Money Talks: Raising Financially Savvy Kids

In today’s tough economic times, talking to your children about money has never been more important.

According to the experts, here’s what financially literate children should look like: They should be able to evaluate financial information, set financial goals and possess the skills to achieve them, be able to use financial services (like banks and loans) effectively, build wealth and meet their financial obligations.

By starting with the basics early, and being consistent over time, your child will be well on their way to being a financially literate adult. Here we’ve compiled the best advice for setting your children off on the right financial foot.

The stakes are high. According to an academic study published in the April 2012 edition of the International Journal of Business and Social Science, 70 percent of American college students have credit cards and the average college student has more than a $4,100 credit-card balance, effectively starting his or her young life off in debt.

Experts agree this is the exact situation early financial education can help prevent by giving kids better decision-making skills and the ability to “run households and manage money in a way that doesn’t give you a high amount of stress,” Takeno says.

As parents, we can relate to financial pitfalls. We, ourselves, are guilty of money mismanagement, both big and small, making it a hard subject to discuss with authority.

The good news is it doesn’t have to be overwhelming. Money has a language, and it’s not necessary that kids be fluent right away. Starting somewhere, anywhere, and keeping that communication going over the long haul can make all the difference.

“It’s choice and freedom and decision making you’re teaching as they get older. Consider it a gradual release of responsibility,” says teacher Michele LeBlanc, who gives a summer course for grade-school students at Mid-Pacific Institute called “Money Doesn’t Grow on Trees.”

“We need to be teaching and re-teaching economic concepts as children grow. It’s an ongoing process,” she says

Wants and Needs

Kids need to understand that money is limited and that everyone—themselves, Mom and Dad, neighbors, etc.—need a set of skills to decide what to spend, what to save and what to share, says LeBlanc.

Start with a simple exercise with your youngest kids to identify wants and needs. “We ask the young children what they need to live and they come up with a list,” says LeBlanc. “Then see what they want to have but that’s not essential.” This will open the door to an ongoing discussion and give you the working vocabulary with your child to explain why we choose to buy some things and not others.

With elementary school students, it’s important to use real-life examples. Since money is woven into our everyday lives, every trip outside the house can provide an opportunity. Grocery shopping is full of lessons on wants and needs. Don’t be afraid to tell your children that your family money is limited and to explain a little about your family budget.

Point out scarcity in your everyday life so they understand that not everything we want is available to us and resources aren’t limitless. Don’t be shy of big economic concepts like scarcity and surplus.

“I break it down like this: If you go in your refrigerator and have six apples, I have a supply of six apples. If you invite eight people over to eat apples, then you can’t meet the demand of your guests—that’s scarcity. But if you only have four friends over, then you have a surplus,” LeBlanc says.

Also integrate charity into the discussion of wants and needs. “A lot of people are less fortunate than us,” says LeBlanc. Talk to your children about how you give and why you make it a regular part of your life.

Setting Limits

We live in a consumer world. Around us there are unending opportunities to spend money, so it can feel as though there’s a barrage of  “I wants” coming from children. But learning good decision-making skills is part of being a good consumer.  Saying “no” to your kids, and giving them the tools to eventually say “no” to themselves, is part of the process.

“For example, you get an invitation to a birthday party and go shopping [with your children],” says LeBlanc. “Tell them ahead of time that you’re going shopping just for a friend. Ask what the friend will like, for example, Hello Kitty. You talk about it ahead of time, set a price range and say you’re only going to go to that aisle. Discuss that they’re going to the store for the friend, not for themselves, and that it’s not the time to ask for something for themselves,” she says.

The key is planning ahead for these situations and making sure your child knows your expectations. If your older child has his or her own money, some parents suggest setting rules on what the money can be spent on.

“We don’t let him buy junk,” says Yasmin Graulau, whose son, Alex, 13, has been saving money since he was 8. “The biggest challenge is the kids always want something at the checkout at the store.” Instead, Graulau tells Alex to pick up things he is considering during their time at the store and carry them around as they shop, giving him time to really think about the purchase.

