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  • 5 Ways to Teach Your Kids to be Money Smart

    This fantastic guest post is from Kyle James, who owns Rather-Be-Shopping.com, a website that specializes in helping families save money with coupons, frugal living tips, and personal finance advice to make their paycheck go as far as possible every month.

    As a father of three kids, (age 5, 8, and 11) I have always struggled with the best way to teach them to be smart with money and understand what a dollar truly represents. I don’t want to send them off into the real world with the notion that they are entitled to certain “things” and don’t have to work hard for what they want. I feel that would be a huge disservice to them and could very well lead to a life of battling credit card debt and financial misery. So I put a plan into place to teach them to be money smart.

    They Gotta Earn It

    My daughter loves horses. I mean really is completely horse crazy. She takes weekly riding lessons at a cost of $35 a pop which adds up pretty quickly. My wife and I found the perfect way for her to earn the money for her lessons. Our neighbor is out of town for 2 weeks out of the month and needed someone to take care of his three horses and various chickens. My daughter stepped up to the plate to take care of the animals and the money earned equates to the cost of her riding lessons. It is the perfect situation as she sees the value of hard work and earning the money herself for the lessons. If you can find similar situations for your kids it is a great way to introduce the idea of having to work towards a goal.

    Allowance, Yes or No?

    I am not a fan of giving kids a weekly allowance without jobs or chores attached. My wife and I give our kids a list of jobs that need to be accomplished in order to receive an allowance and it removes any sense of entitlement. You want some money every week? I am cool with that, but here is what needs to be done to earn it.

    The Power of Savings

    My wife and I opened a savings account for each of our three kids soon after they were born. When they receive money from family members on birthdays, or Christmas, we tell them they have to save a percentage of it. Then when the bank statements show up in the mail I make a point of having them look at them. It is a great way to introduce the concept of investing and compounded interest. They are always fascinated that the bank pays them money to keep their money safe. Even if the interest rate pays them pennies, they still think it is pretty cool.

    In Order To Receive, You Must Give

    Do you have a child who is constantly whining about wanting a certain toy or video game? I think all parents can relate to this in one way or another. Try the tip of telling them that in order to receive something they first have to do something selfless for someone else. Ideas include going through their closet and donating gently used toys or clothing to children in need, or helping an elderly neighbor with chores around their home. Be doing this you instill the idea of just how lucky they are to have what they have and the many blessing in their life. At this point you can choose to reward your child for their selfless acts.

    Personal Responsibility

    I feel the idea of personal responsibility with money is incredibly valuable to teach kids. If they choose to blow their allowance on a cheap toy that breaks within 15 minutes, well, that was their choice and they have to live with the consequences. I have seen this play out many times in my home and amazingly the choices always get better and better. It can be very hard to watch your child make a bad decision but in the end I feel it is the best way to teach them to make good ones. It is deep in our DNA to learn from our mistakes and not make them again.

    These tips have worked with my kids but I can’t guarantee they’ll work with yours. I’d love to hear what does work with yours! Different thoughts and opinions about teaching kids to value money and what it represents will make us all better parents and eventually create money smart young adults. I look forward to your comments.

    Ed. note: What do you think, CFO readers? I’m on the fence about allowances, especially …

    Paying for a private university education

    Earlier this year, I shared the conversation I had with my dentist about his daughter’s dilemma on where to go to college. She had gotten into a couple of excellent University of California schools, as well as a well-known private university on the east coast. UC schools run about $25,000 per year. The east coast school is $50,000 per year. Needless to say, my dentist really wanted his daughter to attend a UC. But her first choice was the east coast school.

    I just saw my dentist for a cleaning and was eager to find out what his daughter had decided. I wasn’t surprised when he said that she’s out on the east coast, and that she’s having the time of her life. I was surprised when he said he had to take out a second mortgage to pay for her tuition. After all, not only is he a dentist, his wife is an attorney. But $50,000 per year is a lot of money, especially when you consider it’s after taxes.

    It’s not like my dentist is one of my best friends, so I didn’t feel comfortable asking if they’d saved money for college while their daughter was growing up. I don’t know much about their finances, but I’d like to think that they had saved enough to pay for at least one year’s expenses.

    I have a strong emotional response to my dentist’s situation, although I can’t quite put my finger on what the emotion is, exactly. It’s just that they’re going through what my dad and I went through. I chose an expensive private school because it “felt right,” without regard to cost. I don’t know exactly how my parents paid for it, but I know it wasn’t easy for them.

    I greatly appreciate the sacrifices they made for me, and I know I wouldn’t have been pleased if they’d tried to knock some sense in me during my senior year of high school. But if I could do things over again, I would definitely pick a less expensive school – or at least one of the schools that had offered me a scholarship. Knowing what I know now, I can’t believe I put my parents through that – or that they let me put them through that.

    My dentist is fairly young, so I expect to be seeing him for many more years to come. I’m interested to see where his younger daughter ends up going to college, and what his older daughter ends up doing for a career. While you can’t put a price tag on the experiences she’ll have at her school, financially speaking, I find it hard to believe that the investment her dad is making will have been worth it compared to the education she would have gotten at a UC. But maybe she’ll prove me wrong.

    Do your kids want to work this summer?

    I was 16 when I got my first real job working as a floater at a department store. (Boring, minimum wage of $5 per hour, too easy to spend the little I did make because of the 30% employee discount, but I figured it was better than McDonald’s. And mostly, I was an ignorant teen who didn’t know a darn thing about saving.)

