From Our Experts

Topic —  Financial Advice

Kids with Coin: Teaching Financial Responsibility

March 13, 2012
Golden Girl Finance

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Remember your favourite child stars? From their pudgy faces to their perfect dimples, these child prodigies had it made. Fame, fortune and a fantastic bank account—all before the age of 14. But then disaster struck. The baby fat melted, the partying kicked in, and suddenly these child stars were near bankrupt and barely getting by. Once the cameras stopped rolling, stars like Gary Coleman, Danny Bonaduce, and more recently, Lindsay Lohan, found themselves in a world of excess, apparently without any strong parental figure to help them stay on the straight and narrow.

When it comes to kids and money, it’s all too easy to lead them down a road of excess and expectations because simply put, we want our kids to have it all. But instead of fearing that your child may do without, you should instead be focusing on teaching important financial principles early in life. Child star or not, the sooner you teach your daughter or son money smarts, the more you can rest assured that your child will indeed not ‘want’ as she gets older—because smart girl, she can fend for herself!

Consider these five lessons to get you started:

Teach your children about value

Allowances are a great way to teach children about money and its value, provided the payment is offered as a reward rather than a bribe. The trick here is being able to distinguish the difference. A reward is provided when the child goes above and beyond that which is expected. A bribe is offered when the child refuses to complete assigned tasks—and needs a little incentive.

By rewarding your child only for exceptional service, they’ll quickly learn the value of hard work (and understand that sometimes in life you have to do things that you don’t like). Furthermore, you’re helping your child understand that each member of the family has a responsibility to contribute to the overall functioning and well-being of the family, thereby instilling a sense of responsibility and respect that money simply can’t buy.

Of course, that’s not to say that giving your kids an allowance is an entirely bad idea. If the purpose of the allowance is to teach your children how to manage money and expectations, then you’re on the right track. Just remember to be consistent and firm with what does and doesn’t warrant payment.

The three S’s

If your child receives an allowance or financial gift, make sure it is understood exactly how this money can—and should—be used. The easiest way to do this is to employ the three S’s:

• Spending – Purchasing toys, candy and other personal treats
• Saving – Depositing a percentage into a bank account
• Sharing – Giving money to a charitable organization or purchasing gifts for a family member or friend

Sit down with your child and help him or her understand why each of the S’s is important and how each one affects the other. Teaching your child how to strike a balance between these three areas is the first step to early financial planning and budgeting basics.

Don’t just say no

It comes as no surprise that children hate it when they’re told “no”. While many parents chalk this up to spoiled-child syndrome, that isn’t necessarily the case. More often than not, it’s because the child doesn’t understand the reason behind the refusal (and no, “because I said so” is not a valid justification). Granted, as a parent you have the final say, but when you’re a kid, this really doesn’t seem fair. So instead of simply laying down the law, take the time to explain to your child the reason behind your answer. The next time your child asks for a new toy at the store, tell them “no, because…” and have them repeat it back to you to make sure they fully understand. This exercise will not only help them comprehend their current predicament, but it will teach them to stop and think before acting on an impulse. (After all, impulse buying is a major contributing factor to consumer debt in adults.)

Plan for the future

Teach your child how to effectively manage money through a series of goal-setting exercises. Part of these exercises should be helping your child to identify his or her needs and then creating a plan that will help achieve the final goal.

For example, a need could be another pair of trendy sneakers. Step one could involve taking your child to the store to look at the various kinds of sneakers and to compare prices. If your child immediately gravitates towards the most expensive pair, stop and explain to them how this will affect their finances and how it might impact some of their other financial goals.
Encourage shopping around for better prices. Whether your child decides to purchase the expensive sneakers or not is irrelevant. What is important is that he or she has learned how current financial decisions can impact future goals. As long as the child is aware and accountable for the end decision, the lesson has not been wasted.

Make it fun!

Financial planning doesn’t have to be boring. Make it fun with games like Monopoly, Acquire or Money. These board games make learning about money fun and rewarding. If your child is too young to play these games, sit them down with a jar full of coins and help them to make change. This will help your child to identify the different types of coins, while at the same time improving math skills.

It’s about making mistakes

It doesn’t matter if your child is a budding movie star or an average fifth grader. Ultimately, he or she is going to make financial mistakes—and it’s your job as a parent to make sure that these errors are executed under your supervision so that the proper lessons can be learned.

Along those lines, as much as you may want to jump in, don’t give in to the urge to save your child when those mistakes are inevitably made; it’s very often the natural consequences of making mistakes that teaches the best lessons of all.

It starts with you

Perhaps most importantly, it’s your job to become a financial role model for your child. Just look at Hollywood stars like Neil Patrick Harris and Jodie Foster—it’s safe to say that these former child actors benefited from strong financial role models. And while your child may not have the income potential of a triple threat like Doogie Howser, she needs financial guidance nonetheless—give it to her now.