How to Raise Money-Smart Kids

By Katie Sweeney

Carrie Coghill admits she used to spend too much money on her 10-year-old daughter. Like many single working moms, she felt guilty that she couldn’t spend more time with her. So saying no at the mall was tough.

But last year, she realized that her free spending carried a high price. Although her daughter was rich in clothes and toys, Coghill noticed she was poor in money skills.

“She thinks money grows on trees,” Coghill says. “She has the expectation that she gets whatever she wants.”

Coghill, senior vice president of D.B. Root & Co., a financial advisory firm in Pittsburgh, began talking dollars and cents with her daughter. And she set new rules. Her daughter now gets an allowance in exchange for doing household chores. She wants a toy? She can have it–if she forks over her own cash.

“It’s funny how kids don’t want as much once they have to pay for it,” Coghill says.

She hopes her new strategy will teach her child financial responsibility and fiscal savvy that many kids never learn.

“There’s nobody teaching this in the schools, at least not uniformly,” says Paul Richard, executive vice president of the National Center for Financial Education in San Diego. “And children have become the biggest and most sought-after market (for advertisers).”

So how can you raise a money-smart kid in a spendthrift world? Not an easy task, but consider these steps:

Give allowances: Kids can’t learn how to manage money if they don’t have any. Neale S. Godfrey, author of The Ultimate Kids’ Money Book (Simon & Schuster, 1998), suggests starting an allowance at age 3. “That’s when they start saying, ‘I want, I want,'” Godfrey says.
What’s appropriate? There’s no set rule, but it should be enough so kids can practice budgeting. Godfrey suggests paying kids the same amount as their age. A 3-year-old, therefore, would receive $3 a week.

Here’s where the budgeting comes in: the child must divide his or her allowance into four jars. 10% goes to charity, and the rest is divided in thirds: “instant gratification” money, medium-term savings (for a toy, bike, etc.) and long-term savings (college funds).

Experts are divided over whether to pay kids for chores. Godfrey’s solution is to create two job categories. Kids don’t get paid for “citizen” chores, like making their beds, but they do get paid for dusting and vacuuming.
Talk about money: “Don’t be afraid to discuss the family budget, especially when Junior is begging for a toy at the store,” says Nancy Nauser, president of Consumer Credit Counseling Service of Greater Kansas City and Mid-Missouri.
Planning a family trip? “Set a budget and involve the kids in reaching the target. And don’t overlook the money lessons to be learned at the grocery store,” Nauser says. Kids can clip coupons, help compare prices, and learn to consumer shop.
Introduce them to investing: It’s great to help your children open a savings account, but you should teach them about investing, too. One way is to open a mutual fund in their name and encourage them to invest a portion of their allowance. Some companies, such as Stein Roe, offer funds specifically for children and have prepared material in kid-friendly language.
Don’t bail kids out: When Nauser’s 11-year-old son buys something that he doesn’t use, she doesn’t berate him, but she asks what he’d do differently the next time.
“Let them make mistakes,” Nauser says. “The consequences aren’t going to be as severe as if they bought a car, and it broke down when they still owed money on it. Those are expensive lessons. Let them learn with smaller things.”
Look in the mirror: “Kids do what they see,” Coghill says. To set a better example, she curbed her own spending and stopped using credit cards in front of her daughter, even though she pays the balance each month.
Her daughter’s getting the message. “Now she’s the one saying, ‘Mom, why are you buying that?'” Coghill laughs. “I’ve improved.”