Whether your family has already begun the process of instilling sound money management or you’re searching for ways to begin, I hope you find the following tips,
suggestions and concepts helpful.
Lead by example
If you’re a parent embarking on the task of educating your children regarding money
management, take a look in the mirror. If, for instance, you budget effectively, invest
wisely, pay down debt and donate to charity, your children will learn by example.
Once you have your own financial house in order, begin early with children. In younger
children, be receptive to expressions of curiosity regarding money. Children may begin
asking questions about coins, dollar bills, checks you write and utility bills that come in
the mail — sometimes as early as age three.
Even with preschoolers, it’s not too early
At this stage, keep things simple and don’t expect too much. Take advantage of
“teachable moments” that happen during the typical day, such as letting the child put
coins into a parking meter or vending machine. You can begin talking to young
children about the value of setting aside money they receive during the holidays or for
a birthday for future wants and needs. Piggy banks make great gifts for this age group.
As a child’s savings grow, you can decide together when to spend money.
In today’s consumer society, perhaps the two most difficult lessons to learn are that
money doesn’t grow on trees and that “no” is sometimes the best answer. Children are
bombarded with advertising targeted at kids, and they need to understand that it takes
hard-earned money to buy the latest toy or game advertised on TV and that the family
has a limited amount to spend. Take the opportunity to explain that advertising is a
sales pitch, and children don’t need everything they see on TV. In addition, begin to
define the boundaries between what we want and what we need to thrive.
For school-age children, try the “three jars” approach
The elementary-school years are a good time to help children understand how far a
dollar goes. At about age seven, children can probably handle a small allowance. But
instead of giving your child his or her allowance to spend as he or she sees fit, introduce
the concept of three jars: one for money the child can spend, a second for money to go
into a savings account and a third for giving to charity. Have the child divide his or her
allowance into the three jars. To help encourage larger allocations to the charity jar,
offer to match the child’s money with your own. Discuss the significance of the three jars. The spending jar can motivate kids to
become wise shoppers. Talk to them about ways to compare quality and prices of
similar items. A trip to the grocery store can easily lead to one of those teachable
moments. You can show children the differences among generic and name brands
and the variations among price and quality. You can begin to discuss concepts at
both ends of the spectrum. On the one hand, it’s possible to save money by purchasing
a brand-name item on sale or by selecting a generic brand. On the other hand, you’ll
want to analyze an item’s quality and how long you want it to last, and perhaps have
a conversation around the concept of “getting what you pay for.”
Of course, learning is always more fun if you can make a game of it. When there’s a
rainy day, spend some quality time playing money games such as Monopoly, The Game
of Life, Easy Money or Pay Day. Also review the exercises on mysavingsquest.com,
sponsored by Wells Fargo Advisors.
As children mature, let them have increasing freedom regarding how they use the
contents of their “spending” jar. For example, as their interest in clothes blossoms, point
out why one purchase may be better than another in regard to quality, appropriateness
Focus on the savings jar
This is also the time to begin focusing on the “savings” jar. As the value of the savings
jar increases, consider opening a savings account at a nearby bank. (To avoid bank fees,
you may have to “prime” the account with some of your own money, although some
banks offer accounts targeted especially to students or teens.)
Together, decide on something the child wants to save for, such as a bicycle, doll,
baseball glove or video game. Let’s say the item costs $50 and your child typically
saves $3 per week. It will take a little longer than 16 weeks (four months) to have
enough to purchase the item. Explain to the child that if he or she can save an extra
dollar a week ($4 per week), there will be enough money to purchase the item in just
over 12 weeks (three months). Of course, it makes for a better teaching experience
if the extra dollar per week isn’t saved at the expense of the “giving” jar but rather
earned through some additional activity or behavior.
Allowing a child to use his or her savings to purchase items is only part of the learning
experience, however. Letting your child make decisions about what to purchase is also
important. Children who save and spend their own money tend to become savvier
consumers. They’re also more likely to take better care of their possessions because
they understand the sacrifice they made to purchase them.
