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Teaching children how to manage their money

Dropping pennies in a piggy bank is a good start, but teaching kids to save often begins with setting a good example.

Kids are like sponges. Some financial planners say that when children watch their parents budget each week, save for a vacation or write checks, it not only reinforces good savings habits, but debunks the myth that money grows on trees.

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"Children should see where the money goes and what your long-term savings strategies are," says Ron Meier, a professor at the College for Financial Planning in Greenwood Village, Colo.

The buying power of youth
Young people have come to form a powerful demographic market in terms of their buying clout, spending roughly $141 billion in 1998, according to teenage Research Unlimited, based in Northbrook, Ill. In addition to the money they earn, their income may be supplemented by financial gifts from parents, grandparents and relatives.

Managing that trove of cash requires discipline from both ends -- child and parent. The parent can help the child set short-term and long-term savings goals while allowing enough freedom to let her decide specific financial priorities.

"Sometimes, kids hear only the negative messages about money from their parents, like 'Do you know how hard I had to work to buy that toy?'," says Brenda Wade, a family psychologist based in San Francisco. "That makes money a scary and punishing concept for kids -- definitely not the message they need to hear."

To erase the fear, a number of consumer groups are reaching out to children to teach them about money management. In April, thousands of bankers came from behind their oak tables and went out to schools to teach students about saving and money management.

Promoting its third annual National Teach Children to Save Day, the American Bankers Association Education Foundation spoke to more than 125,000 kindergartners, elementary school children and junior and high school students.

The little ones learned the fundamental concept of saving money while older students tackled compound interest, budgeting, setting goals and managing money.

The financial facts of life
"Too many people go from piggy banks to credit cards without learning the basic financial facts of life," said Donald G. Ogilvie, executive vice president of the education foundation. "Our goal is to help students become better informed consumers in the financial marketplace."

So, when is it the right time to start teaching kids about money?

When children start saying "I want" when they go to a store, "you'll know it's time to start talking to them about money," says Pamela Hughes, a senior financial consultant in Merrill Lynch's Seattle office.

Unless the children have received a substantial amount of money as a gift, a piggy bank is still an appropriate place for 3- and 4-year-olds to keep their savings, Hughes says. She suggests parents help their children find pictures of the toys or items they want to save for, then tape them to the side of the bank. That gives them a reminder of why they're saving money. Parents can also teach pre-schoolers about money by separating coins into piles by color and size and discuss their value.

Elementary-age kids may be able to grasp the concept of how interest is earned on a savings account. At the grocery store and other places, parents should explain sales receipts and have children clip coupons. Likewise, before venturing off to the mall or the toy store, a family "wants" list posted on the refrigerator can show that not all wants can be bought.

Saving lessons
For pre-teens, saving money goes hand-in-hand with regular allowances. Wade recommends a "third-third-third" concept: one-third of the allowance or earnings can be spent immediately -- to satisfy instant "must have it now urges"; another third goes into short-term savings -- for a new bicycle or school clothing; and the last third gets reserved in long-term savings -- such as for college.

As for how much of an allowance to give a child, opinions differ: "Some parents may require their child to work for an allowance, others will take the child's age, divide by two and that will be the weekly allowance," Wade says.

Whether that money is earned or rewarded, once the child grasps the notion of saving regularly and collecting interest, open a passbook account in his or her name. Many banks let children start accounts with as little as $10 and most will waive any penalties for small balances. To encourage regular savings deposits, some parents match the amount the child contributes to the account. At this age, parents should allow their children to participate in family financial discussions about what to buy, how to save more, how to cut expenses, and groups and organizations to which the family will contribute.

When a child reaches age eight or so, parents can also start explaining how businesses operate and how investors buy and sell stocks. For a fun way to teach kids about stocks and how they work, make a game of it, suggests Robert J. Manning, a portfolio manager at MFS Investment Management, a mutual funds group based in Boston.

"Have everyone in the family pick their favorite company -- McDonald's, The Gap, Walt Disney, Nike -- and invest $100," Manning says. "Then show your kids how to keep track of the stocks' daily progress through the newspaper's financial section." Give a prize to the person whose stock goes up the most over each month, he adds.

That first job
teenagers in junior high school and high school can start to make adult financial decisions, such as deciding whether to have a part-time job. Before they apply for jobs, discuss work hours with regard to study time and household responsibilities and decide whether allowance should be continued.

"This is a good age for teenagers to do household tasks, such as preparing a grocery list and actually doing the shopping," says Meier.

He adds that older, responsible teenagers should be informed of where important financial documents -- such as the deed to the house -- are kept. Meier suggests "It's not a bad idea to discuss ways the family may cope should one parent lose a job, this way, children know the reality of what happens should a financial setback occurs -- it's an important life lesson that will help them later."

Parents, not knowing where to start, can take their pick of a number of online and traditional savings tools available.

One organization, the Jump$tart Coalition for Personal Financial Literacy in Washington, D.C., aligns consumer groups with high schools and universities to teach all aspects of money management from balancing a checkbook to explaining the importance of short- and long-term saving and investment strategies.

Bad examples at home
"The majority of them learn at home, which is not necessarily a good thing, when you consider the examples adults are setting with their own personal finances," says Dara Duguay, executive director of Jump$tart.

What are they learning at home? Duguay says a 1997 Jump$tart survey of high school seniors revealed that 27 percent thought they would earn the most by putting their money in a bank savings account. Nearly one-third thought the retirement income that people receive from their former employers is called Social Security.

"We can't fault our children for getting wrong information -- like most good and bad habits, we as parents have to set the example," Duguay says.

Introduction to online banking
Since young people are among the fastest growing group using the Internet, parents can educate their children about shopping online., an online finance site for teens and kids, allows parents to use a credit card to create an online debit account for their child, then set spending limits and decide which retailers are available for shopping.

The company has also linked up with Security First Network Bank to allow teens and kids to have online interest-bearing savings accounts. To be eligible for this promotion, parents must open an interest-bearing savings account with their child at SFNB and deposit a minimum of $100. SFNB has agreed to waive the fees normally associated with this account.

Another helpful organization is the National Center for Financial Education. This nonprofit group, based in San Diego, helps people do a better job of saving, spending, investing, insuring and planning for their financial future. The children and money section offers tips on spending practices, allowances, part-time jobs and more.

With the bevy of tips and tools available, Wade says parents should also discuss what money doesn't do: "Money is simply a tool that we use to take care of our material needs but it can't buy equally important needs like love, friendship and support."


-- Posted: May 7, 1999




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