Teaching Kids To Save, Budget & Spend Money

Lisa Minnis never doubted the financial responsibility of her 16-year-old daughter, Isabel, but some order was needed, along with a dash of education.

Isabel made decent money from babysitting, although she kept the cash in random locations around her room. Then she got her first real job at a swim and tennis club, teaching 5-year-olds how to swim, and it came with the new mystery of a paycheck that required withholding.

“We went to the bank and got her accounts for savings and checking,’’ Minnis said. “They explained how it could work for her, what would be best. Basically, she’s saving all of her swim-lesson money and using the babysitting money for spending.

“I think she had pretty good money discipline anyway, but now she has structure and a plan. I think she is developing some really good habits with her money.’’

Teaching Kids How To Budget

Teaching kids how to budget and save isn’t really an option, according to financial experts. It’s essential.

“Financial literacy should be part of a political agenda and in my view, we need a national initiative about it,’’ said George Washington University professor Annamaria Lusardi.“We have to make sure the next generation is well-equipped and parents must set an example. They must teach kids about money.

Lusardi is one of the nation’s foremost authorities on debt management and prudent financial practices. She thinks too many parents are counting on schools, employers or even peers to teach personal finance education and that is not going well.

“If you leave it up to other parts of society, such as the employer or private sector, it’s going to be a very unequal process,” Lusardi said. “Learning through mistakes is costly and inefficient. Children should be taught the right way at a young age. They will become financially responsible adults and avoid so many problems.’’

Children Can Start Saving At Age 5

According to research from the Consumer Financial Protection Bureau, children are “developmentally capable’’ of saving at age 5. Allowances are fine, but the real benefit came with parental guidance on saving, budgeting and spending. It creates habits that allow them to effectively manage their finances as adults.

And what’s the best road map for parents who are eager to guide their child’s financial development?

• Set a good example: Imagine the conflict created within a child’s mind if they are told to be frugal, but they witness Mom or Dad buying cars, electronics or clothes on a whim and falling into careless debt. It’s good to explain spending decisions to a child, such as the difference between a need and a want.
• When to say yes. Another positive message is turning today’s “no’’ into a future “yes.’’ For example, “No, we don’t need to purchase that frivolous high-priced gadget that caught your eye at the store, but with the money we continue to save, yes, we can take a nice beach vacation this summer.’’
• Visit the bank: Take the child along and open a no-fee savings account for them. Delayed gratification can be a difficult concept, but the benefits of accumulating compound interest sometimes clicks with a child who might equate a short-term sacrifice with earning “free money.’’
• Explain credit and debit cards. It’s never too early to point out the uses of financial products, such as the difference between debit cards and credit cards. It might be good to give your child a $50 debit card during his senior year in high school and tell them it has to last through all their spending for a month. By the time children leave for college, they should know how a debit card works and, if they’re ready, apply for a credit card.
• Find a cool app: Technology can demystify the worlds of saving and spending. The latest apps are a way of tracking the savings, seeing the growing interest — and it comes in their language. The Nickel app has grown in popularity because it replaces the traditional paper-money allowance without the drawbacks of other digital payments. Nickel is a prepaid, reloadable MasterCard debit card, where an allowance can be auto-loaded each week or month. But children can’t take cash from the card, keeping parents in control. Parents can track spending day by day and it can be broken down by individual retailer. Parents can transfer additional money to the card (if more chores were completed) and the card can be placed on hold if it’s lost (or the child loses spending privileges). The really nice feature? It’s a Nickel Pocket component, where children can opt to take money off their card, saving it for future use. Parents can provide the reward of interest on the saved money after a period of time. If the money is pocketed for at least 30 days, Nickel transfers the pre-determined interest payment to the child’s regular Nickel account. Interest can continue to accrue through each payday.
• Make them work for wants: If a child occasionally wants to purchase a non-essential fun item — and who doesn’t? — teach them that reward must be earned. If they don’t have a job, maybe they can earn extra money by helping around the house, washing the car or mowing the lawn. “Sometimes, I’ll agree to go half (on the payment of the item),’’ said Scott Pascal, an insurance professional whose 15-year-old son, David, occasionally wants equipment or maintenance for his dirt-bike. “But I don’t fully give him anything. I want him to identify what he wants, understand the cost, then find a way to earn his end of it. I think you develop an appreciation for what something costs.’’
• Offer innovation and inspiration: Beth Kobliner, a best-selling author that has written on age-appropriate financial lessons for children and a member of the President’s Advisory Council on Financial Capability, advocates involving a child in the family’s money decisions. That could include teaching them about generic brands and purchasing items in bulk. Parents could also give the child a small amount of money in a grocery store and ask them to choose the best-value fruit.
• Talk about purchase value. Questions can be asked about various purchases. Do we really need this? Is it available at a discount store? Should we not buy this item so we can have more money for eating out later in the week?
• Have your kids perform a home energy audit. Teach your kids how to read your electric, gas and water bills, brainstorm ways to cut your power consumption, and measure results when the bill comes.

Teaching Kids About Saving, Spending & Sharing

If nothing else, there is one very valuable tool that provides a wonderful financial education for just about any age. Create three jars — labeled “saving,’’ “spending’’ and “sharing.’’

When a child receives money for a birthday gift or earns money for chores, the money can be divided equally among the jars. The spending money can go for smaller items. The sharing money is for charity. The saving money should be accumulated to purchase more expensive items. As with any meaningful exercise, a child learns how to save money by making good choices.

“My daughter will be going to college in a few years and I told her she’s going to want to have some money,’’ Minnis said. “I reminded her that it’s not all coming from the National Bank of Mom. We all need to learn how to plan and save. Learn it young and that’s an advantage.’’

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