As the child gets older, introduce the idea that you expect him or her to pay for certain
expenses out of the allowance you provide.
Allowance as a teaching tool
One of the most effective money-management teaching tools for parents is one everyone
is familiar with: allowance. There’s really no better method for teaching children how to
deal with money than by giving them their own to spend, save and give as they wish.
Although this may seem simple enough, deciding to give an allowance actually raises
a few issues.
Should receiving an allowance be tied to completing assigned chores?
One of the goals of an allowance is to put cash into the child’s hands so he or she can
figure out how to manage it. If the allowance is tied to chores that perpetually are
neglected, and thus the allowance is forfeited, you fail to give your child the experience
of managing money. Many experts believe you are better served to give an allowance
regularly. Tie the loss of other privileges or the burden of additional duties to failure to
accomplish household expectations. This arrangement fosters money-management
skills while instilling a sense of responsibility as a family member.
If you want to tie money to work, consider giving the child the opportunity to earn
additional cash for taking on tasks that go beyond everyday responsibilities. This may
also help him or her realize the additional work needed to reach savings goals faster.
How much allowance should be paid?
A child’s age is a primary factor in determining an appropriate amount. A rule of thumb
is to give an allowance equal to half the child’s age. It’s a simple calculation, and the
amount automatically increases as the child ages.
Another factor to consider is expenses you want the child to cover using his or her
allowance. If, for example, you expect the child to buy his or her own clothes, a larger
allowance will likely be needed.
How much freedom should the child have with his or her allowance?
Since the allowance is designed to help the child learn about money, it’s best to provide
as much flexibility as possible. If you use the three-jar approach, you’ll want to give the
child the latitude to allocate the allowance as he or she sees fit – within reason, of course.
But remember that it’s not a bad thing to let your child make mistakes. We all learn by
doing, and sometimes the most important lessons are learned when we fail to reach our
goals. Generally, the stakes are lower at this stage in a child’s life. Let the child learn from
missteps today before the consequences become much greater tomorrow.
Depending on the child’s money skills and interest, you may want to begin discussing
investing in stocks. Describe how purchasing stock makes the child a part-owner in a
company, which means he or she can share in the company’s profitability. Encourage
the child to research various companies. Typical candidates include a high-profile local
company or a company that creates products or services the child uses. You might want
to purchase a few shares of the selected company on behalf of the child and let him or
her track the stock’s progress over time. If the company has a nearby location or is
headquartered in your community, inquire about taking a tour with your child.
Don’t neglect the “giving” jar
Let the child determine where the cash in the charity jar should go. The selected
organization should reflect the child’s interests and age level. For example, if he or she
loves animals, an animal-welfare organization may be a good choice. If there are
multiple children in your household, help each one decide on a charity of choice.
Stepping it up a notch during the teenage years
Accustomed to instant gratification and relatively carefree lives, many modern
teenagers have a hard time understanding “no.” But your teenager’s desire for a new
video game, phone, computer or car can work to your advantage.
At this stage, you can begin to plan periodic family financial discussions. This doesn’t
necessarily mean that your teenager needs to know your total income or the amount of
your home mortgage. But you can certainly begin to familiarize your teenager with the
family budget, financial challenges you may be facing, some of the family’s longer-term
goals and priorities, and perhaps how he or she can help you make progress toward
At this stage your teen may be itching to get a job to earn extra cash. You’ll want
to emphasize the wisdom in balancing work during the school year with school
performance. Studies have shown that teens who work 20 hours or more per week
achieve grades that are half a letter lower, on average, than those who work fewer
than 10 hours.
If your teen is earning a paycheck, he or she may find it easier to access his or her
savings account with an ATM card, a move you may or may not decide to support.
