Financial Literacy - Families and Finance
smart spending
4 money lessons for children to master

Like a fairy-tale curse, poor money skills can screw up your kids, their kids and their kids' kids.

Good money habits, on the other hand, can insulate kids from making major mistakes later in life and will positively impact their quality of life as adults.

To raise money-smart kids, parents should start at a young age and regularly reinforce money lessons as children grow up.

Unfortunately not all parents consciously try to foster money skills in their offspring. A recent survey by TrueCredit.com found that about 20 percent of parents, nearly one in five, had never spoken with their kids between the ages of 4 and 18 about money basics.

Unlike a birds-and-bees talk or don't-do-drugs speech, money skills must be taught to kids, experienced hands-on and consistently modeled by parents.

The alternative could cost kids a fortune -- literally!

Children must learn these four important lessons before they flee the nest to go to college or into the real world.

4 money lessons for kids
  1. Learn how to budget
  2. Make and deal with spending decisions
  3. Understand rewards of work
  4. Delay gratification

Learn how to budget

The ability to live on microwavable burritos and take good notes are important skills to have in college but, arguably, managing and understanding money may be much more useful at school and through the course of a lifetime.

It is hoped you started your children's training early because the foundation of successful personal finance -- everything from mortgages to investing -- hinges on budgeting.  

Luckily, it's very easy to train little kids to budget. It has to start with money, and that means putting cash in kids' hands.

The best way to do that is with an allowance. According to Neale Godfrey, founder of the Children's Financial Network and author of "Money Doesn't Grow on Trees: A Parent's Guide to Raising Financially Responsible Children," allowances serve two purposes: They teach kids to work for money and they can be used to introduce -- and enforce -- good budgeting habits.

"I start when they are age 3, when they start saying, 'I want, I want,'" she says.

Godfrey recommends paying the child's age in dollars per week.

"So a 3-year-old gets $3 a week, a 10-year old gets $10," she says.

Some experts recommend half that amount, but it's really whatever parents feel comfortable with and then you can adjust as you go.

When teaching kids about money and budgeting, parents should implement a tiered system, with savings for charity, spending and long-term goals, say most experts.

Lori Mackey, author of "Money Mama and the Three Little Pigs" and founder of Prosperity4Kids, uses a 10-10-10-70 system for teaching kids to budget.

"When your child gets their first dollar, we suggest that you teach them to save 10 percent, invest 10 percent, give 10 percent and live from 70 percent. When you give them a dollar, you give them two quarters and five dimes and then you sit with them and say this dime is for something that is important to you or that you want to help," she says.

"And they will automatically tell you it's going to be animals or nature or maybe they have a family member that's gone through some type of an illness so you can help them understand what giving back means with 10 cents out of a dollar," says Mackey.

Parents should briefly explain saving for the future and investing while putting those dimes aside.

"And then you give them 70 cents and that's what they're able to spend. So from the first dollar they ever get they will learn not to live paycheck to paycheck and spend 100 percent of their money," she says.

There are other methods or systems for budgeting training wheels. For instance, Greg Karp, author of "The 1-2-3 Money Plan: The Three Most Important Steps to Saving and Spending Smart," recommends breaking money down into three components.

"I give my kid three Tupperware-type containers. One is labeled 'save' and one is labeled 'spend' and one is labeled 'give.' Every week I started them off with $5 -- $2 would go in spend, $2 would go in save and $1 would go in give and the $1 would be the one they take with them to church on Sunday, for example," he says.

Godfrey recommends a similar system, this one involving four buckets.

"Ten percent comes off the top for charity, to get them involved in the idea of giving at a young age," she says.

"The remaining 90 percent is divided into thirds. There is the cash jar for instant gratification. They worked hard, you want them to be able to spend some of their money, and then you're teaching them to make choices, but you set the overall parameters, like no candy or gum or automatic weapons," Godfrey says.

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Another jar represents medium-term savings to teach them to push off gratification for a goal, and the last jar is for long-term savings such as college or a major purchase.

No matter how you slice it, there's a giving, a savings and a spending component.

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