Teach Children Money Skills

Teaching your teenager the ABCs of personal money management will benefit your child now and in the future.

A good place to start your youngster’s financial education – at almost any age - is with an allowance. An allowance can be used to teach such money management basics as budgeting and the consequences of saving and spending decisions.

21st century parents, thanks to the wide variety of payment forms available in the modern financial marketplace, have far more effective and safer allowance options at their disposal when it comes to teaching financial literacy than did their parents, who were essentially limited to cash. Today’s allowance can consist of one or more of a variety of such payment forms as checking accounts and debit, credit or prepaid cards. These alternative forms of cash allow parents to set spending caps and afford them a greater opportunity to encourage responsible spending and saving habits.

Allowances can be tied to chores or used exclusively as a educational aid. There are parents who teach their youngsters that chores, such as clearing the table and taking out the trash, are just part of the child’s family responsibilities. Still other parents believe that the best way to instill sound financial habits, especially in teens, is to require production of a budget, and a signed pledge to stick to it, as a requirement for the allowance. No matter what form an allowance takes, the key to its success as a teaching tool is a clear upfront understanding of the ground rules for its use and ongoing communication between parent and child. It is important, especially for teens that the rules are flexible enough to allow youngsters to make their own financial decisions – both good and bad. It is how we learn.

However, it is equally important that the consequences of making poor decisions be crystal clear from the outset. For example, teens must be told upfront if outspending one’s income for say, credit card purchases, will result in a suspension of charge card privileges and the earmarking of all allowance revenues for debt reduction until the bill is paid. It is essential to the success of this educational effort that the allowance be used as a teaching carrot and not a disciplinary stick.

Here are some other tips from ACEC to help improve the financial fitness of your teen:

• Work with your teen to develop a realistic budget, set long and short-term financial goals and the plans for achieving them.
• Discuss the difference between "must have" purchases such as school supplies and "would like to have" purchases such as the addition of the latest fashion to an already adequate wardrobe.
• Explain the advantages of deferring purchases today, such as the latest computer game, to save for another desired item, like a car or college education, tomorrow.
• Promote shopping around before making purchases; it generally assures a better deal and discourages impulse buying.
• Encourage the use of a computer or a ledger to track income, savings, expenses and debt.
• Use financial – checking account, credit card, etc.– statement reviews as a teaching aid to evaluate spending habits, promote sound financial practices and to instill good fraud review practices.
• Stress the importance of safeguarding such personal and financial data as social security, personal identification (PIN) numbers and credit card information as a means of preventing such frauds as identity theft.
• Foster charitable giving by urging youngsters to donate some percentage of their allowance, however small, to the organization(s) of their choice.