Young Start for Money Smarts

If money doesn’t grow on trees, it must come from an ATM, right? From a child’s perspective, that’s logical. Have you ever told a child you were short on cash only to be met with the wide-eyed response, “Just go to the ATM!”

It’s amusing a child would think that money is just dished out for free from a machine, but the deeper issue is, children should be more knowledgeable about how money works and where it comes from. The key to a responsible financial future is a solid educational foundation that starts at an early age.

Good money habits aren’t genetic. They don’t happen automatically, they must be taught. As proof, a recent survey showed that less than half of all young adults pay off their credit cards every month. That means interest could be eating up their ability to save. These same young adults don’t have rainy day emergency funds, or have a good understanding of the stock market and how it’s used for investing. This could all be the result of a simple lack of financial education.

To help head off any harmful repercussions from a lack of financial know-how, you can teach your children the ways of personal finance as early as kindergarten:

• Start by setting a good example.
• Share with your children your budget and how you cut costs.
• Explain the difference between what you “need” and what you “want.”
• Show your children how you work a budget, comparison-shop and make regular contributions to a savings account.

You can teach kids about the magic of compound interest by putting a dollar in a jar and adding 10 percent interest each night/week/month. Here are some other things to think about doing:

• Set up an allowance for doing chores. A good starting point is 50 cents per week per year of age. For example, a five-year-old would get $2.50; a ten-year-old $4.50.
   
• Have the allowance split into thirds, one for long-term savings (college/car), one for short-term savings (a favorite toy), one for money to spend right away. You can even split it into fourths with one-fourth reserved for charity giving.
   
• Set up a matching program. You’ll match what they save while they put money away for something special (bike, radio, etc.).
   
• Suggest ways to save money. Instead of buying that game or CD, have them get it free on loan from the library or movie rental store.

Learning about money can be fun. Here are some activities you can incorporate into your everyday activities:

• Show your child the different types of money, both coins and paper bills. Count out five pennies and show how it makes a nickel. Do the same with dimes, quarters and dollars.
   
• Set up a “store” with items for purchase. Involve your child in a garage sale. Subject them to the whole idea of buying and selling, and the value of money.
   
• When shopping, show your child how much things cost, especially those items he/she uses or wants.
   
• Let your child hold money and keep it in his/her pocket. Have them count how much they have and explain how much the money will buy.

To ensure your child grows up to be fiscally responsible, there are a number of things you can do. These include keeping an open dialog about money (both yours and theirs) and setting a good example by sharing good money habits. But the most important point of all is, start early! The sooner children understand money and its importance in day-to-day life, the better their chances of having a healthy and productive financial life.

For additional information on children and money, check out The Institute of Consumer Financial Education’s website. And here's another resource: www.moneyinstructor.com/coins.asp.