I have been following my own money advice for many years now. Here are three lessons I have learned about surviving the inevitable bumps in the road along the way to teaching kids about money:
Keep it concrete
Money is an abstract concept to kids. Child development researcher Jean Piaget found that children only begin to think logically about abstract propositions after about age 11. Adolescents also struggle with the abstract because the anatomy of reason and decision in their brain is in such flux.
That means we must make the money lesson for our children—regardless of their age—less abstract. The most concrete money lesson I know is allowance—not the sort of allowance that rewards children for chores, but the sort that puts them on a budget. By giving your child a monthly allowance and agreeing to a plan for how your child will use the money—to spend, save, donate and invest—you assign the responsibility for managing the money to your child. Most importantly, allowance transforms your money into their money, which allows for their hands-on problem solving.
My daughters, Allison, 16, and Amanda, 14, both ran out of allowance money last month. Their allowance covers their clothing, toiletry and school lunch expenses. Amanda started making her lunch and scrounging through every purse and pocket for change. She took her change to the bank (without my help) and converted the change into a $20 dollar bill so she would "not spend it easily." Allison’s solution was to ask me for money—I said no—and then borrow from her BFF.
Our kids each have very individual money personalities. Allowance is not only a very concrete way to help kids deal with the abstract concept of money, but also a way to help us see our child’s money personality very clearly so we know what we are working with.
Privilege, not punishment
Each spring and fall, the girls get a clothing budget in cash. Cash and a budget are concrete. I started this when the girls were fairly young and they saw this outlay of cash as a privilege. Waiting too long can make it feel more like punishment when you go from freely covering all expenses to putting them on a budget.
My cousin’s daughter heads to college this September. To help her understand what it will be like to live on her own money and not her dad’s, I suggested he give her three months of cash to live on this summer. They’ll have a conversation about her expenses and she will get a lump sum on June 1, then no more until Sept. 1. His daughter will keep receipts and they will review her budget monthly. Then, they will use this summer’s experience to determine how they should handle money during her first semester at college.
She will see the trial run this summer as a privilege since it will be used to prepare her for the fall. If he waits until the fall and then cuts her off, she would likely perceive this as a punishment. Timing is everything with kids and remember to watch for the window of opportunity when managing their own cash will be seen as a privilege.
Build in flexibility
I have learned that my daughters often "forget" their money when we are out shopping and need to "borrow" from me—money that never seems to get repaid. To cope with this, I have created "Good as Cash" certificates. Each certificate has a denomination, $5 or $20 for example, that the girls get as gifts along with cash. I actually keep these certificates in my wallet and when they are caught short, I offer them as an option. This is my way of making the act of "borrowing" money from me feel concrete. The certificates, I have found, are harder for them to redeem than if I just loan them the money. It also helps us all keep track of how much was borrowed.
In addition, each month, I have a "date" with each of my daughters. Each gets me exclusively for the day and we dispense with the rules. This generally means that we find ourselves at Target getting toiletries that I pay for. This helps build in breathing room to their budgets while they learn to manage the allowance.
The bottom line: this is about teaching kids. We are not trying to build a portfolio of stocks for them or amass enough savings for a down payment on their first house. We are instead focused on teaching them to make money choices, skills that eventually will translate into a financially responsible adult.
Susan Beacham is the founder and CEO of Money Savvy Generation, a financial education company that provides innovative products and services to help parents and educators teach children the basic skills of personal finance, www.MoneySavvy Generation.com. E-mail her at susan@MSGEN.com.