If your older teen (or college-bound student) wants a credit card, you might take the
opportunity to have a serious talk or two about spending. In general, teens with credit
cards are less price-conscious, more likely to spend more and more likely to
overestimate their savings than those who pay cash.
Start by explaining the importance of a credit score. A credit score is a snapshot of
a person’s credit risk at a particular point in his or her credit history. The score helps
a lender determine how likely you are to repay your debt on time. For teens with no
credit history, no score can be computed.
You can help your teenager understand that one of the keys to qualifying for the loan
he or she will want someday at a competitive rate is a strong credit score. Even beyond
being a key indicator of whether or not an applicant can qualify for a mortgage or line
of credit, credit scores are used in other ways that affect people’s lives. A 2012 survey
conducted by the Society of Human Resource Management found that 60% of
employers conduct credit background checks for some or all job candidates.
Be sure to impress upon your teen that responsible use of credit cards is a common way
to help establish a good credit history and that paying off the balance each month in a
timely manner is an important safeguard against becoming a credit risk. Problem
behaviors to watch for in your teenager include:
• Paying bills late
• Not paying off credit cards in full
• Incurring late payments and fees
• Bouncing checks
Remind your teen how stressful debt can be, and reinforce the point that the credit
history he or she establishes now will increase in importance as he or she applies in
coming years for large loans, such as a mortgage. Make it clear that once someone has
created a bad credit history, it can take a long time to recover.
Continuing education for young-adult children
College graduation day has finally arrived. Your child is one of the lucky ones to land
a job with a regular paycheck. The urge to splurge may be tempting for both you and
your adult child as you celebrate his or her success. A college degree and a blossoming
career are great accomplishments. As in his or her earlier years, however, finding a
balance between spending and investing may be crucial during this period in
establishing long-term financial security. Some of the topics you may want to discuss
include budgeting, “paying yourself first” and the value of investing early.
Balancing inflow and outflow
Budgeting may sound intimidating to the uninitiated, but it’s easier than it sounds
and pays off for years to come. Boil it down to the basics for your adult child, and don’t
hesitate to return to the concept of three jars or “buckets”: one for spending, one for
savings and one for giving. In some instances, you may want to add a fourth bucket
I can provide you and your adult child with helpful budget
worksheets, or you can access any number of templates on the Internet. Your adult
child will be asked to list income sources, such as wages, investment income, bonuses,
etc. After that, he or she will list expenses, such as mortgage or rent payments, utilities,
groceries, gasoline or transportation costs, insurance costs, etc. Those expenses go
into the “spending” jar.
Taking control of expenses
If expenses exceed income by a narrow margin, your child may be able to fix the
problem by cutting some variable items listed in the expense column and transferring
them to the “luxuries” category. For instance, a monthly clothing expense or cash set
aside for restaurants or entertainment could be adjusted. If the margin separating
income and expenses is greater, he or she might find it necessary to look for ways to
reduce housing costs, such as rent, mortgage or service expenses.
Perhaps your adult child has had problems finding a job. Or he or she has
gone through a divorce and is looking to you for food, shelter and comfort. What
should you do? Parental instinct often says, “Of course, we’ll help.” But before
you loosen your purse strings too much, ask yourself: Will my actions enable
my grown child to continue to flounder financially, or can I structure my
assistance to empower my child to build (or rebuild) his or her financial
Before you open your door, establish some guidelines and expectations. What
room and board will the adult child pay? What additional expenses will the child
pay, and how much of his or her budget will be left for entertainment? What is
the plan to eventually get the child on his or her feet financially and on the
way to independence? Negotiating expectations, behaviors and financial
arrangements upfront helps avoid family friction and conflicts down the road.
