Teaching Your Kids About Money Start with the ABCs: Allowances, Banking and Choices. Then set a fine example.
By Marlys Harris

(MONEY Magazine) – Parents these days may notice that their kids display startling financial sophistication. By the age of three, they know how to get money -- from automatic teller machines. They are familiar with credit; when told they can't have a toy, they advise Mom and Dad to charge it. Older children, hit hard by the kiddie tax, cry in their root beers about the evils of the Internal Revenue Service. For all that, kids' actual understanding of personal finance is no deeper than their knowledge of geography. Parents complain that kids spend all their money on junk, don't know the value of a buck and cannot save a dime. Clearly, some instruction is in order, as even my 16-year-old son Max concedes in the box on page 92. Fortunately, the most successful training methods are the same homely devices that have been deployed by parents ever since the days of black-and-white TV: -- Allowances to prove to kids that there are limits to spending power -- Payment for household chores to show that effort produces rewards -- Savings opportunities to get children in the habit of delaying gratification Far and away the most powerful tool is -- yuck -- parental example. Alas, to raise good children, you have to be good too. After all, many kids live by the maxim: money see, money do. By serving as a model of good conduct, you can start teaching children the principles of getting and spending when they are only four or five years old. Merely by going to work each morning, you can give young children a grasp of the underpinnings of family finance. Of course, you cannot expect kids to pick up on every point, so you should call attention to your exemplary behavior to make your lessons stick. James McNeal, a Texas A&M marketing professor who has studied kiddie finance for 25 years, calls these sessions ''teachable moments.'' To make them work, he says, parents should cover only the basics, not the fine points of investment banking. For example, when departing for the office, explain to your preschooler that you must work to earn the money needed to help pay for the house, the food and toys. (Mention the last loudly.) If you are in the supermarket and your child asks why you are buying the jar with the green label and not the white one, explain that yours is cheaper, tastier, bigger or thicker. Teachable moments also provide you with opportunities to ram home important moral messages to children old enough to understand them -- usually those already in grade school. If you discover that a cashier has given you too much change, for example, you might ostentatiously return it, explaining to your child that if money is missing from the store, the cashier might be blamed. Conversely, try not to brag at the dinner table about how the dopey department store clerk undercharged you by $30 or how you wrongfully wrote off your dry cleaning on your expense account while on a business trip. If you , dismiss such transgressions as trifles, you will know it's your fault later on when your child ''borrows'' money from your wallet or samples goodies from the school bake sale without paying. By drawing an honest picture of the family's finances, parents can help their children understand that the green stuff doesn't come from slots in bank machines. Early on, even before kids can count, they should have a sense that there are limits to what the family can buy. This doesn't mean revealing your precise income or net worth at the dinner table (for later disclosure at the schoolyard or a neighbor's house) but instead discussing some of the financial choices the family is making. Examples: ''We can't go on a vacation because Dad quit his job to take care of your new twin brothers,'' or, for teenagers, ''We're really feeling the pinch because of your sister's college tuition.'' Older children should be invited to express opinions on family financial options presented to them. For example, Sherman Nelson, 61, and his wife Denise, 53, both clinical psychologists in Minneapolis, have often given their children direct votes on the family's important discretionary expenditures. In the 1988 plebiscite, when the Nelsons' youngest daughters, Liane and Linnea, were still living at home, the family had to decide whether to vacation in Mexico or hire cleaning help during the year. The vacation won 4 to 0, and the Nelsons spent a glorious week in Mazatlan. Some parents shy away from discussing serious financial problems such as unemployment or bankruptcy with their kids. Arthur Bodin, a Palo Alto, Calif. psychotherapist and past president of the American Psychological Association's division of family psychology, urges parents to be honest but reassuring. Otherwise, children can scare themselves with exaggerated fears. ''Children are willing to contribute if the family is genuinely going through hard times,'' he says. Giving up piano lessons or turning over some babysitting earnings can be a source of pride to kids.

Giving Your Kids Allowances Your children will learn more about finance than you could ever preach by handling some cash themselves. By the time children can count -- usually at age five or six -- they are ready for that all-American financial institution, the weekly allowance. The ritual's chief virtue is that it gives kids the illusion that they can buy every bit of junk their greedy hearts desire when, in reality, it is teaching them the fine art of budgeting. - Settling on a reasonable sum is a parent's first task. Rather than picking an arbitrary amount, decide which expenses the allowance should cover and then weigh in other factors -- whether you live in a city or small town, for example -- that might alter a child's financial needs. A six-year-old probably needs money only for bubble gum, an ice cream bar or an occasional video game. He or she is not old enough to carry around more than $1 at a time. Still, this first allowance should be big enough to enable a child to buy something all at once. Your kid should not have to save for three weeks to buy a candy bar; few six-year-olds can delay gratification that long. By third grade, a child is generally ready to learn the difference between fixed and discretionary expenses. Construct an allowance that covers one or two essentials such as school lunch and bus fare as well as some recreational spending. One rule of thumb is to grant a child an amount as much as two times his fixed expenses. Of course, if he spends all his lunch money on baseball cards, you'll have to reconsider the amount. As he gets older, increase the allowance to cover more necessities as well as treats. Sixth-and seventh- graders can probably pay for some clothing items, records, books, school supplies and movies and use their own earnings for extras. By the time Junior is ready for college, his allowance should underwrite nearly all his fixed expenses. He should be required to earn the money for the cost of dating and gasoline. If your child comes to you at the end of the week begging for more cash, remain as impassive as Buddha. The real-life lesson of budgeting will be lost if you shell out an extra $10 or so every time your daughter wants another Barbie doll. What if she cries that your Scrooge-like stinginess will force her to go without school lunch for two days? Hold back your tears and have her make a peanut butter sandwich to bring from home.

