Explaining Money's Mysteries To Your Children

What you tell your kids--and how you behave--will make a big difference

If there's a topic that parents dread talking about with their kids more than sex, it's probably money. Not so long ago, the question: "How much money do you make, Mom?" might have elicited the brusque reply: "None of your business." Today things are changing. In a culture inundated with gossip about celebrity incomes, stock-market chatter, and TV shows such as Who Wants to Be a Millionaire?, family experts--and parents--believe tackling these types of queries head-on is the best policy. Even if you don't disclose your actual earnings, you can parlay your answer into either a discussion of economic and social values, or a lesson in money management.

Educating kids about money is a tall order. Parents must transform an abstraction into something concrete, and then put it in its proper place in the family's life. With so much of our identities wrapped up in how much we make, money can be a highly emotional issue. As for money skills, parents get little help from schools, which usually don't offer instruction until high school. "If parents don't take the time to answer their kids' questions about money, the school of hard knocks will," says Dara Duguay, executive director of the Jumpstart Coalition for Personal Financial Literacy (888 45-EDUCATE, www.jumpstart.org).

So welcome the questions as a chance to teach. It helps to remember that your child's age and your own comfort level will steer you to the answers. "You are the parent and can reframe the question," says Marcee Yager, financial planner and counselor with Sterling Wood Financial in San Francisco. First, figure out what's behind the question, says Stephen Goldbart, a psychologist at the Money, Meaning, & Choices Institute in Kentfield, Calif. For example, your child asking, "Are we poor?" may be a sign she is worried about the future. Or it may simply be that she wants a Sony PlayStation 2 and is wondering whether you'll buy her one.

Now it gets tougher. After all, it's an age of plenty, and you probably could buy that PlayStation and a cart full of games. The real question is: How do you decide how much to spend on your kids? Yager, many of whose clients are Silicon Valley's newly rich, suggests settling on a monthly amount for toys and entertainment that suits your family's budget and values. Then stick to it, and if your child is old enough, bring him into the decision. "Say to your child: `We have a budget in this family because we believe it's important to set goals and learn how to value things correctly,"' advises Yager.

Don't wait for questions to begin fiscal education. Even with a toddler, it's not too early to dispel the notion that ATMs generate money. Each time you withdraw funds, explain that the money comes from Mommy and Daddy working, and that the bank is merely storing it for the family.

Preschoolers also can make financial choices. Pam McCurrach remembers when going to Wal-Mart with her then-three-year-old son, Braden, would lead to big fights. "He would always want a new He-Man," says McCurrach, an interior designer in Franklin, Tenn. Figuring she would fritter away the cash on small stuff for him anyway, she gave Braden $2 a week and explained that if he saved for two weeks, he could buy another of the $4 action figures. "It made shopping much more pleasant," McCurrach says. "He had choices and he had control."

McCurrach, whose husband David wrote a book on allowances, had exploited the notion that a weekly stipend is one of the best tools for teaching money concepts (page 192E8), even to three-year-olds. An allowance backed by a well-thought-out program gives kids a taste of real-world budgeting.

In grade school, children can handle more complex concepts. Try showing how money is used to buy things and how to value those that are bought, says author Suze Orman. She suggests taking a toy your child begged for and quickly discarded. Put it next to its cash equivalent and ask your child which he would rather have now, the toy or the cash. Orman, a financial adviser and author of The Courage to be Rich (Riverhead Books, $24.95), says kids will usually pick the cash because the toy no longer has value in their eyes. You can then point out that the amount, which could have gone into buying other things, has been spent. End the exercise, she says, by asking: "Was this a good use of our money?"

It's often in grade school that children begin to ask how much money you make--and how your income compares with others. Judy Willis, a teacher in Santa Barbara, Calif., felt comfortable revealing the family's total financial picture to her daughters Malana, now 22, and Alani, 12. But she followed up with a talk on why they shouldn't use money as a criterion to judge people. Stacey Katz, of Takoma Park, Md., decided the actual figure wouldn't mean much to her son, David Fegley, 9. "Over $1,000, those numbers are a blur," she says. "We say there are people who earn a lot more and people who earn a lot less, and just put it in perspective."

Jacob Needleman, author of Money and the Meaning of Life (Doubleday, $16.95), says we should seize money questions as a chance to talk about justice and social responsibility. Showing children that money has the power to help others is a crucial part of fiscal and moral education. When Katz's daughter, Hannah Fegley, was 11, she read about kids overseas whose schools didn't have basic supplies. Deciding to donate $100 of what she had saved from her $5-a-week allowance, Hannah, with her mom's help, searched the Internet for worthy programs. She settled on CARE, an international aid organization. "We had wonderful discussions while deciding where to send the money," Katz says.

GAS PRICES. At middle school, kids are ready for more details. You can speak more frankly about the family's income and expenses. You can also measure your kids' money IQ by quizzing them on what things cost. Willis was shocked at what her daughter Malana, then in her teens, didn't know: "She knew the cost of the big-ticket items, but not the cost of a gallon of gas." That led to a discussion about what it takes to run a household and how expenses can add up.

The time to really open your balance sheet is when your child is making choices about college, says Elissa Queen, a children's therapist in Woodmere, N.Y. You can then dispel any mistaken assumptions your kids may have made about the family's resources. And you can work as a team to pick a school that best suits your child's academic needs and the family's financial ones. Older teens are also ready for a discussion about trust funds, if they have any. And the teen years are usually when youngsters make their first foray into the working world. Many experts say a job is essential in teaching kids the value of money, as long as it doesn't distract from the teens' real job--school.

No matter what the ages of the children, parents need to be frank when finances take a turn for the worse. Deborah Umansky, a single mom of two in Santa Barbara, Calif., says money was tight after her divorce. So she talked to her kids, then aged 9 and 13, explaining that "in our family, money is shared. We don't have as much; we have to be more careful." You should also take a hard look at yourself, says Robert Kiyosaki, author of Rich Dad, Poor Dad (Warner Books, $15.95). He challenges parents to observe if they're passing on the bad financial habits that led to their own fiscal difficulties.

Children learn more by watching what their parents do than by listening to what they say. So the more consistent parents are in their own financial behavior, the better examples they'll be. "Mom and Dad need to talk about what they learned about money when they were growing up, and what they want to preserve or discard from that," says psychologist Goldbart. If you're not clear yourself about what money means in your life, you'll never give the children satisfactory answers to those thorny money questions.