakes in the future.
Teaching Children How to Budget
Talking to your kids about the family finances and fostering good habits when it comes to allowance, saving and credit card use are great ways to introduce budgeting.
Another way to ensure your child truly understands the concept is by giving them responsibility when it comes to spending. Annually, the average teen spends $1,400 on fashion items, with 61 percent of this money coming directly from their parents. Rather than taking your teen shopping for back-to school items, make a list with them of what they need and decide on a reasonable amount to spend on those items. Then give them the money to go out and buy the items themselves.
If they end up spending the money on the latest CDs or the hottest new shoes, rather than the items you discussed, they will have to accept the consequences of their purchases and wear what they already have.
Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.