Kid Stuff
It's time for parents and children to talk over a taboo topic: money
To be sure, it has been hard lately for parents to teach kids that with patience, they'll earn money on their savings. That's because savings accounts have recently paid out only about 1 percent interest. "When I was a kid, we got like 5 percent interest on a basic account," says Eileen Levitt, mother of Rachel, 9, and Sammy, 5.
So the Columbia, Md., resident and her husband came up with a creative solution that more and more parents are trying out: To encourage their daughter to save some of her $9-a-week allowance, they've agreed to match anything she sets aside for long-term savings. "At least when she starts working and is offered a 401(k), she'll be accustomed to matches and will be the first to sign up," says Levitt, who runs a human resources firm.
After you get the kids to save money early on, it's imperative that you keep them on this path. One way is to take advantage of their high school math skills and teach them the power of compound interest. That's the phenomenon by which money saved earns interest--and that interest earns its own interest, so it is working for you. Alas, only 10 percent of teens surveyed understand how powerful a force compound interest can be.
SHOW THEM THE STATEMENTS. Every month, when they receive their college-savings plan statements in the mail, Mark and Kathy Heller call a family meeting. That's when the Tampa couple--both educators by profession--show 11-year-old Benjamin and Kennedy, 8, how much the family has set aside for each of their college funds and how much those accounts have increased in value. "We're trying to get them to understand that this is how money grows," says Mark, 43, who is associate headmaster at the Academy at the Lakes. Adds Kathy, 38, an administrator at the same school: "We also hope they'll understand that this doesn't just happen by magic."
Financial planner Steven Podnos says it is also helpful to show kids what the family actually spends on certain items, like cellphone service, groceries, and utilities. He says this will be especially useful to teens once they start working part time. When his daughter turned 16 and started working after school, "she'd come home with a paycheck for like $270 after taxes for a two-week pay period," he says. "She'd then realize that that's an entire month's electric bill."
While some parents may be squeamish about sharing financial information, keep in mind that with the Internet, your kids can easily find out how much your home is worth and how much someone in your profession roughly earns.
HAVE REGULAR FAMILY MONEY MEETINGS. Talking to your kids regularly about family finances also helps clear up misunderstandings. Marty Carter, a family-communications consultant in Jefferson, Maine, says "kids often learn about money more by watching what parents do rather than listening to what parents say." She said she once had a client whose son asked him for money but was turned down because, as the father said, the family simply couldn't afford it. Shortly thereafter, the son noticed that his parents had bought a flat-screen television for their master bedroom. "What the kid didn't know was that the parents had been scrimping and saving for years to buy that television," says Carter.
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