Teaching Money Management Skills

Income versus gift. Are you paying your children in return for them completing a task or tasks, or is their allowance a gift? Decide before you implement an allowance and explain your thinking to your children. If you are paying for a task or tasks, what is expected? Be specific. How much is the work worth to you? Do you feel children should help out their family members without expecting payment? Maybe a compromise is in order where you don’t give an allowance for regular household chores. Instead you give them a regular gift of money to manage, but you also pay per project for bigger tasks.

Other questions to consider. Will you pay your children for their grades? Should different grades have a different monetary value? Do you believe that school is a child’s work? Remember, you are reinforcing lifelong financial values in your children.

Spending versus saving. Do you want to encourage your children to save their money or are you more concerned with teaching your children to make wise spending decisions? These aren’t mutually exclusive, but depending on how you approach your children’s allowance most parents end up emphasizing one over the other. If teaching good savings habits is most important to you, consider matching your child’s savings. For example, say your child saves $10 of his/her allowance in a month. At the end of the month you give him or her another $10. Keep in mind that this can get expensive for you, but it definitely encourages children to save. Such a savings plan should also have a defined, and agreed upon, goal before any money is spent.

What if you are more concerned with teaching your child about spending? Depending on the age of your child you may want to refuse to make any discretionary purchases for your child except on birthdays and gift giving holidays. This means your child is dependent on allowance money for everything he or she wants. You will find there is a big difference between wants and needs when a child is spending his or her own (allowance) money. One caveat though. If you require your children to use their own (allowance) money you should not tell them what they may or may not buy. You can certainly offer suggestions, but the final decision needs to be made by the child. After all, it is their money.

Another possibility is to implement both options: a savings match and the requirement that your children use their allowance money for discretionary spending purposes. As I said, these possibilities aren’t mutually exclusive, but the more alternatives you add to your allowance policy the more potential there is for unforeseen complications.

Another approach is to tell your children how to allocate their allowance money. For example, Susan Beacham of Money Savvy Generation recommends splitting money into four categories: saving, spending, donating, and investing. She has even designed a piggy bank with four sections, one for each category. Again, depending on your values concerning money, this approach may or may not appeal to you.

This certainly isn’t an exhaustive list of options. Far from it. However, use these ideas as a road map to develop your own goals regarding your children’s allowance.

Teaching Values

We all have our own set of values where money is concerned. If you believe, as I do, that one of our most important roles as parents is teaching our values to our children, then make sure your allowance policy is an accurate reflection of your values. Think about the beliefs and behavior you want to pass on to your children. Once they are clear to you, the answers to whether to pay your child an allowance and how to go about it will come much more easily.

First of all, let me say I don’t like credit cards. I rarely use mine and always pay my balance in full at the end of the month. When I do use a credit card it is only for emergencies when I don’t have enough cash in my checking account to use a debit card (my preferred method of payment). For example, when my son had his wisdom teeth pulled I had to pay at the dentist before taking him home. I didn’t have an extra $1000+ in my checking account, so I paid with a credit card. When the credit card bill was due I paid it in full. I never, ever use credit cards to buy things I want but can’t afford!

Nonetheless, I have a credit card (see example above) and gave each one of my sons a credit card when he turned 16 with two very strict rules attached. These rules are:

1. Only use the credit card for emergencies.
2. Pay the balance in full every month.

Notice how the rules I set for my sons’ credit card use are the same ones I live by myself.

How has this worked for me? It has worked extremely well. My sons know how to handle credit before getting their own credit cards. When they do get their own credit cards I doubt they will get into trouble because they have had the benefit of my guidance and their own experience using credit cards.

However, this plan is reliant on a few things that are true in my family, but may not be true in yours. One, I am not in credit card debt and live by the rules I set for my children. Two, I trust my sons, yet I also monitor their credit card usage very closely online. Three, I would take the credit card away immediately if either one of them abused his privileges and they both know it. If you can say the same, then you are a good candidate for this method of teaching your children to use credit cards wisely before they reach adulthood. If you can’t say the same, perhaps you should have an honest conversation with your teenage children about your issues with credit and why you want your children to avoid them. Then maybe you can work together to learn to manage credit cards to your advantage. It isn’t easy, but it is worth it.

DO

• Encourage your child to save for expensive items.
• Listen to your child’s explanation for why he or she made certain choices.
• Try to understand your child’s point of view.
• Have compassion if your child makes a bad choice.
• Make suggestions about other possible choices only if, and when, your child is open to your suggestions.
• Remember everyone makes mistakes. That is how people learn.

DON’T

• Tell your child what to do with the money in his or her own account(s) even though he or she is a minor.
• Automatically buy things for your child.
• Rescue your child from monetary losses or mistakes.
• Say, “I told you so” or “You’re wrong.”

