From talking them out of squandering their birthday money to convincing them to steer some of their first paychecks into a 401(k), teaching kids about money is a work in progress. To harness the wisdom of the financially savvy individuals who frequent Morningstar.com's Discuss forum boards, I asked them to share a tip or two about how they had schooled their own children in budgeting, saving, and investing.
Readers shared guidance on how to counsel children on wise spending, as well as saving early and often.
'Are You Sure You Want to Spend the Money Now?'A key starting point when teaching kids about money, posters agreed, is to discuss spending choices. JNITER and spouse, parents of a three- and a six-year-old, are trying to teach their children to spend their money on things they'll truly value--not impulse buys. "One thing we do consciously is discuss how we as the mom and dad make spending choices with the kids. We also emphasize and say often, 'Just because we can afford to buy it, this does not mean ought to buy it.' And then we will explain reasons why. For example, we were at the bookstore just yesterday. Our son (6) saw a book that included a bunch of cars. We looked at the book and told him we felt it was not a wise choice to purchase the book. 1) The reading level was very easy for him. 2) He already had many of those cars, and those cars were cheap plastic which would break easily. This was not a purchase he would enjoy for very long and not a good use of money."
Offthegrid concurred that modeling good choices for your kids--including delayed gratification--is one of the best ways to teach kids about smart spending. "Want them to save for purchases and not go into debt? Do the same yourself and let them know why you are waiting. Buy the two- or three-year-old car instead of the brand new one."
Dndhatcher and spouse also coached their kids on thinking through the merits of a given purchase. "Starting very early (probably preschool), whenever my kids wanted to buy something we asked them a series of questions. 'How much does it cost? Is it on sale or cheaper at another store? Do you have that much money?' (Probably the best lesson ever was when my younger son had already spent his birthday money and could not afford to buy a toy that his brother who had saved his money could.) Are you sure you want to spend the money now, or wait for it to go on sale or put it on your birthday/Christmas list? Now when we are in a store, most of the time instead of asking to buy something they tell us they are going to put it on their Christmas/birthday list or buy it when it goes on sale."
Giving kids a budget they must stick to can help influence smart decision-making. Dwhit1 wrote, "A friend of mine while on vacation was constantly bombarded with requests from his children for souvenirs, candy, and so on. In exasperation, he gave each of them $50 and said, 'This is yours to spend on whatever you want. Once it is gone, don't ask for more.' To his surprise, the nagging stopped. They started making their own cost-benefit decisions, and returned home with most of the money he gave them."
Dragonpat found that a similar tack worked with her adult daughter on an overseas junket. "[My daughter and I] visited the capital of Italian shoe-dom, Sorrento (more shoe stores than I have ever seen per square foot). To fend off repeated requests for shoes, I told her she got EUR 50 for shoes and that was it. We were there for 10 days, and it wasn't until day six that even one pair of shoes was purchased. The downside was that I had to spend a lot of evening hours with her in shoe stores."
Signing on for monthly bills, however affordable they might seem, can be costly over time, a message that Inklime has been trying to reinforce: "I've tried to get my son to see a bigger picture. When he tells me, 'It's only $10 more per month,' I say: 'That's $120 per year. How many other little 'extras' like that could you do without, and put away?"
'Our Start for Them on Financial Responsibility'
In addition to swapping tips on how to encourage savvy spending, posters also shared their strategies on getting young kids into the habit of saving.
Jackdrac's savings vehicle of choice is old-fashioned but helps drive the point home about the main investment choices. "I bought a special piggy bank for my kids that is see-through and has four compartments with a slot for each: 1) Spending 2) Saving 3) Investing (I explained the difference between saving and investing in terms of short-/midterm versus long-term and how much the long-term compartment can add up) 4) Charity. Whenever I give them money, I let them choose which slot to put it in, with some guidance."
GuppaZ155 used a similar strategy when coaching kids about what to do with their allowance money. "When our kids were young (many moons ago), they each received an allowance (starting at a dollar, and escalating to $10 over the years). Chores were mandatory. They were taught to take their allowance and break it up. A percentage to savings, spending, and charity. The percentages were negotiated up front, and over the years, changed modestly. That was our start for them on financial responsibility, and it's worked well for them in their lives, I do believe."
Nateoh and spouse have developed a clever, multilayered system to get their kids in the habit of saving and investing--and to teach them about money along the way. "My kids are 13 and 9," this poster wrote. "The kids do not get allowances but earn money for chores and grades with incentives such as double money for straight A's. Each dollar the kids earn is subject to 25% deduction for their 'retirement account' which they will get upon retirement as a kid at age 21, and which is invested in a S&P 500 index fund (the kids don't understand the index, but are aware that it goes up and down); and 25% in a 90-day certificate of deposit 'house bank' which pays interest. The kids must calculate their interest based on a 365 days/year basis at withdrawal. The kids can spend their remaining 50% as they wish (even though my wife and I sometimes grimace). The teaching goals are: 1) financial/investing literacy; and 2) responsibility for purchases."
The Dndhatcher household has also started investment accounts for the children, now in late grade school. "We sometimes talk to them about saving and investment markets. We are now starting a savings/investment account that hopefully by high school will turn into a small stake in some mutual fund so they can experience some volatility and growth in an investment before they get to a job."
Meanwhile, Banker5358's story illustrates that this stuff can really work and may influence long-term career choices, too. "When my son was 5, I opened a trust brokerage account and purchased shares of common stock in a couple of major corporations for him. The result: 1) He started getting mail addressed to him (with me as trustee), which was a big deal; 2) I accompanied him to the local bank, had him endorse the dividend check ($0.25), and 3) provided a basis of education as he grew older as to: ownership of corporations, dividends, financial statements, and the economy."
Making sure that kids have "skin in the game" is GTB1954's philosophy. This poster has encouraged the children to take part-time and odd jobs to help save for extras during college and to pay for things they want. The message seems to have sunk in. "[My daughter] complains some, but I think she is gaining valuable real-world experience--not everything is fun and games, but not everyone has the advantages she has."
'Keeping the Discussion of Money an Open One'
Yet as useful as the suggested lessons are, several posters agreed that teaching children about money can be an uphill battle at times--perhaps especially when their first paychecks are burning a hole in their pockets.
Howaya wrote, "My sense of the problem is that for many young people, the initial act of starting to save is a huge obstacle."
Chief K concurred that it can be difficult to impart wisdom to an unwilling party. "There is nothing hard about what is being taught," Chief wrote. "The hard part is whether the student is willing and able to apply the lessons. Sometimes prudent and useful advice falls on ground that is not ready for it. You just have to keep trying and hope that the soil is fertile the next time."
A unifying theme among all of the posts was the importance of communication flow--not being afraid to talk about money, modeling good communication skills among spouses, and engaging kids in family discussions. JNITER wrote, "For us, the most important thing has been keeping the discussion of money an open one. Our kids witness mom and dad discussing large expenses, from canceling our tennis club membership to purchasing a home. Mom and dad do not hide anything from each other, nor do we feel any need to keep these discussions from them. We know they don't understand everything we talk about, but we hope they witness a healthy attitude towards money and internalize that value."
Christine Benz is Morningstar's director of personal finance.
