One of the best ways parents can help their children grow up to be financially responsible adults is by teaching them to be money-wise at a young age.
"If they don't learn the value of a dollar early on, they could potentially have more difficulty managing debt, spending, and saving for retirement later on as adults," said David Desmarais, CPA/PFS, a KLR partner-in-charge of the Boston accounting firm's private client services group.
There are so many books available about teaching kids to be money savvy that knowing where to start can be daunting. For a list organized by age, Desmarais recommends the Kids' Money website.
Experts say it's never too early to start teaching children about money — and parents play a vital role in this valuable lesson.
"Research shows that parents are the number one influence on children's financial behavior, which makes sense," said Krista Johnson, a licensed professional counselor for kids based in Colorado Springs, Colo. "I don't see enough parents making this a priority because most families are pretty overwhelmed these days. It is unfortunate."
Financial responsibility is a combination of attitudes and practices, as well as tools. Here are a few tips geared toward children ages 7 to 12:
- Talk about money. Don't underestimate the importance of talking about financial decisions with children to help them better understand the value of a dollar.
- ThreeJars.com. More than a digital piggy bank, this online allowance tool shows kids how to manage money. Parents sign up for a free account, which also creates an account for their child.
- Use allowance as learning capital. Instead of rewarding kids monetarily for their regular household chores, behavior, or grades, Pearl suggested using allowance as a learning tool to encourage financial responsibility.
- Apps. There are several apps that are similar to the Three Jars concept. A few that Desmarais recommends are PiggyBot, a virtual piggy bank that lets children track spending and saving, free, for iPads; Bankaroo, a virtual bank that lets kids create checking, savings, and charity accounts to track allowance or gifted money, free, for Android; and BusyKid, an allowance tool where kids earn money for weekly chores, then either save, share, spend, or invest it, linked to an actual bank account, 30-day free trial, then $14.95 a year, for both iPads and Android.
- Teach delayed gratification. When children save to buy a Lego set or skateboard they have a better payoff than when a parent simply gets it for them.
Jayne Pearl, an Amherst, Mass., author who has a series of books about teaching financial responsibility, including Kids and Money Guide to Learning Capital: How to Structure Strategic Allowance, Develop Incentives to Save and Teach Basics of Investing, took the time to explain finances to her son when he was younger.
When he was 8, he asked how much money she made. "I knew even if I said $1,000 a year, that would seem like a lot to him with no other context," Pearl said.
She began by listing their monthly living expenses such as electricity, heat, groceries, and gas, then multiplied it by 12. Her son got teary. She explained that she earned enough money to cover the expenses, as well as enough for savings, allowing her son to better grasp finances.
Desmarais saw firsthand how kids can struggle with the concept of money when his parents gave his young nephew a $25 Dunkin' Donuts gift card for his birthday. The first time the boy used it for a doughnut, he announced he could get doughnuts anytime they were out.
"He believed the gift card had no limit," Desmarais said. "It needed to be explained how hard-earned money had to be put onto that card, which had a certain value, and how that value was worth a certain number of doughnuts."
Parents decide how often to pay allowance or gift money, and the child chooses which jar to put it in: saving, spending, or sharing. Parents hold the actual cash while the website tracks the kid's earning. Children, who may choose to invest their money, can request cash or gift cards to spend or share by donating to a charity. Kids manage their accounts, but all financial decisions require a parent's approval.
"It's a really neat website that teaches kids valuable lessons," Desmarais said.
Allot money to children to pay for expenses you already cover such as school lunches, toiletries, or sports items. This allows kids to make trade-offs or mistakes they can learn from, Pearl said.
Take school lunch as an example. If lunch is $3 a day, give them $15 on Monday, allowing them to be responsible for making the money last all week.
"You're setting it up so they can make decisions. Instead of buying school lunch one day, they can make their lunch at home the night before and save the $3 for something else important to them," said Pearl, who thinks it's OK to pay children for extra chores they do beyond their regular ones.
Children will see money differently when faced with making these decisions for themselves. "Then parents become the ally, not the enemy saying, no, no, no," Pearl said.
Keep in mind the privacy concerns when using mobile apps because personal data may be collected. Likewise, Pearl cautioned against apps (and allowance websites) that are thinly veiled online stores because the parents' goal is to help kids appreciate saving money, not tempt them to spend more.
"If they have saved up for six months for that, that's where self-confidence comes from," Pearl said. "Delaying gratification by having children save teaches them to actively work toward the goal, and when they achieve it, it shows them they can be successful."
It also helps children better understand the concept of setting a budget, not only for things now but down the road as well, said Jeff Owens, CPA, a Dallas-based partner with Armanino LLP, an accounting and business consulting firm.
"One of the biggest problems with kids is they only look at the now and don't look at the future," said Owens, who volunteers with Junior Achievement of Dallas to teach children financial literacy. "Having our kids set long-term budgets will help them keep it in focus."
Anslee Wolfe is a freelance writer in Colorado Springs, Colo. To comment on this article, contact Chris Baysden, senior manager of newsletters for the JofA, at Chris.Baysden@aicpa-cima.com.