Learning from Earning Handouts are rarely treated as carefully as money that is earned. Children will grasp this principle when they are paid for work they do. You should be the employer of first resort by supplying your kids with what Harold Moe, author of Teach Your Child the Value of Money (Harsand Press; 800-451-0643; $6.95), calls ''income opportunities.'' He defines them as chores you would have to hire somebody to do -- washing the car, trimming the hedge or typing. You may have to be a little creative for younger children, giving them special ! chores such as lining up all the shoes in the closets or folding laundry. A few caveats are in order. Children should undertake some regular chores without pay simply because they are members of the family. Examples: walking the dog, drying the dishes and keeping their bedrooms tidy. Further, kids must not be paid for fulfilling every request a parent makes. (''Quick, Joey! My nitroglycerin tablets!'' ''That'll be 50 cents, Dad, paid in advance.'') Whether the work is paid or unpaid, parents should try to make the job a positive experience that the child will want to repeat. ''Don't nitpick about the way everything is done,'' says Moe. ''The beds don't have to have hospital corners, and it's okay if the kid missed a few spots when he washed the car.'' If his performance is truly substandard, don't withhold pay. ''Focus on what the kid has done right,'' Moe adds. ''Then point out what has been done wrong and show him how to correct it.'' Given a pleasant introduction to work for pay, most teenagers lust for an outside job to earn even more money. Bodin suggests that parents limit their teenagers' outside jobs to a maximum of 20 hours a week. ''I think that's the most they can handle while carrying a full load at school,'' he says. Don't eliminate your kid's allowance when he takes an outside job. Doing so will only teach him that he was better off accepting your money without exerting himself. Sometimes kids take on extra work because their families really need the money -- usually for college savings. The Nelson family of Minneapolis had six children to educate. Facing college bills that might give pause to Donald Trump, the two psychologists made a deal with their kids. ''It was necessary for them to help,'' says mother Denise. ''So we agreed to pay for tuition, room and board, but they had to earn money for books, supplies, clothes and other extras.'' While in high school, Liane, now 22, took jobs babysitting. At Bryn Mawr College, she cleaned houses on Philadelphia's Main Line for $7 an hour. Linnea, currently a high school junior, found a $3.90-an-hour job scooping ice cream at a local store after school hours, but she was forced to return to lower-paying babysitting jobs after she injured her wrist playing soccer. Children should not receive money from their parents just for good behavior or high marks, however. Parents who pay for everything may find themselves victimized by little blackmailers who say: ''For $50, I might be able to bring my history grade up from a C+ to a B-.'' If a child has made some momentous effort -- for instance, to sit still during a five-hour car trip to Aunt Jenny's house -- parents may more safely recognize the achievement after the fact with a nonfinancial reward such as a picnic, an afternoon at the bowling alley or a special meal of the child's favorite foods.

Teaching Responsibility As hard as you may work instructing your kids to watch their pennies, advertisers and retailers work equally diligently to get your children to spend their spare change. Marketing professor McNeal offers as evidence his recent study in which 112 third-graders were asked to draw pictures of shopping scenes. One girl depicted a store in which everything was labeled Esprit, a sportswear company with a popular children's clothing line. ''She wrote 'Esprit' -- this complicated foreign word -- correctly,'' says McNeal. ''But she misspelled 'shirt' and 'skirt.' '' Parents who hear tearful requests for television-touted products should not fabricate a financial crunch just to get out of buying them. Prohibiting your kids from purchasing toys is no solution either. Sure, your daughter is silly to spend two weeks' income on her 13th My Little Pony, but kids must make their own spending decisions and live with the mistakes. Errors should not be borne lightly when they involve expensive stuff you bought, however. If, for example, your daughter leaves her bike in the driveway where it is squashed by a guest's car, don't immediately replace it. Let her feel the loss for a month or so. Then start a savings fund for a new bike to which you and she will contribute. That way she will understand the consequences of her carelessness.

Instilling the Urge to Save Kids should learn to put aside some of their income from allowances and earnings. Many mothers and fathers try forcing their kids to save through bank accounts as if such saving were the financial equivalent of washing behind their ears. Harold Moe believes that only true passion will give a child a gut-level understanding of the virtues of saving. To stir up feelings, he says, a parent should try to find a child's ''hot button'' -- something he or she longs to own or do. It could be a leather jacket, an outing with Girl Scouts, a portable cassette player or just a small toy that the kid thinks he or she must have. Once the price is known, parent and child can discuss how much must be set aside from an allowance each week & to save for the item and how much might be earned from extra chores or outside jobs. A child under nine should not be expected to save for more than four weeks; otherwise he'll become discouraged. Older kids, however, will be happy enough seeing dollars mount up toward their goal. Another way to instill a desire to save is by introducing a child to the wonderful world of compound interest. Moe suggests that parents of eight- or nine-year-olds take out a checkerboard to explain compounding. Place a single penny in the first square, two in the second, four in the third and so on. Unfortunately, no bank doubles your money so quickly -- which you'll have to explain -- but, adds Moe, ''Once kids understand that they can earn more money by saving, they're on fire.'' Parents need not cram investment principles down the throats of young children. When your child reaches age 12 or 13, you can begin to explain the broad differences between various types of investments. If your kid seems curious, you can go into more detail. He or she may eventually want to sign up for a personal-finance course. Before your son or daughter packs off to college, explain how to use a checking account and a credit card. Both will be essential in his or her new semi-adult life. Don't cover bounced checks or provide access to your bank card's line of credit, though. Overdraft charges and a low credit limit will keep a freshman spendthrift in line and remind him or her that all resources -- except parental affection -- are finite and must be used sparingly.