Teaching Our Children the Value of Money
As parents we all want to give our children everything we could never have in our young lives. I cannot forget the emotional reaction I had to the lucky few of my fellow middle school students regaling our class with stories of their family summer vacations at Disney World in Florida. I never did get to go to Disney World as a child and this created such a strong memory for me that one of the first things I did after my third child was born, was to begin saving for Disney World. It took three ½ years but I was finally able to take our family on the vacation I could never have as a child. The point of this story is that sometimes childhood emotions surrounding money have a profound impact on us as adults; driving us to do things that may not be in the best interest of our children, such as spoiling them. Take a look around and you will see ten, eleven or twelve year olds walking around with cell phones, iPods, Prada bags. Underlying this is, I believe, our desire to provide our children with a better life. We all seem to want for our children what we could not have, ourselves, as kids. But where does this leave our children? Will they grow up being spoiled and self indulgent, expecting from society rather than being grateful for what society has given them? Is our parental need to make up for what we lacked in our adolescent lives going to hurt our children, and if so, how do we mitigate this?
Creating a Money Management Education Plan to properly educate your children about money requires three important and co-dependent elements:
1. Earning Money – Any Money Management program must begin with creating money for a child to manage. This is done by creating an allowance program so they can begin earning money.
2. Saving Money – This part of the program focuses on teaching a child how to save what they’ve earned. This is broken down into two additional parts: short-term savings (to be used for the spending portion of the money management education plan) and long-term savings.
3. Spending Money – This teaches a child how to manage their expenses. The money for this comes from their short-term savings, or what I like to call their discretionary income.
Earning Money
If a child is too young to earn money, an allowance will do just fine. But this allowance must be tied to some chore, task or responsibility. It is difficult for most children under a certain age to fully grasp the need to make and manage money so you may want to hold off until they are old enough so that the lesson will not be lost on them. Since each child is different, there is no hard and fast rule as to what would be a good age to begin their education. In my opinion, age ten is a good general age to begin a money management education plan, which will include an allowance program.
Before you begin any allowance program you should develop a plan. Any plan should have four fundamental elements:
1. A Weekly List: Create a weekly list showing the chores/responsibilities by day of the week starting Sunday and ending Saturday.
2. A Check Off: Include on your list a section for a check off for each chore/responsibility. Have your child take on the responsibility for checking off each completed task, each day of each week.
3. The Payoff: At the end of the week (Saturday) have a family get together with a review of the completed tasks for the week. If all tasks have been completed and checked off then your child is given their allowance.
How much of an allowance should you give a child? The point of the entire money management education plan is to provide a child with a general understanding of how money works, so the amount of the allowance is unimportant. As a general rule $5 a week works fine, until they become teenagers. Then everything changes. For now, keep it simple and affordable, for you. Consider giving your child an allowance in smaller denominations – for example, five ones instead of one $5 bill. This way a portion of the allowance can be easily deposited into the piggy bank.
Saving Money
One of the most valuable lessons you can teach a child is the value of saving what they earn or receive. The piggy bank is really a tangible metaphor for establishing what financial planners call a long-term savings plan. The funds in the piggy bank can be periodically invested into a passbook account or some other investment for your child down the road, but the piggy bank is an important tool to help in the education process. As an enticement to save, you may want to add a matching feature to reward your child for saving their allowance. For example, you may agree to match whatever money your child has accumulated in their piggy bank over a period of time. This could be a fun thing for everyone. A neat idea my wife and I used with our kids was to clean out the piggy bank after each month and match whatever was in our child’s piggy bank. There is another reason for doing this. Kids may be tempted to periodically deplete the piggy bank and use the money for candy or something else. Matching not only motivates your child to save but also creates accountability. If your child takes money out of the piggy bank, they know you will find out, since the agreed-upon savings will not equal what was actually in the piggy bank at the end of the month. In the business world we call this budget vs. actual. Businesses close out the month to see if their forecasted profits equal their actual profits.
Spending Money
No money management education plan for a child is complete without helping educate them on how to manage spending their money. To help them spend their money wisely, have your child create a monthly “wish list” of things they would like to spend their money on during the month. We call this wish list in business, a budget. By setting up a wish list you are actually helping them budget their monthly expenditures. The important thing here is to make sure that whatever they decide to spend their money on during the month represents purchases that you do not ordinarily make for them. For example, if your child tells you they are going to spend their money on candy for the month, then they need to understand that you will not be buying them any candy, for that month. They are now responsible for their candy purchases for the month. If they want to use it for movie tickets then you cannot be giving them additional money to go to the movies during the month.
They need to learn how to manage the money they have available. If you provide them with money for the same items they have listed on their wish list, then they will get confused and not grasp the point of managing their spending. This creates accountability by putting your children in control of how their money is spent each month; knowing that when the money is gone so is their ability to spend. If you give into the demands from your child for more money for the things that are on their wish list, then you are undermining the money management education process. Of course you are going to give your kids money for things they want. Let’s not kid ourselves. Just don’t give them money for the things that they have put on their wish list. Those things are the responsibility of your children and they need to know that you are not going to come to their rescue if they need more money for the candy that is on their wish list. So when your child develops their wish list make sure the items they list are items that can be managed, like candy and movie tickets. I am opposed to allowing them to include large ticket items on their wish list as this does help educate them on how to manage their spending. What spending lesson will they learn if they put an ipod on their wish list? Buying a large ticket item, like an iPod, is really more a savings lesson, not a spending lesson.
Think of your child’s money management education plan as a stool held up by three legs. The first leg is Earning Money, the second leg is Saving Money, and the third leg is Spending Money. If any one of these legs is missing, your stool will topple over.
It is a fact that the average American is heavily in debt. We are a society of debtors with our Federal Government leading the way. It is my opinion that one of the primary reasons for all of this debt is that our very own parents never understood how money works and thus could not educate our generation on fundamental money management principles. We have the opportunity to reverse this trend. As parents we have a moral responsibility to teach our children these fundamental money management principles and help them secure a brighter future for themselves and their children.
Tom is a Certified Public Accountant, a Certified Financial Planner, CLTC (Certified Long-Term Care) and President of Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works with clients helping them manage their money, retirement planning, college savings, life insurance needs, IRAs and qualified plan rollovers with an eye towards maximizing tax benefits and minimizing taxes. Tom is founder of the Rich Habits Institute and author of “Rich Habits”.
Article Source: http://EzineArticles.com/?expert=Thomas_Corley
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