Today’s banking industry isn’t making it easy to teach your child to save. My son’s savings account earned 20 cents in interest last year. “Pathetic,” was his response.
And he’s right.
But that started a family discussion about why we save and how to keep money safe. The goal is to help my kids develop money management habits now that will help them face credit cards and mortgages later.
Teach them to save
In his book, “The First National Bank of Dad,” Dave Owen suggests setting up a household bank using a spreadsheet. Your child gives you money and you record it. Any time your child wants the money, give it to him or her.
What’s so great about that? The interest rate—make it high. Owen suggests about 5 percent a month. So now her $100 becomes $105 after one month and the next month, even if she doesn’t deposit anything, that initial $100 becomes $110.25. Pretty dramatic.
Teenagers: When you set up the bank, use a sliding interest scale. Otherwise, once your teen starts to earn money, you’ll be wiped out. But even 10 percent annually is a fantastic rate and should be a great incentive to save.
Teach them to earn
Allowances are a line in the parenting sand. One camp ties allowances to chores. The other camp thinks chores are everyone’s responsibility so they shouldn’t be “for hire.”
We used something in the middle. We gave our kids allowances that were a little on the stingy side and didn’t tie them to chores. If they wanted or needed more money, then they had to earn it by doing a big chore, such as helping clean out the garage.
Teenagers: Once your child can earn money babysitting, caddying or shoveling snow, the allowance should end.
Teach them to spend
If you’re giving your child an incentive to save through a more-than-generous interest rate on your household bank you don’t need to worry much about the spending.
You’ll find when it’s your child’s money, he or she will be much slower to spend than when it’s your money. And the kid will make some mistakes, which is fine. Remorse is a great teacher.
Teenagers: Give your teen more responsibility. Our teens buy their own school clothes. They present a budget, then we give them a preloaded credit card once a year.
Teach them to give
Instead of requiring that your kids give to charity, talk about the charities you support and why. According to Bev Bolson, director of Children’s Ministries at First Presbyterian Church of Wilmette, grade-school children are aware and want to make a difference.
“When the tsunami struck Southeast Asia, children were coming to me and asking if we could do something,” she says. “That month, our children’s offering went to disaster relief.”
Teach them to invest
When Alan Nadolna’s children were 9, 13 and 15, he opened a stock account for each with a small amount of money. He helped them make selections using a philosophy from the famed Wall Street investor Peter Lynch: Buy what you know.
“My two older children had played the stock game at school, but they showed more interest in these accounts because it was their money,” says Nadolna, a Wilmette resident and CEO of The Associates Group, a Northbrook-based wealth management firm.
He’s been pleased that his children research companies, monitor their accounts and occasionally ask his advice.
Teach them about credit
Credit cards aren’t magic, but they can seem that way to a child. If we don’t teach our kids how to use credit cards, they turn into curses. Nellie Mae Student Loan Center reported that in 2008 college students who used credit cards owed an average of $4,138 at graduation.
Teenagers: Start good habits in high school. One resource is the Young Americans Center for Financial Education (yacenter.org), which offers a secure MasterCard for teens who have a savings account that covers the initial limit—$100.
The Real Education
Teaching your kids about money means you’re really talking to them about virtues—happiness, generosity, self-reliance, hard work—and if you can get your children thinking about these big questions, that might be the most valuable lesson of all.
Making Sense of Credit Debt
You might be able to explain to a child how credit card debt accumulates when you make only the minimum monthly payment, but when the percentage starts compounding, I usually collapse muttering over my calculator.
Here’s a great website that makes it easy to show your child what happens when you make only the minimum payment. Let’s say your kid “has” to have a new laptop, but he or she doesn’t actually have the $2,000 it costs for the nice one that weighs only ounces and looks really sleek.
Go to bankrate.com’s debt calculator and plug in $2,000. Before you press “calculate” ask your son how long he thinks it will take to pay off the computer if he pays just the minimum, and how much that computer will really cost.
For a credit card with 20-percent interest rate, paying the minimum $53 a month, it would take more than 15 years to pay off the computer, and you would pay a total of $4,764 dollars for a computer that would be obsolete long before your child was done paying for it.