Saving and spending

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One way to encourage your children to develop sound money discipline is to make savings a condition of their allowances. So try to account for this when deciding on a weekly or monthly figure.

This, of course, means setting a budget - and deciding what to do when children run afoul of their own guidelines.

One answer is to require them to save their allowances in locked boxes. But since this doesn't teach restraint and you won't always be around to oversee savings deposits, there are more instructive ways to make the point.

Neale S. Godfrey, co-author with Carolina Edwards of Money Doesn't Grow on Trees: A Parent's Guide to Raising Financially Responsible Children (Fireside, 1994), recommends what she calls the Bill-Paying Game, inspired by a scene in the film "I Remember Mama."

Count out a reasonable "salary" in play money, like that from a Monopoly game. Then, take some old bills and write the amount due on the back of the envelope of each. Show the child the entries in each for "date due," "minimum payment due" and "balance due," then let them decide how much to pay. If the allotted money is enough to pay the bills, everyone wins.

Use the leftover money to introduce the concept of savings. The younger your child, the more limited his or her concept of time.

If they've been receiving your sage financial teachings from an early age, older children shouldn't have trouble understanding the concepts of long-term and short-term saving. If not, illustrate the concepts by using goals, as with a new video game a month from now versus a bicycle this summer.

Remind them of these goals to keep them from straying.

The more worthy and ambitious the long-term goal, the more you may want to consider matching grants to reward your child's savings discipline. These grants can be anywhere from 1.25 to 1 to 3 or 4 to 1.

Younger children understandably have trouble grasping off-site savings, so the best mechanism for them is often a piggy bank for coins and a wallet for bills. Count the money with them periodically and tell them how close they've come to their goals. Above all, praise their progress.

Once children reach the age of 9 or 10, they're more amenable to banks. Quantitatively adept children of this age can understand the concept of interest rates. Until they're old enough to handle a checking account, children may take withdrawals as cashier's checks or money orders.

The best way to encourage sound spending habits is to exhibit them. When planning a trip to the grocery or discount store, get your children involved in making a judicious list and sticking to it. This will teach them to avoid the bane of all savers: impulse buying.

For big-ticket items like appliances, show them how to do the research: reading articles and reviews, phoning stores to see if your choices are in stock, negotiating with salesmen on price, going to several places to see what's available and compare values.

Doubtless, an occasional purchase will be defective. No problem. Use this to demonstrate the importance of saving sales receipts and reviewing warranties. When you return the goods, take your children along and show them how to overcome salesmen's arguments.

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