A mother of three junior high students told her children she would give them money at the beginning of each week to pay for that week’s school lunches. She also said if they made their own lunches at home they could keep the lunch money for themselves. Her rationale was that she would be spending the money either way and by giving them this option, she was teaching her children two things. One, they were learning to make spending/saving decisions. Two, they were learning responsibility because if they wanted to keep the money they had to prepare their own lunches.

If a plan like this is to work, however, you have to be firm. For example, do not make the lunches yourself or give your child more money to buy lunch at school in addition to keeping the original lunch money.

Are there other things that might meet these guidelines? Things you pay for that your children are perfectly capable of doing, such as simple tasks you pay someone outside the family to do. Some possibilities that come to my mind include:

Basic housekeeping chores.

Mowing the lawn.

Babysitting for younger siblings.

Shoveling snow.

Gardening.

Walking the dog.

If you brainstorm I’m sure you can come up with many more. Give it a try. You have nothing to lose and a lot to gain!

I hope you enjoy the following blog, authored by Jim, as much as I do.

Spending Decisions — Going Beyond Wants Versus Needs

The news reports tell us the nation’s economy is getting better. Advertising tells us we ought to spend. Our bank account tells us not to spend on anything we don’t really need. So, what’s a person to do?

This year, many of us got a quick (and harsh) lesson about the problems of having credit card debt. Banks cranked up the interest they were charging, raised the minimum payments, and ruined our household budgets in the process. We learned the problem would have been avoided if we didn’t have debt in the first place. To solve that problem, many people decided to do everything they could to pay off credit card debt—and well they should. The language of managing household spending became a comparison of “WANTS versus NEEDS.” The idea is that you can reduce your cash outflow and reduce your debt by telling yourself, “If you don’tneed it, don’t buy it.”

After a while the use of “wants versus needs” begins to create new problems. For one thing, it makes us feel deprived. Worse yet, it can take away our feeling of self-worth. It’s like saying you should only want to eat enough to live. That gets old in a hurry.

If you already follow the “wants versus needs” approach, you can actually make better spending decisions if you ask yourself what problem you are trying to solve with your purchase. There are two good reasons why this is the case: First, if you are using only the “wants versus needs” criteria to make your decisions, you are really trying to find some way to deny yourself the opportunity to spend money. And if you are always trying to say “NO!” to yourself, you are likely to cheat the truth sometimes to avoid being so negative. If you are not honest with yourself, you can’t make good decisions about spending.

Second, if you identify the problem you are trying to solve when you buy something, you give yourself a chance to find the best way to solve that problem. This technique let’s you use your mind to solve your problem in creative ways, rather than deny something as only a “want.” And if you are trying to solve a problem by spending, you need to shop and compare different ways to solve the problem.

If you make your spending decisions as a means of “solving problems” you must remember your ultimate goal. If your ultimate goal is to get out of debt, you can’t afford to solve short term problems spending money that will be needed to pay off that debt. You will face many “problems” before you can pay off a significant amount of debt. Not all problems need to be solved. Some of them just want to be solved. I know that sounds a lot like “wants versus needs.” But in the practice of solving problems, you might be able solve problems without spending money (or a lot of money) if you think about different ways to solve the problem.

The desire to go out to a movie is obviously a “want.” If you manage your spending using “wants versus needs,” a night out at the movies will lose every time you attempt to make that decision. You know you don’t have to go to the movie, so you tell yourself to stop thinking about it.

However, if you manage your spending by trying to “solve problems” you might find other ways to satisfy the problem that don’t cost as much as your first option. These other ways might even be free. Instead of going to a movie, you might rent a movie you never got to see. In such a situation, you have still filled your evening with a movie. You had a wider choice of movies to choose from, and you avoided the expensive concession counter. And during this movie you can talk! You can even run it back to replay a scene.

It’s true that you really don’t need to see a movie at all. But if you ignore the problem building up from a lack of entertainment, you won’t feel good enough about yourself to analyze other spending decisions accurately. Always “doing without” is a tough road. It is better to accept that some of your “wants” represent a basic “need” in disguise.

Ask yourself why you want something. Your answer will help identify the problem you are trying to solve. A fresh look at solving your problem will be much more rewarding than simply telling yourself not to spend any money at all. And it puts you back in control. But don’t forget that long-term objective out there on the time horizon — you still want to pay off your debt.

James W. Stone
Copyright 2009, James W. Stone, all rights reserved worldwide

Encourage your child to use the account(s) by depositing allowance money as well as any monetary gifts and earnings your child may have. If your child doesn’t receive an allowance, deposit any money he or she earns or monetary gifts in the account(s). If you open a checking account, get a debit card for your child in addition to a checkbook. That way your child has the option of writing a check or using the debit card when making purchases.If your child overdraws an account or incurs any other fees have him or her pay the penalties.

