Teaching Children Financial Responsibility

(from Busy Moms Central)

Are you wondering when you should teach your children about managing money? You should start as soon as they learn to count and understand the concept of more and less. Think your six-year-old is too young to learn about simple money management concepts? Think again. Teaching children about managing money early will lead to adults who are financially responsible. Young adults are bombarded with offers for credit and quickie loans that are easy to get and hard to pay off. Without a good understanding of how to handle their money, they are often caught up in a financial nightmare. As a parent, you can help your child avoid this situation.

1. Start early on with an allowance. There is much debate over whether the receipt of an allowance should be based on earning the money through chores or just given out. I believe it should be associated with some type of responsibility. After all, no one hands you a paycheck at the end of the month if you don't actually go to work and do your job. This will help instill a good work ethic in your child. Make the chores and the amount of the allowance appropriate for your child. A five year old cannot be responsible for cleaning the entire house, but they can set the table, pick up their toys each night and make their bed. Five year olds don't need a large amount of spending money to learn simple money concepts, while your teenager will need a little more disposable income to learn about saving and spending. However, an allowance should be required to buy necessities. This means that you supply the basics, your children can buy extras with the allowance.

2. Teach them about needs and wants. What is basic and what is extra is something you and your children should decide together. But try to remember that as a parent, it is your responsibility to teach them that "want" and "need" are not the same thing, even if it is your desire to give your children everything that they want. Many parents fall into this trap for one reason or another. No parent want to see their child unhappy. But if you give you child everything that they ask for and never force them to learn about managing their money, your child will not be happy financially as an adult.

3. Let them make mistakes. Even very young children understand that in order to buy things at the store, they have to pay for them. You may have to explain to a younger child about saving their allowance so that they have enough to pay for an item they want to buy. Let your child buy what they want to with their allowance (within family rules of course). If they choose not to save it to buy a toy they really want and instead blow it on something else, let them. When they cannot buy the more expensive item, use it as an opportunity to explain again about saving their money towards a goal. It won't take long for them to learn this important lesson. Even if you are starting this process with a teenager, you have to let them learn. If you are supplying the essentials then the mistake will be made about something that your child can truly live without (no matter what they say!)

4. Teach them to shop wisely. Teach them about comparison shopping and how to shop for quality items. Remember to let them make their own mistakes. If they want to spend their money on something of poor quality, rather than waiting until they can afford one of higher quality, let them. When it breaks, don't replace it. If they are in a hurry to buy the latest video game and insist on paying full price, even though it might be less expensive somewhere else, let them. They will soon learn that waiting a couple of days for a nonessential item is not the end of the world.

5. Teach them about simple debt and interest rates. If your child wants to borrow some money, let them if it is not an outrageous amount. Write down how much they are borrowing, how much interest you will charge (10% is an easy amount to use for teaching purposes) and how the money will be repaid. Don't forget a late penalty. For example, you loan your son $20 for a date. He must repay you $22 by a certain date. Give him his allowance each week, but do not constantly remind him about repaying you. If he does not repay you by the date agreed, tack on the penalty. If this goes on too long, withhold the allowance until the money has been paid. Going without any money will teach him quickly about repaying his obligations. If you are lucky enough to have a child who always repays on time, congratulate yourself on teaching them well. But more importantly, congratulate your child for being responsible. This can work with younger children too, but you will need to simplify it a little.

6. Teach your teenagers how to budget, even the younger ones. Sit down and estimate what their monthly expenses and income are. If they work, then an allowance may no longer be appropriate, and you should use their true income. Remind them to include something for unforeseen expenses or absences from work which would cause a decrease in income. While your fourteen year old will not be working, he or she will certainly have expenses related to their social life.

7. Teach younger teenagers about credit cards and loans. Once your child has a budget, teach them about credit card debt and loans. Show them how the debt payments affect their budget. Show them how making the minimum payments on a debt will take year to pay off even if the debt is small. But most importantly, show them the total amount they would pay over the life of the loan. Use a loan calculator website to create a table that is easy to understand.

8. Teach teenagers how to read a credit card or loan offer. Take one of the credit card offers you get in the mail and read through all of the fine print with them. Make sure that they understand what the offer really is, and not just what is says in big letters on the front. Remind them that in most cases if they are late on another bill, not related to the credit card or loan that the company can still raise their interest rate. Explain about the interest rate and the payment amounts. Yes, the offer says you will get $1000 with a payment of only $25 per month, but it will mean that you pay $25 a month for many years to satisfy the loan. Go back to that loan calculator that you used before. Plug realistic numbers in and show them what happens.

9. Set a good example. Remember, you children learn the most by watching you. Pay your bills on time, follow a budget and if you are in over your head financially, get help. Your children will model your behavior.

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