It's never too early to start teaching your kids about money. Toddlers can be introduced to the value of money using toy piggy banks and cash registers, while older kids can learn to manage cash and pretend to be real estate moguls by playing Monopoly. To get a taste of trading stocks and mutual funds, there are online games and contests, as well as investment clubs. And more importantly, high schools and colleges around the country are now offering personal finance courses, with some making the class a requirement before graduation (see BusinessWeek.com, 3/7/07, "Finance Courses Get Personal").
The first step for parents, say financial planners, is to start talking about money matters at home. "Having conversations about money at a young age lays a good foundation," says Phyllis Silverman, vice-president and senior trust advisor at PNC Financial Services (PNC) in Pittsburgh. "That's going to create the attitudes and lay the foundation for their future actions."
One planner, Charles Massimo, president and founder of CJM Fiscal Management in Garden City, N.Y., says he has hired a psychologist to establish a proper way for his wealthy clients to communicate with their kids, because many parents worry the knowledge of their wealth will create complacency. "They worry their kids will be lazy and not motivated if they know they'll have money coming their way," he says.
This week's Five for the Money offers some golden rules about money to pass along to your children. With the right lessons and planning, your kids, as they grow older, may be able to avoid money traps like getting deep in debt from those alluring but deceptive credit card offers—and embrace sound strategies as they save for big purchases such as graduate school, car, and a home.
1. A penny saved is a penny earned.
Parents can start teaching kids about earning money as early as elementary school, Silverman says. Set a weekly or monthly allowance for chores done around the house, and offer extra for helping neighbors and performing other tasks. "Allowance should not be seen as an entitlement; it should teach responsibility," Silverman says.
Then show your kids how to split their earnings into four money jars: for saving, spending, giving, and taxes. While younger children may not necessarily owe Uncle Sam a portion of their earnings, an awareness of taxes can be useful. "As they get older and get into the workforce, they'll find that what they earn and take home are two different things," she says of the importance of setting aside tax funds.
2. Stick to the budget.
Show your kids your monthly bills such as car payments, mortgage, and utilities, says Robert Wasilewski, a financial advisor at Baltimore Washington Financial Advisors in Columbia, Md. This will not only teach them about your family's cost of living, but also get them involved in the process. "Teaching people about money is a lot like poker," he says. "No one will play until their money is in the pot."
Make a list of wants vs. needs with your kids. When it comes to spending, parents need to ask why their kid needs something—or if they just want it, Silverman says. "It's a conversation about values," Silverman explains. Granted, this list will change as teenagers start driving and working part-time, and have busier social lives. They need to learn how to budget their monthly earnings to cover expenses.
3. Learn the power of interest.
Take your child to a bank and open an account that earns interest. Let the child decide how much to put in and let him or her calculate the interest the account is earning over time, Wasilewski says.
Or, rather than hand kids cash to spend each week, parents can put a set amount in the bank account. In a survey done in January, 2007, PNC found that 63% of parents set up a banking or investment account, but only about 21% of teens put money into the account or make investments.
When it comes to investing, children should learn how owning a diverse number of stocks and funds can grow in value over a span of many years. Massimo says his wealthy clients set up investment clubs—and let their kids pick three or four friends to join—to teach them investing basics. Wasilewski thinks that some of the online stock market games teach young people that stocks are a short-term holding and tend to go up, rather than the important lesson that stocks should be owned for the long run and can easily decline.
4. Stay out of debt.
Credit card offers with your child's name arrive in the mail sometimes as early as high school. Show your kids your credit card bills and how to pay them off on time to demonstrate how the cost of an item goes up because of the interest charged. And teach children how the bad habit of paying late can put you in a deep financial hole.
At the same time, it's important to establish a good credit history, because there will likely be a time when your kids are going to need to borrow money. "The big problem is, young people don't really understand how to get interest to work for them," Wasilewski says.
5. Giving back is the best gift.
Donating to charities, including volunteering in your community, is "a really important value for children to learn," Silverman at PNC says. At a young age, your kids can donate clothes and toys that are usually collected by organizations around the holidays. According to the recent PNC survey, 40% of parents said they encourage kids to participate in community events. Many high net worth families set up foundations and let their children pick the socially responsible causes they want to get involved with, Massimo says. "They want to teach the value of giving time, but also giving money responsibly," Silverman says.
Another way to give back, Massimo says, is teaching kids how to invest in socially responsible stocks—usually companies that are environmentally friendly and don't make alcohol, tobacco, and firearms—or funds that emphasize those kinds of stocks. Whether it's getting, spending, or giving, teaching your children some sound financial principles now should help them to make smarter choices about their money as they grow older.