Teaching Kids Good Money Habits

Once, long ago, I knew a man who spoiled his children atrociously. I probably shouldn't have, but one day I asked - is it really a good idea to buy the sixteen year old girl that red sports car? Or to give the boy every video game he wanted?

His answer surprised me: he wanted his kids to get used to a certain standard. His philosophy was that if they grew to expect things in their lives to be a certain way, they'd work to ensure it remained there.

While there is some wisdom in what he said, there's also a flaw: by buying them everything, he wasn't teaching them to work for their money. He also wasn't teaching them about credit, setting savings goals, or any of the other hundreds of things older adults take for granted and young adults struggle with.

Ideally, our children should, yes, get used to that standard so they don't have an impoverishment of goals; most of us today seem to be taking care of that. But our children also need to understand how money works, why it is a tool to get what they want, and how they can use it even as children to create real wealth.

Teaching The Youngest Kids

You should start very young, about the same time your kid gets the "wants." When a child wants a toy - say, the new ROTFL Elmo - show them how much Elmo costs the next time you go to the store. Then explain how many Happy Meals that is, how long Mommy works to make that much money, and how many other toys they could purchase for the same price. This is boring and tedious for many of the smaller ones, but if you continue doing it, your child gains a sense of financial proportion. To a child, if it's advertised, it all costs the same - until you show them differently.

Teach them to save. Give your child jobs they can use to earn money, and encourage them to set financial goals for themselves - for instance, your son wants a bike? Show him how to save, give him a calendar with financial checklists, and help him work to reach that goal. Use a weekly allowance - one that he must earn through work - to give him the basic idea of a paycheck. And if you want to be really tough, require a percentage of his paycheck to go toward savings. This helps you give your child an idea of how taxes take money directly out of paychecks.

While it's nice to give your child gifts, a gift always costs a child the same - nothing. Instead of constantly purchasing gifts when you're out with your child, give him a small amount of money each time you go to the store. Let him or her spend that money, rather than you spending money for them. And let them go to the register alone; the physical act of handing money over will make them think.

Older Children and Money

A twelve-year-old is old enough to learn about more advanced money concepts. If he's accumulated a decent amount of savings, this is the time to take him to the bank to let him open a savings account or a CD. Show him how he can use money to make money just by investing it in this way.

When you're budgeting, involve your child. Show him where your money goes, how you make money, and how you use money to make money (and how credit cards are the flip side of this.) A prepaid credit card when your responsible child is fourteen or so will help him establish a credit rating and teach him how to use credit cards responsibly. Too many kids get to college and see those credit cards - and think, hey, free money! This, in my experience, is the worst of all young-adult financial pitfalls.

Your child should get a part-time job as early as possible, whether it's babysitting, creating websites, or working at McDonalds. When your child turns 18 and has shown responsibility with the pre-paid credit card, he should be shown how to examine credit card offers for hidden fees and realistic expenses, and ideally should get a low-limit credit card to solidify that credit history. He should also be taught about identity theft and how to protect himself from thieves and scammers.

Though most parents don't think about it, that good credit history might be the most valuable gift you can give your child.

Beyond Money Habits: Financial Attitudes

Even children with great money habits sometimes don't have the right attitude toward finances. Money is not a finite and bounded resource; instead, it is all around us, and we are provided opportunities to generate it every single day. If you encourage an entrepreneurial attitude toward cash - that is, help your child find or create opportunities to make money - this attitude will remain with him all his life. You can start by checking out [link]these great jobs for kids [link].

Cash flow inward is one thing, but how can you teach a child the right attitude about how to use the money they've made and saved? The best ways are through games and what-if questions. Play lots of money games, like Monopoly for older children or Grocery Store for younger ones. For the oldest children, you can even play low-stakes poker with real money to teach them about gambling, though this should be done carefully and responsibly. (Teaching through gambling may be controversial advice, but I've found that forbidding things without showing the reason why is counterproductive.)

My favorite method is the what-if game, and it can be played in just minutes, or you can play it for hours. The parent comes up with a scenario: what if you were trapped in Europe and ran out of money? Where would you go and what would you do? Or what if you had a flat tire in the middle of Oklahoma and had no access to cash to pay for it? I do one of these about once a week with my young teen son, usually in the car when we have nothing else to do, and I watch his creativity and resourcefulness grow every day. The what-if game teaches responsibility with money, creative use of money, and creativity in general with real life scenarios.

The most important advice, ultimately, is to talk to your kid about money frequently. Like sex, drugs, or violence, poor financial choices can cause short or long term damage to your kid's goals. Responsible parenting should include plenty of discussion about money, both how it's used and how it should not be abused. You have the power to inoculate your children against poor financial decisions in the future.