    My friend’s daughter, who is 13, has a much better first job. She’ll be “working” as a camp counselor-in-training. Since she’s too young to be employed under California law, she’s officially a volunteer. But she gets a $500 cash “scholarship” at the end of the summer. Not bad for a 13-year-old.

    If your child wants to work this summer, there are some legal rules you’ll need to know, such as whether a permit is required and how many hours per day and week your child is allowed to work. The federal government’s blog, Gov Gab, has a handy post with links to helpful sources.

    The most important link is worth bookmarking. It’s the U.S. Department of Labor’s Youth Rules site, and is all about the federal and state rules for young workers. If you have kids who are old enough to work (or will soon), I highly recommend checking it out.

    Teaching our children value and to accept "no" as an answer

    This post was inspired by Michelle at Scribbit, who wrote about her decision not to pay for her kids’ college education and other alternatives to help prepare children for college financially. One of her suggestions is to teach children to “think cheap,” since public universities are a fraction of the cost of expensive private colleges.

    Her post got me thinking about my dentist, whose oldest will be entering college in the fall. His daughter’s first choice is Tufts. My dentist’s first choice for her is UC Davis. The difference in annual expenses? Approximately $25,000.

    My dentist doesn’t want to say no to Tufts just because of money. And his daughter simply isn’t used to her dad refusing her something, particularly when it comes to something as important as education and certainly not just because of money.

    My conversation with my dentist reminded me of my own decision on where to go to college. Foolishly, I picked the most expensive private school that I had gotten into – one that hadn’t offered me a scholarship. Even more foolishly, my parents didn’t say no. (If you’re reading this, Mom and Dad, sorry.) Or maybe it wasn’t that foolish, at least from a non-financial perspective.

    Here’s the thing: If my parents had said no, there’s no way I would have understood. I probably would have resented them for it – particularly my dad, since he was the family’s financial manager. The problem is, I wasn’t used to being told I couldn’t have something simply because of money.

    I grew up very privileged, particularly when it came to experiences and education. My parents spent a lot of money over the years to provide me with enriching experiences and a top-notch education. So by the time it was time for me to go to college, I fully expected that they would prioritize those two things more than, say, managing the expense. And they did.

    In retrospect, I wish I’d been mature enough to understand the sacrifice they were making and that they had refused to make it. I’m sure the money could have been put to a much better use, which isn’t to say that I didn’t have a great experience and that part of who I am is surely due in part to that time in my life. And I’m certainly grateful for the sacrifices that my parents made. But 15 years after graduating, nothing about where I went to college matters. I realize now that all that really mattered after graduation was my GPA, my major, and how hard I worked.

    So what I have learned to pass on to my kids?

    I’ve learned to say no.

    Not to everything, of course. But I do already explain to my three-year-old that we aren’t buying a certain item that he wants because he has too many of the same type of toy at home, or it’s not on sale or a good value (even a 99-cent toy is a waste of money if it breaks immediately). As the boys get older, I’ll expand the concept to other things (e.g., why get an iPhone when there are less expensive phones that do the same thing?). I know they won’t always understand. But at least it won’t be a surprise when Mom and Dad refuse to pay $200,000 per year for college (which is probably what private universities will cost!).

    Savings for Your Child

    This post over at The Simple Dollar about starting a savings account for a new baby suggested putting away $5 or $10 a week for the child until adulthood. Trent did the math, coming up with numbers between $9,000 and $39,000, depending on the amount invested, the type of investment, and the age of the child when the account is given to him.

    Since Alex and Tyler are still so young, I haven’t quite thought through the system I want to use to teach them to manage their own money. I do plan on giving them an allowance, and teaching them to give, save for both short-term and long-term goals, and to spend wisely. But in the meantime, I’m not putting aside money for them to have when they’re older. I’m taking any money that I’d give them and putting it in education funds.

    But what I have done is open UTMA accounts for them, using money that was given to them or to us to spend on them. Marc and I agree that we can afford to buy the boys everything they need, and they have more than enough toys to play with. The best gift we can give them is to invest the money and let it grow into a much bigger gift than the original. Because the money is in a UTMA, each child will gain possession of his account when he turns 21. I hope that by then, wise money management practices will come naturally to them.

    I like that what Marc and I are doing requires no extra investment on our part. We can continue to devote all of our savings for our children to their education; yet when they turn 21, they’ll have access to a substantial sum of money that can help them buy a house or pay for grad school. Other ways to save “free money” for your kids are:

    • Sell their gently worn clothing and used toys and books.
    • Sell your own clothing and books if you’re not wearing or reading them anymore.
    • Take the money you would normally spend on holiday and birthday gifts for your kids and invest most of it – especially if they’re too young to know the difference.

    Teaching Your Child to Delay Gratification

    Life is so hectic that delayed gratification is not as high on my list of priorities as I wish it could be. When I tell Alex that he needs to wait, I do it out of necessity rather than as a teaching tool. However, I do think that delayed gratification is extremely important and I really like the experiment mentioned in this letter at All Financial Matters from a mother to her daughter about saving for retirement:

    When you were a little girl I did an experiment with you. You didn’t know about it. I put a marshmallow on the table and told you that if you waited for 10 minutes until I got back and didn’t eat the marshmallow while I was gone, I’d give you two marshmallows when I returned. But if when I came back you had eaten the marshmallow, I wouldn’t give you a second one.

    What did you do? You waited until I got back. And then I gave you two marshmallows which you promptly devoured with a big grin on your little face.

    I’ll probably wait until Alex is a little older to do this with him, but I think I’ll do it repeatedly over time (varying the reward) to reinforce the point that good things are worth waiting for.

    Note: The letter is long but worth reading and using as a model for your own letter to your children.