Teaching Kids About Money: Raise a Smart Spender

Does your kid think money grows on trees? That's a problem! Here, the lessons you need to teach right now to raise a smart spender -- and saver.
Manners & Responsibility: Should You Tie Allowance to Chores?
Manners & Responsibility:  Should You Tie Allowance to Chores?

On a trip to a local Wal-Mart, 4-year-old Alex Mitchell, of Carlsbad, New Mexico, begged his mother, Lorie, to buy him a Spider-Man backpack. Lorie, looking for an out, told a little white lie. "We don't have enough money to buy that today," she said. Alex had the perfect solution: "Just go to the money machine and get some more.

His response might sound familiar to parents of preschoolers. From an early age, children see their parents make 20-dollar bills pop out of an ATM. They watch us write checks and whip out credit cards at the cash register. They hear commercials urging, "Buy now, pay later." So it's no wonder they're left with the impression that money is a limitless commodity. How can you explain money basics in an age-appropriate manner? It's easy. "Make your world a classroom by incorporating financial lessons into your everyday activities," says Neale S. Godfrey, author of Money Still Doesn't Grow on Trees. These five fun suggestions will help you do it.

Play With Pocket Change

A 3-year-old can't comprehend the relative values of different coins, says Janet Bodnar, author of Raising Money Smart Kids. But she can still learn plenty by playing with them.

Give your child some change to jingle or stack (remind her to never put coins into her mouth). Point out the names, sizes, and colors of different coins. Send your child on a hunt for loose change you've hidden; then have her count the number of coins and store them in her piggy bank. Such activities will strengthen her fine motor skills and teach early math skills such as counting and sorting.

Let your preschooler handle money in the real world too. Have her insert coins into vending machines, and give her bills to pay for an ice-cream cone. If there's change, let her keep it—to save, not to spend.

Take Him Shopping

By age 4, your child is becoming aware of the relationship between shopping and money. This is the time to convey the idea that we simply can't have everything we want.

Before you leave for the supermarket, make a shopping list together. Let your child suggest the items you need to buy for breakfast, such as juice, milk, and cereal.

Kids this age love cutting out coupons too. Sort them by category (such as canned goods and frozen foods), and explain that these coupons let you pay less money for certain products.

In the store, check prices to show that you put thought into your purchases. Get your child involved in the decision making as well, suggests Istar Schwager, Ph.D., an educational psychologist in New York. Ask him, "Shall we buy the red or the green grapes?" You might even give him money to pick out an item he wants, such as a package of juice boxes. Point out all the flavors and brands, and mention whether any are on sale.

Let your child in on your spending decisions. If you're tempted to splurge on a purchase, say, "Wow, I really like this sweater, but I don't need it." Then put it down. This will help him learn to say no, a skill he'll need when he shops on his own.

Give Her an Allowance

To become a smart spender, a child needs a chance to control her own money. Experts recommend starting an allowance by the time a child is age 5. How much should you give? The general weekly guideline is 50 cents to $1 times a child's age ($2.50 to $5 for a 5-year-old, for example).

Though some parents tie an allowance to chores, experts advise against doing this. Kids need to recognize that picking up toys and clearing the table are "citizen of the house" duties that don't come with a financial reward. Instead, let your child earn extra money by completing bonus tasks, such as stacking newspapers for recycling.

Lay out the ground rules before you begin doling out dollars to your child. Explain that she can use them right away (to pay for, say, the stickers she's been asking for) or to save up for the Build-a-Bear she's been begging you to buy her. "Don't worry if your child blows her money on the first cheap trinket she sees," says Jayne A. Pearl, author of Kids and Money. She'll realize soon enough that once she spends it, it's gone.

Still, encourage her to save by buying a see-through bank and taping on a picture of an item she really wants. Amber Ennen, 7, of Pompano Beach, Florida, is stashing away money every week until she can afford to buy a two-wheeler. When she's ready, her mother, Dee, plans to take her shopping, then treat her to lunch to celebrate the big purchase.

Demystify Money Machines

Your 5-year-old may have seen you use an ATM, but he has no idea of how the money got there. Explain the concept along these lines: "The bank is like a giant piggy bank. Mommy and Daddy put money in when we get paid from our jobs. When we need some, we take out a little. But we try to make sure our piggy bank never gets empty."

When you write a check, point out that it's the same thing as taking money out of the bank. And when your child is around age 6, you can begin to talk about credit cards. When you slide your plastic through a scanner, say, "I can use this instead of money to buy things. But I will need to pay for real in a few weeks."

Share the Wealth

It's normal for your child to want things. She's bombarded by manipulative TV commercials that fuel her inner consumer, and when she sees the latest toy at a friend's house, she may get the gimmes.

But you can tone down the materialism and instill a sense of generosity by having your child give to the less fortunate. Make charity a family affair, whether you purchase items for a toy drive or give money to homeless people on the street.

To really make your child appreciate what she has, have her donate her own money as well. Some parents have kids set aside a percentage of their allowance for charity. Others give their children money at the holidays and help them choose a worthy cause. A little research can go a long way: Show your child that the $30 she wants to spend on a new dollhouse can feed a starving baby in Africa for a month, and she'll get the message.

Molly Perrin, 5, of Walworth, New York, raised cash by doing bonus tasks around the house so she could buy care-package items for American soldiers stationed overseas. "I was touched that she wanted to use the extra money she'd earned to help others," says her mother, Jackie.

Such gestures help children learn what Dr. Schwager calls the ultimate money lesson at this age: "There's more to you as a person than the things you own."

Copyright © 2005. Reprinted with permission from the September 2005 issue of Parents magazine.

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