Kid Stuff
It's time for parents and children to talk over a taboo topic: money
There are certain subjects parents dread talking to their kids about--like sex, drugs, and money. But of the three, there's really only one topic that most kids are actually open to discussing with Mom and Dad. And that's money.
In fact, two thirds of teens look to their parents--not their teachers and not their peers--to teach them how to make money and how to manage it.
Maybe it's because money is the one thing that even the most rebellious child expects his parents to provide. Maybe it's because kids know at an early age that they need money to buy the things they want--like that $200 cellphone or that $300 iPod. Maybe they realize that attending college will require serious coin.
Regardless, kids are up for a talk. Unfortunately, parents aren't terribly chatty on this subject. A recent survey by the market-research firm GfK NOP found that parents are more likely to talk to their teens and preteens about household chores than about money. Even in well-to-do families, more than a third of children say they rarely or never discuss finances with their parents. That's according to a survey of high net worth households by JPM organ Private Bank.
Cheryl Burbano, a financial planner near Tampa, suspects today's boomer and gen X parents "aren't talking about it mostly because their parents didn't talk about it." But parents who don't educate their kids about managing money are "handicapping their children for life," she says.
Here's a snapshot: More than 1 in 5 teens don't know that interest must be paid on borrowed money. Fewer than a third of teens know how to budget their money. And only 36 percent know how to open a savings account.
Yet at the same time, "we've given our kids pretty expensive tastes," says Linda Leitz, author of The Ultimate Parenting Map to Money Smart Kids . This has led to the inevitable: The average undergraduate today owes some $2,100 spread out over more than four credit cards.
For mothers and fathers, teaching kids to respect money isn't just part of a parent's moral duty. It's also in the parent's self-interest. Aside from health-related issues, one of the biggest concerns baby boomers have as they enter retirement is their children's financial ignorance, surveys show. These parents are right to be worried. That's because these issues often come home to roost--literally. Between 2000 and 2004, the number of adult-aged children who still live with--and off--their parents rose nearly 70 percent, according to Craig Brimhall, vice president of retirement wealth strategies for Ameriprise Financial (story, Page 64).
OK, so where should you begin?
START EARLY. Parents have to start teaching their kids money lessons at a younger and younger age--as early as 3 or 4. That's because children are learning about what money can buy early on in their lives. Academic research shows that children who are bombarded with television commercials and other advertising can grasp and identify brand names at 2 years old.
Take Alex Mac-Lachlan. At the tender age of 5, Alex--who lives with his parents and younger sister in West Chester, Pa.--is already on his second Nintendo Game Boy. What's more, he got an Xbox video-game system last Christmas. And this year, Alex wants yet another video-game player, Sony's hand-held PlayStation.
"Saying no is one of the hardest things a parent can do," says his mother, Annette. But that's what she and her husband, Alexander, have decided to do. The 33-year-old Annette, a real-estate agent, says Alex already has his fair share of games and toys. And teaching him and his younger sister, Emily, that they can't have everything "is the first real lesson they'll learn about handling money."
SHOW THEM THE MONEY. It may sound simple, but the only way kids will truly learn to handle money is if you give them some to handle.
Well, aren't parents already doing this, in the form of allowances? Actually, no. The fact is, only 30 percent of so-called tweens--kids ages 8 to 12--and only 27 percent of teenagers get a regular allowance. "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.
Yet kids, when given their own money, often manage it wisely. Silvers notes that kids who are given cellphones by their parents are apt to sign up for all the bells and whistles, such as text messaging and photo options. But when kids get older and are forced to pay for cellphone service on their own, many opt for just basic service.
GIVE THEM A BUDGET. Giving kids an allowance only teaches half the lesson. While allowances provide children with income, kids must also learn at an early age that they have obligations to meet with that money.
For young children, Leitz recommends starting small. On family vacations, give kids a small amount of spending money and let them budget it. That's what Leitz, a financial planner in Colorado Springs, Colo., did with her 12-year-old daughter on a recent trip to Disney World. The trick, she says, is "not to bail them out" if they blow their entire stash on candy on the first day of the trip.
Eileen and Jon Gallo, authors of The Financially Intelligent Parent, advise giving teens a clothing budget instead of simply buying their clothes. The couple's Gallo Institute teaches families and advisers about the psychology of money. By giving your teens the power to make their own clothing purchases (within limits, of course), Jon Gallo says, "they're going to see that those designer jeans they want may cost a third of their clothing allowance."
"We did this with our youngest," says Eileen Gallo. She adds, however, that parents must be strong enough to allow the kids to make mistakes by exceeding their budgets. This will force them to return extravagant items should they run out of money.
What if your kids aren't that responsible? It doesn't matter, family financial experts say. They argue that it's better for kids to handle money and learn from their mistakes early--when failure means blowing through a modest weekly allowance--rather than waiting until the child goes to college and failure means maxing out a $5,000 Visa card.
SHOW THEM THE TIME VALUE OF MONEY. It's fine to teach kids that there's virtue in saving money for the future. A more powerful lesson, however, is teaching them that the world literally rewards those who save. To do that, kids have to understand the basic concepts of compound interest and the value of money over time.
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.
SHOW THEM HOW TO SAVE. No child is born with an innate knowledge of the banking system. So parents should consider teaching their kids the mechanics of saving early on. For kids in grade school, take the child to the bank and open up an interest-bearing savings account for them.
Bert Whitehead, a Franklin, Mich., financial planner, suggests parents of young kids teach them the 40-30-20-10 rule for their allowance and cash gifts. Under this guideline, kids apply 40 percent to long-term savings; set aside 30 percent for big-ticket purchases, such as a bike or a video-game console; spend 20 percent immediately (so that it's not all about deprivation); and earmark the final 10 percent for charity.
Christopher Parr, vice president of the planning firm Financial Advantage, says it's important to teach kids at an early age that handling money is more than simply earning the maximum interest--it's about doing the right thing. "If you don't plant the seed early, they may not understand," he says.
As kids reach junior high, parents can help them invest their long-term savings in a child-friendly mutual fund--one with low fees and low balance requirements. Even better, Patricia Brennan, president of Key Financial, a planning firm in West Chester, Pa., suggests opening a Roth IRA for kids who work part time. This will not only teach them about compound interest but will also allow them to learn about the importance of managing taxes. And when a kid hits high school, consider opening a checking account in his or her name. The idea, according to the Gallos, is to get kids comfortable with writing checks and balancing checkbooks before they leave home for college or work.
BE PROFESSIONAL WITH MONEY. Kids won't take money seriously if parents don't handle it with respect. This is why Ellen Weiss always gives her children their allowance at the bank, on the day she receives and deposits her paychecks from work. "I can't go to my boss and say, 'I just saw a great pair of shoes, so can I have my pay a few days early?' " says Weiss, marketing director for the financial advisory firm Leonetti & Associates in Buffalo Grove, Ill. So Weiss wants her teenage daughter and son to learn that their allowance is like a paycheck.
While some may regard this as unnecessarily formal, the message to kids is that money--whether it's $10 or $10,000--is serious and should be treated as such. "The goal of all of this," says Weiss, "is to raise a child who is independent."
This story appears in the December 12, 2005 print edition of U.S. News & World Report.