When your child comes knocking…
Listed below are spending figures from the 2011 Department of Labor Consumer
Expenditure Survey (the latest data available) that show where consumers spend their
money. These figures are not necessarily guidelines for you and your adult child. But
you may want to compare the expenses listed on his or her budget worksheet with these
Clothing and services 3.5
Health care 6.7
Also consider the following common guidelines for spending:
Mortgage payments Not to exceed 28% of gross (pretax) income
Discretionary expenses (clothing, entertainment, restaurants, etc.)
Not to exceed 20% of after-tax income
Auto loans and credit-card debt
Not to exceed 20% of total after-tax income
Combined monthly debt Not to exceed 36% of monthly gross (pretax) income)
One of the easiest and most practical ways to ensure that your adult child invests
for the future is by encouraging the principle of “paying yourself first.” Assuming the
child has a job, recommend participating in the employer-sponsored retirement plan
if one is available. If the plan offers an automatic payroll deduction feature [such as
with a 401(k) or 403(b) plan], encourage the child to enroll. If the employer provides
a matching contribution, encourage him or her to contribute at least the amount that
will be matched as such contributions are essentially “free” money. Discuss with
your child what he or she will do in the future with potential salary increases. Plant
the seed of intention now to increase retirement-plan contributions as his or her
salary grows, which will ease the path toward eventually reaching the maximum
annual contribution amount.
More affluent families may also want to reward saving. If you or a grandparent expect
to have a taxable estate someday, gifting to a child or grandchild may be beneficial.
You may want to tie the gift to the saving behavior. Grandparents could make it
clear that if children or grandchildren increase their savings amounts in a companysponsored
retirement plan or IRA, grandparents would be inclined to gift an equal
amount to the child or grandchildren.
If your adult child’s employer doesn’t provide a retirement plan, encourage a systematic
way to begin investing in a traditional or Roth IRA. Wells Fargo Advisors provides an automatic way to transfer funds directly into an IRA.
For adult children whose adjusted gross income (AGI) falls below certain limits, remind
them of the saver’s credit. The credit is equal to a specific percentage of employee
contributions made to a retirement plan or IRA. The specific percentage depends on
the taxpayer’s filing status and income. Ask your tax consultant
about more information if you think the child may qualify.
You’ll also want to educate your adult child on the value of dollar cost averaging,
reinvesting dividends and investing in other tax-deferred accounts. Ask me for a copy of “Taking Control,” a complimentary investment
primer that discusses these and many other investment concepts.
Developing social responsibility
Now it’s time to revisit the “giving” jar with your adult child. Along with a career
and financially stable life comes a social responsibility to give back to the community.
Just as with younger children, you may want to encourage your adult child to set aside
a portion of his or her inflow for charitable purposes. Remember, your child’s values
may differ from your own; the goal here is not to raise funds for your favorite charity
but rather for your adult child to support initiatives that are consistent with his or
Preparing for marriage and children
As your adult child matures, marries and begins a family of his or her own, you’ll
want to continue to encourage sound financial management. At this point it’s important
to review family protection programs including life, disability and health insurance.
Remind your adult child to check for child-care flexible spending accounts (FSAs)
through his or her employer. And, of course, he or she will want to ensure that proper
estate documents (at least a will and durable power of attorney) are in order in case
of the unforeseen. For even more information and guidance at this stage of life, ask me for a copy of our “Guide for a Growing Family.”
Depending on your child’s financial success, this may be the appropriate time to
reintroduce him or her to your me. I can offer
an array of financial services and programs to begin helping your adult child achieve
the same financial success you enjoy.
This barely scratched the surface of techniques and concepts you
may want to use to nurture your children toward financial literacy. In addition to
this, consider these additional publications to expand your horizons in this area:
“Raising Financially Fit Kids”
by Joline Godfrey, published by Ten Speed Press
“Silver Spoon Kids”
by John and Eileen Gallo, published by Mc-Graw-Hill Companies
“Rich Dad, Poor Dad”
by Robert T. Kiyosaki, published by Business Plus/Hachette Book Group
As a mother of three boys myself, let me know if there is anything I can do to help!