Money Smarts

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By Gail Vaz-Oxlade

Children are a whole lot smarter today then when I was a child. Television, computers and the internet have allowed our kids to access information we never dreamed of when we were kids. Given our kids’ ability to handle complex information, and our own desire to ensure our kids are well-equipped for the future, it’s surprising how little time we spend teaching them about money. Let’s face it, money is a tool that can either be used well or poorly. And how our kids use money will affect them throughout their lives.

Teaching kids about money doesn’t have to be an arduous task; but it does take a plan. First we have to give our kids some of the stuff so they can learn to manage it. Then we have to set some expectations about how it will be managed. Finally, we have to guide our children through the process, making their experiences fun as well as educational.

Give ‘em Some Moolah

Age five is about as early as children can handle the concept of an allowance. As a rule of thumb, consider giving one dollar for each year - so a twelve-year-old would get 12 dollars a week. Woah! Twelve dollars a week? I only got two dollars, and that was plenty!

Yes, but how long ago was that? An allowance of two dollars a week given 25 years ago would have to increase to over seven dollars a week just to keep pace with inflation at five percent a year. And when was the last time you tried to buy something for 25 cents?

If you want kids to be able to manage money, you have to give them something to manage. Of course, most parents who resist an allowance do so because they see it as above and beyond the money they are spending for their children’s necessities. But an allowance shouldn’t be one hundred percent mad money. Instead, think of an allowance as the money you would normally spend on your children, put into their hands so that they can learn to manage it.

Paula has three kids: Thomas who is almost 14, Laura who has just turn 9, and Brianna who is five. Brianna receives five dollars a week that includes the money Paula would spend on renting videos for her. Laura’s allowance of 12 dollars a week includes her entertainment and money for her voracious reading appetite. Thomas receives 25 dollars a week, including his bus fare for school, entertainment and sports supplies. In all, Paula is handing out 42 dollars a week in allowance. It seemed like a lot at first, until Paula did a tally of the money she was spending on the kids using the "dole" system - they would ask for a treat and she’d dole it out. Now, if Brianna wants a two-video week-end, she has to postpone renting a movie for a week to save up the money. And if Laura has gone through her book budget for the month, she has to wait until she gets her next allowance. Thomas has had to learn to put aside money in the months when he doesn’t ski so he’ll have enough for the busy winter ski period.

Should an allowance be tied to chores? Who pays you to do your chores? Chores are part of the family experience. If your child expects you to make yummy lunches for school - that’s one of your chores - you have the right to expect her to put away her toys as one of her chores. That’s not to say that there aren’t jobs she can do for which she will be paid. But those jobs are above and beyond her regular chores. And those paid-for-work jobs should have legitimate worth. (As soon as my Alexandra is old enough, if she wants to earn extra money for cleaning the cat litter, that’s a job I’d willingly pay for.)

The other point to remember is that if you withhold the allowance when your child’s chores aren’t done, you’re defeating the very purpose of an allowance - that is to put money into your kids’ hands so they can learn to deal with it.

Set Some Expectations

As your children’s money-guide, it will be up to you to set the expectations for how they will manage their money. Each child’s budget should include long-term savings, the money that will be spent on regular expenses (like Thomas’ skiing and Brianna’s videos) as well as some mad money.

Getting into the long-term savings habit isn’t something that comes naturally to everyone. Starting at an early age will help to establish the habit. Most financial experts agree that saving ten percent of our gross income is a good bet. So, for each dollar you give little Molly, have her put ten cents into her savings container.

Make sure when you provide the allowance, that you do so in denominations that make it easy to put the savings component away immediately. If a child has to wait until she breaks a five to put away her dollar in savings, the dollar may find it’s way into the till instead of the piggy bank.

For each planned spending item, young children (those under the age of 10) will need separate containers to keep the money for their budgeted expenses. For example, Malcolm might need a container for his video game money, as well as one for his comic book collection. By age ten, most children can transfer their accumulation to paper, using a budget sheet to keep track of their cash flow. This is also a good time to set up a child’s first savings account.

While the focus of an allowance is on teaching good money management, it’s important to remember that kids are kids. At least a small portion of their allowance should be mad money that can be spent impulsively on absolutely anything their little hearts desire. That’s part of the fun of money. Usually the percentage of the allowance that can be used as mad money decreases as your child gets older and more capable of earning their own mad money.

Be Their Guide

As you help to steer your children through the world of finance, it will be up to you to model the behaviors and attitudes you want your children to imitate. Children learn far more from what they see us do than from what they hear us say.

Make the world your classroom. As you go about your daily routines, talk to your kids about what you’re doing. "We have to go to the bank today to get the money we need to do the groceries. See, I put my card into the banking machine, tell the machine how much I need, and if I have enough in my bank account, the machine gives me the cash."

Pose questions and let your kids offer solutions. "Where do you think the money goes when we put money into a banking machine?" As you teach, compliment your children’s successess. "That’s a pretty good guess." And have fun. "Would you like to try pushing the buttons to make the withdrawal?" Use your imagination. "When we get home, would you like to build our own banking machine?"

And relax. You have a long time to help your children learn the important money lessons. If they ask questions you don’t have answers for, tell your kids the truth. "Honey, I just don’t know anything about mutual funds. Why don’t we get a book and see if we can figure them out together. And maybe Aunty Angie can help us figure them out. She knows a lot about investing."

Absolutely every person I’ve spoken to with parents who actively taught them about money is happy that they did. Take the time to introduce your kids to the world of money and you’ll be very proud when asked to be the guest-of-honor at their mortgage burning party!