“At the end of walking around the store, he usually wants to put them down,” she says.

Be careful not to micromanage. Making mistakes is part of the learning game. “We need to empower them to make little decisions along the way,” says LeBlanc.

Earning money

For children, money requires a context. “Money represents your life energy,” says June Russell, a Kailua certified public accountant and mother of two daughters. “If you work for money, kids need to understand: ‘I had to work that many jobs or hours to buy this item.’”

Allowance or no allowance is a perpetual parenting debate. All kids should have the ability to earn money in some way; some parents dole out an allowance based on a regular set of chores and some don’t. But regardless of what you choose to do, linking work to earnings is a good lesson.

“We started so early, he doesn’t put up a fight,” Graulau said. “Not doing your chores isn’t an option.” Alex receives a monthly allowance and, now that he’s older, also earns extra by tutoring a younger child and doing lawn work for neighbors.

LeBlanc doesn’t suggest a weekly allowance. “I feel that everyone needs to chip in. The dishes need to be done. The garbage needs to be taken out. These are non-negotiable chores,” she says. But she says kids who want to earn money can request extra work for pay, chores that go above and beyond their daily responsibilities.

Watching Money Grow

Whether money comes from birthday checks, allowances or odd jobs, learning to save automatically is the definition of good financial sense. “My mom said it over and over—save half and blow the other half on whatever you want,” says Russell. She credits her mother’s early teaching with her own savings strategy now. “You should take your money out for savings first, right off the top.”

Give your small children their money in small increments, like coins and small bills. You can use an old-fashioned piggy bank or decorate a do-it-yourself moneybox to make saving coins fun. After a set period of time, show them how much the money inside has grown by emptying the bank and counting the money together. Keeping a chart over time can give them a good visual on how money grows.

Older kids with bank accounts can see their money grow using some tried-and-true methods, not often employed in this digital age.

“As soon as he opened his account, we taught him how to balance his savings book,” said Graulau of her son, then 8. “We had him write in the numbers for his deposits and withdrawals, do subtraction, all that.”

‘Iolani economics teacher and father of two Richard Rankin says he kept an old-fashioned ledger for his kids.

“We gave them specific chores, some that you did as a family member and those which you did as a chore. Then they got a salary every week. I’d add that salary to the ledger right in front of them.”

Rankin handled the payouts himself, rather than using a brick-and-mortar bank. “Essentially, I was the bank and the ATM,” he said. He also decided to pay the kids interest to show the benefits of keeping money stashed away.

“I had to pay a really high interest rate so they could see the money grow over time,” he says.

Teaching these early financial lessons has some interesting payoffs. In 2008, University of Hawai‘i Professor Michael Chang started the Kids Savings Project to bring local banks into schools to help children—especially those from low-income households—to make regular deposits, even partnering with local organizations to help provide seed money to open the accounts.

“The average savings per child is about $115,” he said, a striking figure, considering the seed money was only between $5 and $25. Since the program started, students statewide have saved about $220,000.

Chang says research shows children who have savings in their own names tend to get better grades in school and are more likely to go to college. There are other benefits, too.

“One parent came up and said, ‘When my daughter started saving money, she started to mature and the drama is gone. She used to whine about toys and about chores, but now she tells her mom what things are wants and needs.’”

Adding It All Up

When a child grows up financially literate, they might look and act a little different from their peer group.

“When we go to the mall, most kids run out of money. Me, I can get two slices of pizza and still have enough for a movie,” says Alex Graulau, 13.

Just like their parents, kids might not always hit the mark and will certainly make mistakes along the way. The important thing is to let them learn the lessons by gradually increasing their responsibility and control over their financial decisions.

“It’s a nice little nest egg now,” says Yasmin Graulau of Alex’s $1,700 bank account.

“I think that’s pretty good for a 13-year-old. When he moves out, he’ll get complete control over the money. My hope is that he doesn’t buy anything with it. But I guess we’ll see.”