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

Make and deal with spending decisions

Though giving and saving are important skills to master, good money habits start with spending. That's where all the action is.

"The spend bucket is where all the most valuable lessons are to be learned. They should spend that money regularly and deplete it. You want them to make mistakes with that money," says Karp.

"As parents, we're kind of hardwired to let our kids avoid making mistakes. But if they make little mistakes now, they can avoid making big mistakes later," he says.

The trick is not to bail them out when they realize that they've gone wrong. Ideally parents would start very young, as young as 3 years old and let them find out that bad spending choices can sting a little bit.

"Let them make impulse buys, that kind of thing. There is an opportunity cost and it teaches that money is finite. You really want them to regret some decisions because they won't forget them," says Karp.

Understand rewards of work

There are at least two schools of thought on working for allowances.

One is that it teaches kids to earn money, so you're teaching them to work hard, that money has to be earned and they get a glimpse of the employer-employee relationship within the allowance system.

The other side is that it's too easy for kids to challenge the chores-for-pay system, so earning and budgeting should be separate lessons.

Godfrey splits chores into two sets.

"There are citizen-of-the-household chores where they don't get paid. That is keeping your own personal space clean, picking up wet towels, getting up on time, brushing your teeth, making the bed," she says.

"And there are work-for-pay chores, so what you are also doing is teaching kids how a household works," Godfrey says.

The system Karp outlines in his book is similar, but he prefers to keep allowance separate from chores altogether.

"Keep the spending lesson separate from the earning lessons. You do need earning lessons and you can do that by offering a list of things the kid can do for extra money," he says.

"If you tie it too closely to the chores, you may have the kid who says, 'Well how much are you going to pay me to make my bed,' or just doesn't do it altogether. And then the whole system just crumbles," says Karp.

Additional chores can be offered for extra money so that kids learn to work for their pay -- and that way they can feel a little more in control of how fast they'll be able to save up for special purchases.

Delay gratification

Saving can help children develop their ability to delay gratification and learn to save for a goal. Both are important later on when young adults can apply for credit cards or loans.

Dividing savings buckets into long and short-term goals can also help kids realize that saving isn't just about spending at some point in the near future.

In Mackey's 10-10-10-70 system, the 70 for spending includes money that kids want to save for a short or mid-term goal.

It's not actually saving if they're just putting away money for something to spend on in a week or a month or whenever they have enough money, she says.

"They're not actually saving anything, they're just prolonging their spending," says Mackey.

Putting away money just for the sake of having a financial cushion is a routine that every person would do well to follow, and the earlier that concept sinks in, the better. It's a lesson that eludes many adults.

Build on budgeting

As kids get older, the lessons can grow more complicated if you think your kids are ready to take on more responsibility.

For instance, Mackey recommends figuring out how much you spend per month on children's nonessential expenses such as CDs, trips to the movies and cell phone bills.

"We've been doing a survey on this and finding that it can go from $25 to $400 a month for nonessential purchases that kids don't need to survive," she says.

She suggests that parents cover the necessities such as clothing, food, education and shelter and allow children to earn money for the extras that parents generally buy.

"You assign chores for that money and then when you go out into the marketplace they use their own money. I guarantee you that they will not spend their own money like they spend your money -- ever," Mackey says.

If kids can master these lessons on a small scale with their allowance, then they'll likely have the discipline and money skills to resist the lure of credit and living beyond their means later on as adults.

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