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Kids and Cash: Teaching Children the Value of Money

“What do you think? Money grows on trees?”

I can hear the words of my own mother echoing in my head as I hear my 13-year-old daughter wanting the latest iPhone, or whatever else that isn’t “so last year!”

That’s because, despite the fact that the things she wants and “needs” today are ridiculously more expensive than they were when I was a kid, kids really have no clue of the value of money or where it really comes from.

And for the most part, that is not your kid’s fault. Yes, my parents would shout that typical lament about the lack of a money tree in our backyard, but that was pretty much where the discussion ended.

Money is one of those taboo kind of subjects that parents tend to shy away from, even when asked direct questions about it. That is a big mistake according to most experts.

“Money is a great way to teach your children about decision making,” says Paul Richard, Executive Director of the Institute of Consumer Financial Education. “Almost everything to do with money is based on a decision. Is something too expensive? Should you save for something else? etc. etc.”

The experts also agree, that one of the best ways to teach kids about the value of money is to get them to understand the difference between wants and needs as early as possible.

Wants and Needs

The difference between wants and needs can be tough even for adults, especially when in a shopping mall! A Rocky Road ice cream cone? It’s food, so I need it, right? That gorgeous pair of shoes, or that cool T-shirt, we all need clothes, don’t we?

But parents need to set the right examples. You need to explain to your kids that needs are things you “need” to live – food, water, shelter. Everything else is just a “want.” Here is a great exercise to help your little ones see the difference. All you need is a piece of paper and a bunch of newspapers, magazines and store circulars.

On the paper, draw a line down the middle and label one side “Needs,” the other “Wants.” Now go through the papers with your kids and ask them to cut out what they think are pictures of things they “want” and they “need” and have them paste in the apropos column. The first time they do, so you probably will be shocked at what they think are “needs.” But you can now go over their choices with them. Praise them on the ones they got right, and help them to understand some of their more misguided choices.

Other Tips for Tots

Understanding wants and needs is only the beginning of a proper financial education for your kids. Paul Richard says you need to introduce the concept of money to your kids as early as possible. As soon as they understand numbers and can count, you can start teaching the basics of dollars and cents. You need to tell them that things cost money, and how daddy and mommy have to work hard to earn the money to buy them.

Besides using it to buy the things you need (and sometimes want), tell them the other ways you deal with money in your household. Do you invest it? Or save it? Richard goes on to say, “do not feel you have to only discuss ‘money matters’ behind closed doors. Be open, and when appropriate, include children in your process when making financial decisions.”  He also suggests that when a child wants something, have them set that as a goal, and teach them they have to earn and save the money to get it.

Heidi Emberling, a Parent Educator, says it is also important when teaching kids about the value of money that you start to teach them early about charitable giving. She says for her own children she has a chart, and each time they perform a task she wants them to do — homework on time, getting ready for school, brushing teeth, etc., — they earn a sticker. Each sticker is worth a dollar. At the end of the week she totals up the stickers and they earn “their pay.”

The kids have three jars. One marked “save,” one “give,” and one “spend.” At the end of the week they can divide the money they have earned into the jars in any way they like, but at least one dollar has to go in each jar. They can take money from the spend jar whenever they want to buy something they like, or they can wait and combine it with the “save” jar for something bigger. They know that the money in the “give” jar is for people (or animals, or some other cause) that do not have enough money of their own. Emberling says that by allowing children to decide where the money goes, it empowers them to make their own, and hopefully sound financial decisions.

Credit Where Credit Is Due

Teaching kids, especially teens, about credit and how to properly manage it, is as important as teaching them the value of money for their financial futures. When they are pre or early teens and they want something badly, that is very expensive, that is a good time to suggest they can either save or take a loan from you. Tell them they can only have the loan if they agree to pay it back by a certain date, which you can mark on an official loan calendar. Then introduce the consequences and penalties that will occur if they do not pay the loan back by that date, or if they miss a payment.

The Bottom Line

Money managers always talk about the “bottom line.” The bottom line when educating your kids about money is to lead by example. Handling your own money in a responsible and open way is the best financial tool you can give your children. If you try to limit credit card debt, live within your means, and encourage long term savings — you will set a good example for your children about money that is worth its weight in gold!

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