Raising money-smart kids

August 23, 2004
By Gerri Willis, CNN/Money contributing columnist

NEW YORK (CNN/Money) - Last year, 150,000 young adults aged 18 to 25 declared bankruptcy. In an age of runaway debt a solid financial education is more important than ever.

If you want your kids to be smart about money, experts say you've got to start training them early. How can you raise savvy consumers? Here are today's 5 tips.

1. The art of the allowance.
The allowance has become the family staple, teaching children how to manage a small amount of money every week or month.

Sounds simple enough right? Well, it's just the beginning. Simply handing money to a child doesn't necessarily make them any wiser. Neale Godfrey, author of "Money Still Doesn't Grow on Trees," has a few suggestions.

She says children need to be introduced to the "work for pay" concept early on. When they're little, even as young as three years old, have them do chores with you so they start to connect work with pay.

Make the world their classroom. Explain that you have a job so you can earn money to buy food. Introduce them to different jobs that allow people to earn money, like firemen and truck drivers.

To avoid giving them an entitlement mentality, be careful about what chores you're paying them for.

Godfrey says, "There are 'citizen of the household chores,' like cleaning their rooms. They shouldn't get paid for that." But you can reward them for helping out with setting table, recycling, dusting, vacuuming and sorting family laundry.

2. Banking it.
At 5 years old, take your child to the bank to open up a savings account. Let them deposit their long-term savings in the account and watch it grow with monthly deposits.

Take the time to look over the quarterly bank statements with them. You can even help them track their savings online.

3. Links with their world.
By age 10, Godfrey advises introducing the concept of investing. Buying a share of stock or two for them is a great way to do it.

What products do they use? What companies do they know? Buying shares in companies whose products they know, can link them with their world.

Do they love Disney? Are they inseparable from their iPod? Do they love sports cars or Harry Potter movies? They'll be able to track their investments and learn to read the annual reports they get in the mail.

You can even talk to them about how world events (like rising gas prices) might affect their investments. Check out www.oneshare.com where you can purchase single shares for gift and novelty purposes.

4. Cold hard cash lessons.
Some parents give kids access to their credit cards at age 12 or 13. Godfrey says this a big no-no.

At age 12 or 13, it's a good idea to let your child learn the art of budgeting. Negotiate an allowance that will fit their needs. Then, give them a cash card with the agreed upon amount on it. This will give them the opportunity to learn that cash is finite.

They'll soon find out for themselves whether they can afford trips to Starbucks and ice cream after the movies. When they run short, they'll learn to prioritize their spending.

5. Spender's ed.
College students who carry credit cards also carry a lot of debt. According to Nellie Mae, the median credit card balance for undergraduates is $3,400.

Bottom line: Parents need to talk to kids about credit cards before they start getting solicitations. Parents need to explain in no uncertain terms that credit cards can cost a lot of money if bills aren't paid on time -- or all at once.

In other words, it's important to make sure your kids understand that credit card interest rates and late fees can drive their balances sky high, and that making minimum payments won't eliminate their debt. Schools don't teach this stuff, so it's really up to the adults in the household to provide this kind of education.

If you don't talk to your kids about credit the consequences can be scary. More people filed for bankruptcy last year (1.5 million) than graduated college (1.2 million). For more information on teaching kids about money check out www.childrensfinancialnetwork.com, www.MoneyInstructor.com and www.themint.org.

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