Personal Finance: Financial training wheels
When it comes to teaching our kids about money, we're failing. Need proof? Consider how much—or how little—teens know about cash, besides how to spend it.
Only 1 in 10, for instance, knows the concept of compound interest—that if you save or invest money for a long period of time, interest will eventually be generated off of interest so that your money works for you.
Only 17 percent of teens know how to manage debt, according to a survey of teen financial literacy by the Charles Schwab Foundation. Less than a third know how to create a budget. And only 18 percent say they are saving money "because it's good to save," according to a separate study by the market research firm GfK NOP. The rest are saving to buy things—like clothes, video games, cellphones, or music. (More below.)
The good news is that kids are open to learning. More than two thirds say they want their parents to teach them how money is made and how it should be managed.
So what are some easy things you can do to teach your kids about money?
Show them some money. Only 29 percent of preteens and teenagers get a regular allowance. Yet family financial experts say the only way kids will learn how to manage money is with their own hands. "We're not giving our kids the individual responsibility to understand how to handle money," says Cary Silvers, GfK NOP's vice president for consumer trends.
Don't just give them money—give them a budget. For instance, on family vacations, give kids a small amount of spending money and let them decide how they want to budget it. But if they blow through their entire stash buying candy on the first day, they'll have to learn to live with it. As kids get older, think about giving them other budgets to manage, like clothing money. The idea is to let them make some mistakes early—when failure means exhausting a modest weekly allowance instead of maxing out on a $5,000 Visa card.
Encourage savings early on. Burt Whitehead, a Franklin, Mich., financial planner, suggests the 40-30-20-10 rule: Parents encourage really young kids to start saving 40 percent of their allowance for long-term goals and 30 percent for big-ticket items, like bikes or video games that may take a while to save for. Then, 20 percent of the kid's allowance can go to immediate spending needs. And kids should be encouraged to use the remaining 10 percent for charitable gifts.
Create a family 401(k). To motivate your children to save money for long-term purposes, consider making matching contributions to their savings account. This is a great tool for extended family as well. Instead of grandma's writing the grandkids a check on their birthdays, why not set aside a pot of money that can be used to match any long-term savings that the grandkids commit to?