With the cost of living on the rise, parents have become more aware of the need to raise financially savvy kids. But money skills don’t come naturally. To teach your children financial literacy, experts suggest you communicate responsible money usage and provide a variety of earning, saving and spending opportunities.
That’s what Chris Favilla has done. “Somewhere around age 6, my children started asking for more expensive toys and other items,” says the mother of her now 8- and 11-year-olds. “I knew it was a prime time for learning, so I said, ‘We’re not going to get this for you, but let’s discuss how you can earn money and save for it.’”
An allowance is, in fact, one of the best ways to teach kids financial skills & literacy.
“To begin, explore your own philosophy surrounding allowances,” says Bonnie Meszaros, associate director for the Center for Economic Education and Entrepreneurship. “What responsibilities will be required in exchange for the money? What do you expect it to be used for? And how much do you plan to give? Then communicate this with your child.”
Karen Graham hasn’t given her daughters a fixed allowance, but they have still found ways to earn money. “When our oldest was in junior high, she used her love for animals to start a pet care business, says the mother of her now 23-, 19- and 13-year-olds. “And on occasion they’ve been paid to help with my event planning business. They earn money doing extra household chores, too – yard work and moving the wood pile.”
As your children begin to acquire funds, lay out expectations as to how they should be allocated.
“One example would be the one-third principle: one-third of the allowance goes to savings, one-third for charity and one-third for spending,” says Ronni Cohen, financial literacy educator. “With the latter, help your child establish spending goals by writing down what he wants to buy and putting a picture of the item in a visible location. Then work on a game plan: ‘How much do you need to save to purchase this item and how long will it take?’”
Meszaros agrees and adds, “Most importantly, give your child freedom to spend on items he chooses. Even if it’s a mistake there is merit in it as foolish spending can teach him to be a wise consumer.”
Favilla found this to be true. “Of the $5 my children earn each week, $2 have to be put into savings. The remaining $3 they can spend on what they want,” she says. “Not long ago my son saved for a video game that had just come out. I suggested he wait until the price came down, but he had to have it right away. When he finally brought the game home, he was disappointed; it wasn’t as fun as he expected. The store did buy it back. The resale value, however, was only half what he had paid. He was furious, but learned a valuable lesson.”
“Teach your child to make informed choices by exploring all the options: ‘Can I find this item on sale?’ ‘Does it need to be new?’ ‘What other things could I buy with this money?’” says Cohen. “Also talk about the reality of marketing: ‘Will this item make me as happy as the children seem on TV?’ Discuss delayed gratification too. If an item costs more than $5, encourage your child to think about it several days before making the purchase.”
Graham’s youngest daughter has a grip on delayed gratification. “Ainsley has heard us talk with her sisters about college and realizes it takes planning to achieve goals,” she says. “Right now she’s saving for a laptop, so every dollar she gets, she stashes away.”
Teaching financial skills and literacy means educating your children on credit and debit cards, too.
“A good way to introduce this concept is through prepaid cards or gift cards,” says Meszaros. “Children have a limited amount, can make multiple purchases and track their balance each time the card is used.”
Also encourage philanthropic efforts, as this teaches responsible citizenship. Model giving but don’t dictate where or how much your children donate; let them decide.
Favilla does. “My employer puts a huge emphasis on giving so I frequently take my children along to events,” says the bank president. “The first time we did the JDRF Walk [Juvenile Diabetes Research Foundation] I made my contribution and was shocked when they each gave $10 of their own accord.”
Most importantly when building financial skills, get your child involved with family finances by shopping for sales, clipping coupons and comparing prices. Also set a good example in the way you handle money.
Graham has and believes her efforts are paying off. “Ainsley and I frequently discuss where we can get the best value for our money and shop for sales on all kinds of items,” she says. “We make it a game, ‘How much can we get this for and how much will we save in the process?’”
Books that teach financial skills
- “A Chair for My Mother” by Vera Williams.
- “Beatrice’s Goat” by Page McBrier.
- “Dollars and Cents for Kids” by Janet Bossner.
- “The Everything Kids’ Money Book” by Diane Mayr.
- “Less than Zero” by Stuart Murphy.
- “The Pickle Patch Bathtub” by Frances Kennedy.
- “Rock, Brock, and the Saving Shock” by Sheila Bair.
- “Something Special for Me” by Vera Williams.