Money management for kids

Children are fascinated with it.

Parents worry about it.

Yet many families don't talk much about money and related topics — allowances, spending, saving, donating, budgeting, raises — and aren't sure what to say when the subject comes up.

With children back in school, now is a good time to institute some practical ways to start children on the road to good money sense, said Michele Wulff, who coordinates economic education for the Omaha branch of the Federal Reserve Bank of Kansas City, Mo.

Wulff is a former fourth-grade teacher who knows how to lay the groundwork for healthy money habits that will last a lifetime.

Children as young as 4 or 5 can learn the value of money and what it can do, Wulff said. By the time youngsters are in school they can benefit from a sensible family discussion about what money is, what to do with it and what NOT to do with it.

“They understand the difference between needs and wants. They know the basics they have to have, like school lunches or supplies, and the extra that they can do with as they wish.”

Information and discussions about money should be appropriate for the age: A 10-year-old doesn't need help counting pennies but might not understand the concept of mutual fund investments.

One good starting point is a family meeting on money, Wulff said, where children and parents can reach agreements, with all sides having their say in the matter.

“That way, the responsibilities are discussed rather than Mom or Dad just telling them what to do. When you get that child's input, you have that agreement that they're going to follow through. It goes much smoother that way.”

Consider these topics and Wulff's tips for success in money managing:

ALLOWANCES

Allowances vary with age and responsibility, a family's ability to pay, a child's ability to manage money and the expenses a child is expected to cover.

If non-discretionary purchases such as lunches and school supplies are the child's responsibility, the allowance must be larger. Children 10 and older generally can begin to handle non-discretionary expenses.

Should an allowance be considered “pay” for carrying out chores around the house?

“Some parents feel like this is what you do because you're part of the family,” Wulff said, while others think an allowance should be like wages for the work each child does. Either way, it's important to teach money management skills.

CREDIT

Children should know that no cash advances or IOUs will be available. Youngsters should learn early about delayed gratification because it lays the foundation for good credit decisions later.

MISTAKES

Unwise spending is likely and can teach valuable lessons. A child might buy a trendy toy that other children have, only to find out that it's actually boring or breaks quickly. Discuss comparison shopping, analyzing purchases before buying and considering alternative uses of cash.

“I think they learn from that, especially if the parent can point out what happened,” Wulff said, without an “I told you so” tone.

A “buying journal” allows children to look back and see what they purchased and whether they are making good financial decisions.

BUDGETS

Putting money into separate categories can be simple for young people, such as putting coins in one container for savings and another container for spending. For older children, a budget can include separate amounts for school expenses, clothes, savings for short-term (a laptop?) and long-term (college?) goals, charitable contributions and entertainment.

By ages 9 or 10, children have the math skills to do budget calculations and can begin to set some savings goals.

“You'd be surprised,” Wulff said. “They know that when they're in high school maybe they're going to want a vehicle to get around in. They can set those goals.”

A budget should realistically balance income and spending so that the child doesn't have undesignated money or uncovered expenses at the end of the allowance period. That way, the child gets used to having a budget that fits both the money coming in and the spending going out.

OUTSIDE INCOME

Children who want to earn more money beyond their regular allowance can go the small-business route when ready — shoveling snow, cutting grass, baby-sitting, washing pets or doing other neighborhood tasks.

Such jobs should come with parental approval and proper safety precautions.

RAISES

An allowance “review” can work like a pay review at a job, with a specific time set in advance — such as every six months — to look back at spending habits, performance of chores and other criteria and ahead at future expenses.

Kids are subject to inflation, too, and as they age the things they want and need are more expensive. This is another chance for the give-and-take of family negotiations.

Contact the writer:

444-1080, steve.jordon@owh.com

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