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MONEY MANAGEMENT FOR KIDS

"My Mom and Dad started giving me an allowance every Saturday. I used to spend it all real quick - mostly on other people. I would buy things for my parents, my brothers and my friends, and by Monday there was nothing left for me. Then I got some envelopes. On one I wrote "Friends and family", on another I wrote "Me" and a third was "Savings". When I got my money, I put a third in each envelope. Now I spend some money on myself, some on others and keep some as savings. And I'm much happier. Just spending all your money on other people doesn't automatically make you happy." Arianna, aged 13.

There are so many good reasons to teach our kids about money management - and to start as young as possible! By the time a child is old enough to ask you to buy him things, he is old enough to start understanding how money works. By the time he is old enough to pay for sweets, he is old enough to start learning about earning and saving.

The most important thing to learn as a parent is to handle and express our emotions about money in a calm way that is conducive to teaching and learning. If you want your children to grow up with a wise approach to money management, the first thing you should do is ensure that you discuss money issues openly and calmly as a family.

That can be easier said than done, especially if, like most families, there are difficulties from time to time. It is all too easy to let our children grow up hearing the message, over and over, "we can't afford it." What if you could communicate the same message in a positive way that helps a child understand how money works: "We're not going to buy xyz because we have a more important use for that money right now."

A useful idea for encouraging money management skills in your children is to have a regular family discussion time when family and individual finances are discussed, including allowances and savings, at a level that everyone can participate in - from preschool age upwards.

The four basic money management subjects to teach your kids, starting at an early age, are Earning, Spending, Saving and Borrowing. We'll take a brief look at each of these subjects, with ideas of key points to talk with your kids about - repeatedly. These lessons will need to be repeated over and over during the various phases of childhood, becoming more advanced as the children grow, if your kids are to emerge into adulthood with good money management skills. You will also want to address the subject of Investing when your children are a little older (we'll cover that in a later article).

Earning

• See the earlier article on chores and allowances.
• Explain where the family income comes from. Who earns, and what to they do in order to earn this money. What are various other ways of earning money - such as buying and selling, or running a business.
• For older children, explain that taxes are deducted before the income is received.
• Older kids can also learn to use auction sites on the Internet to sell unwanted items such as CDs or toys.

Spending

• The difference between needs and wants (for young children, illustrate this with things like the difference between spending money on your school lunch versus sweets. For older children you can talk about household bills versus holidays).
• Gradually make your child responsible for her spending - at the pace that works for your family. For example, at six years old she may be ready to manage the money for buying her own sweets; at eight, her own school lunch and toys; at 11, school supplies and her pet's food and toys; at 14, clothes and other essentials. How much responsibility can be safely delegated at what age will vary from child to child.
• At each stage, teach your child to plan her spending in advance. Use envelopes or jars so she can physically see what money she is putting aside and for what purpose.

Saving

• The essential lesson to learn is to put some money aside for savings from all income that comes in.
• For the youngest children, use a jar so they can physically see the cash building up, and start off with teaching them to save up for just a few days! They can't think in months or weeks, let alone years, so the time between deferring gratification (putting money aside instead of buying sweets!) and the reward of buying something special needs to be as short as possible.
• Your goal should be to build the ability to defer gratification as the child grows, until as a teenager your child has the ability to save up for several months for an expensive item or a holiday.
• A good idea for small children is to give allowances or earnings in denominations that encourage saving - for example give five dollar coins instead of a 5-dollar bill, and suggest that one of them be saved.

Borrowing

• Once your child has learned the basics of earning, spending and saving, he is ready to understand borrowing.
• Your goal should be for the child to learn that in general it is better to save up and buy what he wants rather than borrowing and paying later. The way you do this is just like the financial institutions do to us adults - charge interest!
• Keep repayment periods as short as possible, especially with young children - and ensure that you charge enough interest to cause some pain, otherwise the lesson is not learned.

As you progress with teaching these money management lessons to your children, they will become more responsible and are likely to surprise you with the increasing maturity of their attitude towards money. Remember to keep talking about the lessons over and over - and also to allow them to make their own mistakes. The purpose of giving your kids responsibility for money management is not for them to be perfect at it straight away, but to learn, experiment, and make mistakes in safety. It will save them from making much costlier mistakes when they leave home!

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