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Giving Kids 'The Talk' About Money

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August 9, 2009 - (by Kathy M. Kristof, Personal Finance LA Times)

The recession is a perfect time to give children hands-on lessons about how to manage their finances.  David Strauss knew he needed to do a better job teaching his children about money, but the layoff notice he received in January gave it a sense of urgency. "It made the discussions a lot more real," said Strauss, 43, a Boston-based radio station manager.

Knowing that the downsizing was coming, Strauss had already started talking to 17-year-old Daniel and 12-year-old Alexandra about wants versus needs and discussing how the family expected to cut back.  "The kids are interested in talking about money now," he said. "Daniel is getting his first job. Alexandra is about to have a bat mitzvah. It's pertinent to what's going on in their lives."

The Strauss family is indicative of a trend that's sweeping the country. Whether by want or necessity, parents are taking greater pains to teach their children about such topics as budgeting and investing. Nearly half of parents said they were using the recession as a catalyst to talk about money to their children, according to a recent survey by T. Rowe Price Group Inc.  "When things are going along fine, you just don't have to think about this," said Karyn Hodgens, co-founder of Kidnexions, a Rocklin, Calif., company that offers software to teach children about money. "But because parents' finances are in such a state, they're coming to the conclusion that now would be a good time to introduce these concepts to their kids."  Experts agree that the recession is an ideal time -- a perfect teachable moment -- to help children learn how to handle money. But parents still say they're flummoxed about what to teach and how to teach it.

"We scare parents by saying that they should teach kids about money," said Laura Levine, executive director of the JumpStart Coalition for Personal Financial Literacy in Washington. "They think they're not qualified. But kids learn most of their money lessons from their parents. You just need to talk about it."

It's not hard, experts agree, if you take it step by step.  The best way to introduce the concept of money management is to give children some money to manage, said Janet Bodnar, editor of Kiplinger's Personal Finance magazine and author of "Raising Money Smart Kids."

Bodnar suggests setting a weekly allowance that equates to half your child's age -- $2 for a 4-year-old and $5 when a child hits 10. Other experts say there's no need to adhere to a formula on the amount. You can simply shift some of the money you're already spending on them for discretionary items -- such as toys and snacks -- and allow them to decide how to spend it.

The important thing is for the children to see that managing money is all about making choices, said Jill Suskind, founder of WealthQuest for Teens. If you buy one thing, you won't have the money to buy another.

"It's like teaching kids about healthy eating. You don't sit them down to look at the food pyramid -- you have them experience it," said Hodgens of Kidnexions. "You make money experiences a part of everyday living."

But children shouldn't spend all the money they earn -- they should also save some and give some to charity.  Michele Brockhum, a certified public accountant in Tampa, gives her daughter Alex $1 a day in quarters.  One quarter is for everyday spending; one is for longer-term purchases -- T-shirts, DVDs and other sundry items she can't afford immediately; one goes to charity; and one goes into long-term savings.
This idea has so many proponents that there are dozens of specialized piggy banks to help promote the concept. The majority offer three-part banks, labeled "spend, save, share." Some, such as Brockhum's, have another category for long-term savings and investing. What Brockhum particularly likes about it is that 12-year-old Alex quickly mastered a lesson that so many adults find difficult.

"She realized really quickly that if she didn't fritter away her everyday spending money buying root beer floats and snacks, she could reach her longer-term goals much more quickly," Brockhum said.  She was going for a simpler goal when she started giving Alex an allowance when she was 4 or 5 years old.  "I originally started this because it seemed like every time I went to the store, it was like gimme, gimme, gimme," Brockhum said. "The allowance ended the whining at the store, and it made her appreciate whether she wanted whatever it was that she was asking for that bad after all."

Alex wanted everything when it was Mom's money, Brockhum said, yet asked for considerably less when it meant spending her own cash.  If a desired toy is too expensive, parents need to hold back on their urge to step in and help out. Children need to learn that when the money is gone, it's gone.  Parents also need to decide what kind of expenditures are appropriate -- and stick to their guns.

Tara Payne started paying her children for chores last year and has had them divvy their money equally to spend, save and share. But because she's new to the money lessons, she hasn't set a lot of limits on what her girls can buy.  When 7-year-old Marissa said she wanted pierced ears, Payne thought she was too young.  "In a moment of weakness, I told her that if she saved the money, she could get them," she said. "I figured it would take forever for her to save the $30, so I didn't need to really worry."
What she didn't count on was that the two younger girls would turn their big sister into their favorite charity.

"They gave her all their 'share' money," Payne said. "Prior to that, they thought their share money was what they put in the 'red bucket' at the holidays."   Payne said she was wiser when Marissa told her that she wanted to buy "shopping Barbie," who came with a shopping bag and a constantly replenished credit card.  "I just kept on thinking about the horrible message we were sending with that doll," she said. "We talked about it and decided on Astronaut Barbie instead."

When children are old enough, it's time to teach them about credit.  Tweens can learn about credit if you charge them interest when they overspend their allowance, deducting the amount from their next payment. But as youths get closer to college, many parents believe it's smart to give them real-life experience with a credit card while they're around to help monitor it.

Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation, for example, said she wanted her boys to get credit cards as soon as they could drive. That ensured they'd have access to cash if they had an emergency on the road, but it also enabled her to sit down with them when they received each monthly statement for a little lesson on the cost of spending more than you have.

"You want to show them on a monthly basis what they spent and what happens if you don't pay the balance in full and on time," she said. "It's similar to teaching them to drive a car. You want them to practice under your watch."

For Pete Kellison, teaching his 11-year-old son, Chase, about money is something of a balancing act. Kellison, a Sacramento lobbyist, said virtually everyone he knew had been affected by the recession, and several parents of Chase's friends been so severely hurt that they had moved and pulled their children out of Little League and country clubs, where they used to meet.

"It's caused him some concern," Kellison said. "And it's made us all a little more sober about what we choose to do."  By the same token, Chase is about the same age that Kellison's grandfather was when the Great Depression struck, and Kellison laments the fact that his grandfather became so frugal that he never enjoyed his wealth.  Kellison and his wife, Heidy, want to emphasize that money is a tool that provides both enjoyment and security when used wisely.

"My grandfather grew up poor and was never able to enjoy his money; I grew up affluent and lacked awareness of the cost and the choices that are made," he said. "I want Chase to have respect for money but not love it too much or fear it too much."  Like many parents, they're feeling their way through the lessons by bringing Chase shopping with them and making him aware of the decision-making process when they decide to splurge.

If the family goes to a ballgame, for example, the Kellisons talk to Chase about how much the night out will cost. "That's money we'll spend having a good time, but it may mean that there are other things we won't do," Kellison said.

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