As your child matures, consider depositing larger sums of money in his or her account(s) with the expectation that he or she will be responsible for spending this money on items you would have purchased in the past. For example, some parents make a single deposit in their children’s savings or checking account every month with the expectation that the money will be used for all discretionary spending for the next month. This might include everything from clothing, to food purchased outside the home, to entertainment expenses, etc. Keep in mind if you do this you must leave ALL relevant spending decisions up to your child even if you think he or she is making bad choices. However, don’t, under any circumstances, give your child money beyond the initial deposit until the next monthly deposit.

Give this a try. You will find that managing finances is a lot like learning to drive. Children need their parents’ patient guidance when preparing for their future independence.

This technique not only makes running errands with your child easier, it teaches even very young children essential lifelong finance skills. Before going shopping with your child determine a reasonable amount of money to give him or her. You want the amount to be small enough that you don’t care how it is spent, but large enough that it can be used to purchase something. When you are in a store and your child sees something s/he wants, state that s/he can buy it with his or her own money if it is within the dollar amount you have set aside, or s/he can save the money for the purchase until s/he has enough to buy the item. If your child does decide to save the money make sure you reward that choice by continuing to give the same amount of money each time you run errands with him or her so the desired item is eventually affordable.

Keep in mind that when young children want things in stores they genuinely want it at that moment, but what they really want more than the item itself is some control (this is also true for many older children and adults). For that reason, it is best if parents let children make their own spending choices even if they are choosing to buy something you would never agree to buy. The only exception should be if the item your child wants to purchase poses a danger. That’s why you set spending limits by determining the amount of money to give your child.

Not only does this teach children the following good financial habits, it makes running errands easier on you, the parent. It also works with children as young as three.

The good financial habits taught using this technique include learning …

1. The value of coins and bills.

2. How to count money.

3. The benefit of saving.

4. To make choices about spending.

5. The difference between using one’s own money versus using other people’s money.

If you decide to try this technique with your children, please let me know how it works for you. It worked wonders for me with my children.

Email is the preferred method of financial con artists. The benefits of email are that it is difficult to trace and can be sent out in large quantities. Essentially con artists are “phishing” for responses. Phishing is defined as the process of attempting to acquire sensitive information such as usernames, passwords, and credit card details by masquerading as a trustworthy person or company. Some phishing emails look extremely realistic, making it very difficult to tell whether it’s actually coming from a legitimate company. For that reason, NEVER give out personal information via email because legitimate companies DO NOT ask for it this way. If you continue to worry that an email was legitimate, call the company (using a phone number from its website, not a phone number from the email) that the email supposedly came from and ask a company representative to verify the email message you received.

Not all phishing attacks come via email. Some come as phone calls. For example, messages that claimed to be from a bank told users to dial a phone number regarding problems with their bank accounts. Once the phone number, which was the phisher’s own number, was dialed prompts told users to enter their account numbers and PIN. Some con artists even make direct phone calls, speaking to potential victims one-on-one. And, these phone calls use often use fake caller ID information to give the appearance that the calls are from a legitimate organization.

Other financial scams aren’t looking for personal information at all. They are trying to sell you some phony financial product. This type of scam often comes in the form of TV infomercials, print and online advertisements, mail, email, and direct phone calls. They are usually real products, they just don’t work. The best way to tell whether something is a bogus financial product is if it seems too good to be true or it relies upon a “secret strategy”.

Tips to Avoid Becoming a Victim of a Financial Scam

1. IF SOMETHING SEEMS TOO GOOD TO BE TRUE, IT IS TOO GOOD TO BE TRUE! Avoid anything that is too good to be true at all costs no matter who the source is, even if it’s your best friend, a trusted financial advisor, anybody.
2. Never give out personal information via email.
3. Never respond in any way to an email that appears to be a scam.
4. Never send money to anyone with the promise of more money in return.
5. If someone leaves a phone message asking for personal information, do not respond. No legitimate company ever does this.
6. If someone asks for personal information in a one-on-one phone call, verify if that person is actually representing the company they say they are. You can do this by saying you are too busy to talk at that time, but will call back when you are able. Make sure you write down the name and job title of the person calling you. If s/he won’t give you a name or phone number, you know it’s not legitimate. If s/he will, call the company using the phone number listed online (never the phone number the person gave you) and ask to speak to the person who called you. If the company has never heard of the person, you know it wasn’t a legitimate call.
7. Beware of secrets. If someone is trying to sell you something that relies upon a “secret strategy”, avoid it. Usually in cases like this, the strategy needs to be kept a secret because it doesn’t work, is illegal (remember Bernard Madoff), is too complex to understand, and/or is too good to be true.

They…

1. Have discretionary funds.
2. Are active consumers.
3. Will make better decisions in general.
4. Will understand financial risk.
5. Will learn how to live within their means.
6. Will know how to manage their bank accounts.
7. Will understand how to use debt responsibly.
8. Will be less likely to be used or swindled by financial professionals or con artists.
9. Will learn that the earlier they begin saving money for retirement, the less they’ll have to put aside for retirement during their lifetimes.
10. Won’t have to learn this stuff the hard way, like we did as adults.