There are several "talks" that parents have with their children over the years. The sex talk, the drugs talk, and perhaps less common, but just as important, the money talk. Money is a taboo subject in America, right up there with sex and politics, although it's also something every adult deals with daily. Cheapism.com sought out Ron Lieber, author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money, for advice to parents who want to raise financially savvy children and then added some tips of our own.
There's no shame in not understanding enough about money or having a good handle on what you're spending. Many adults find themselves in this situation without even realizing it because no one talks about it. Planning to talk to your children about money is an opportunity to first, and finally, get a grip on your finances and start setting a good example by showing the importance of learning about money.
It's hard to know how to answer money-related questions that children pose. One way to respond is simply to say, "Why do you ask?" The answer will give you a better idea of where the child is coming from and how much she or he already knows. Answering a question with a question also buys you some time.
THE TOOTH FAIRY
The first lost tooth is a good time to introduce children to the money thing. This is a teachable moment, probably their first encounter with any type of "income." Use the opening to begin discussing the value of money and how and what the child can do with it. Parents who wonder about the correct amount to leave under the pillow can check the ups and downs at Delta Dental's Tooth Fairy Index; the current national average is $4.36.
An allowance can be a teaching tool, as well, but don't use it to teach kids about the work ethic -- that's a lesson better learned by simply telling children that all family members are accountable for some family responsibilities. If you tie money to chores, inevitably the day will come when the child has earned enough and decides it's not worth working for a while.
THREE PIGGY BANKS
Author Ron Lieber suggests that parents direct kids to divide their money into three separate stacks: savings, spending, and charity. He likes the idea of clear jars instead of traditional piggy banks because the glass lets kids easily see how their funds grow and shrink.
Kids learn through experimentation. In his book Lieber profiled one grandmother who treated her grandchildren to a trip to the dollar store on birthdays and gave them one dollar for every year of age. The children took their time roaming the store and discussed with her the pros and cons of potential purchases.
VALUE OVER PRICE
Lessons about money don't require big-ticket purchases. If children seem curious about the contents of thrift stores or the goods displayed at garage sales, leverage these interests into the joy of finding hidden treasures and good deals that can be had with limited funds.
WANTS VERSUS NEEDS
One of the most important lessons to share is the difference between needs and wants. Start with simple and tangible examples, such as choosing a glass of water or a glass of soda when you're thirsty. Both relieve the parched feeling, but the water fulfills a need and the soda satisfies a want -- and not incidentally costs far more. Talk to your children about times when you had to distinguish between wants and needs and when you had to save up to buy that special (unnecessary) something. Print a debit or credit card statement and together go through some of your past purchases. Discuss whether they were needs or wants, and explain the rationale behind each expense.
It can be hard to figure out just how much "value" a purchase has for a child. Lieber recalled the approach taken by one Ohio family: The parents asked the children to work out the "hours of fun per dollar" for different purchases. (In this case, a deck of cards had the highest ratio.) This exercise is a dual lesson in math and personal finance, one that shows price is no measure of utility or enjoyment. That said, don't stop your children from making impulse buys on junk even if you know better -- this is a valuable lesson on its own.
When discussing needs and wants, a core principle to focus on is the importance of spending money where you get the most value. Some people may value an evening at the movies more than a nice dinner, while nothing beats a new video game for others. There's no wrong choice, but discuss what the child hopes to get (that is, the value derived) from his or her purchases.
Once the child understands the concept of value and the difference between needs and wants, it's time to introduce budgeting. Start with the three piggy banks (savings, spending, charity), a setup not unlike the "envelope" method used by many adults. Talk about how the money in each jar can be allocated, the importance of planning for future expenses, and how the jars will be refilled. (To encourage saving, some parents pay interest on that "account.") Put the budget plan in writing and go over it together periodically to determine whether the goals were met and what to change if they weren't.
Showing children what it takes to run a home will help them make educated decisions about their own spending. Even younger children can learn something when you open the books. Start by looking at shared family expenses -- the utility bill, say -- and tie the dollar amount to specific activities -- leaving the lights on when no one is in the room, for example. Jointly set a goal to save electricity and agree to split the savings with them.
Another suggestion from Lieber's book is to let teens help make major financial decisions that affect the family. Although you, the parent, always have the final word, involving teenagers in planning a summer vacation or choosing a new television is a solid stepping stone to making sound financial decisions later.
A simple mobile phone is often a necessity rather than a desire, but a smartphone is definitely a luxury (even if teenagers don't see it that way). Parents can show they understand the appeal of a smartphone by contributing enough to cover the cost of a basic phone and letting the teen pay the difference (monthly) for an upgrade. This may be the first recurring payment the child will make, but it certainly won't be the last.
SITTING AT THE TABLE
Letting your child handle negotiations for your next car purchase may not be the brightest idea, but give them a seat at the table. If you're following best practices by comparison shopping, reading the fine print, making sure the numbers add up, and working hard to land a good deal, they'll learn a lot simply by watching. Don't worry if you make a mistake, we all do, and they'll learn from that.
Unpaid internships may impress college admissions officers, but paying jobs -- even minimum wage jobs -- can pay off, as well. An article in The New York Times stated that admissions officers understand most students need a paying job to help support themselves or their family. As long as the student is doing something during the summer, they applaud the effort; bonus points, though, go to applicants who have found paying work that aligns with their career aspirations. Starting a paid job early on also helps young people learn about taxes and can be an opportunity to practice budgeting skills.