Investment

» PEIC - Five Good Habits to Instill In Your Children

Let's talk about how you can raise confident and happy children who possess a healthy approach to money.

1. ATM ABCs...

If you could get inside the heads of toddlers or young children today, their original understanding of money might be as the prize in a kind of game involving ATMs. Whenever you find a machine, you put your magic card in the slot, punch in a few numbers and voila! money pops out. Cool!

Quite innocently, parents are totally messing with their kids by exposing them to this "game" without providing any context. It seems to me that when a child reaches four or five years old you have to start explaining how the game really works. A full-blown lesson on the American banking system isn't necessary, just a few brief, clear messages explaining why you're able to make ATMs "give" you money on command. Likewise, the next time your child asks why you have to go to work, I want you to respond along these lines: "I am fortunate because I get to go do interesting work and earn money, so we will be able to buy things that we need." That answer not only begins to introduce the idea that money is earned, not a part of a game, but it also puts money in a positive light. It drives me crazy when I hear parents tell their kids: "I hate having to go to work instead of staying home with you, but I have to go make money." With that answer you have managed to teach your kids to hate work and to hate money. Not what you really intended, right?

2. Shop Talk

A great many of you need to instill some mall discipline in your kids. The key to this is to set parameters for each trip, organized around a pre-determined reason or objective for the excursion. Taking children to the mall without this kind of planned focus is a ticket for disastrous impulse buying. And just think what message that sends to your child. Whenever they want something all they have to do is go to the mall and Mom or Dad will whip out the credit card. How do you expect your child to ever learn the value of money when you spend it like that?

One of the best ways to teach moderation and the difference between wanting and needing is to sit down with your child before you go clothes shopping for the new school year. Before you ever set foot in the mall, have a clear game plan: we are looking for three sweaters, four shirts, and four pairs of pants. Period. And if your kid has a few favorite stores, I suggest you insist they case each store before any purchase is made. That way, you'll avoid buying everything you need at the first store and then having your kid walk into the next store and claim they will "just die" if they can't also have this or that item. The idea is for them to take a look at everything that's available and then make choices based on the parameters you've set with them.

In today's brave new world, of course, you also need to come up with an online shopping strategy. Because of the incredible convenience, I see way too many parents buying for their kids via their PC or Mac without thinking. You're sitting at dinner and your son mentions a new video game he wants. Then an hour later, when you are at your computer finishing up on some work, he appears at your elbow and suggests you just buy it online. So you do.

Take a look at your credit card statement and add up how many purchases are those "easy" online transactions made simply because your child asked at an opportune moment. Scary, huh? It's time to set some limits. As I explain below, gifts are to be reserved for truly special occasions. Anything beyond those special occasions needs to be financed by your child. Part-time jobs (for teens) are crucial money management lessons for kids.

3. Bill of Rights

In addition to setting the right spending examples with your kids, you also need to teach them the mechanics of managing money. Let them begin to learn by "helping out" when you pay your bills. When a child is a pre-teen or young teen, let him or her even write out a few bill checks for you to sign (or handle the clicks on your online bill-pay). Again, there doesn't need to be a lecture here, nor is your goal to make your child feel the weight of all your financial responsibilities. But it's a good first step in showing them what it takes to live. Trust me, a child who receives $5 or $10 for allowance is going to get quite an eye-opener when they see that the gas & electric bill was $300 during the winter months, that the cable is another $40 or so every month, and that your cell phone (one of life's most basic necessities in their worldview) costs $50 a month.

Speaking of cell phones, when you decide to give your child one, don't pass up the opportunity for a great financial lesson. Even if you are simply adding a child to an existing plan, let them know what their "share" of the bill is. I would recommend that you increase their chores and responsibilities around the house to offset the cost of their phone. Again, you are not denying them; you are taking advantage of a natural way to teach them that nothing is free. And any excess minutes they run up need to come out of their own allowance, or be worked off with extra jobs around the house.

4. Gifts Are Not a Given

I don't care how wealthy you may be, or how much joy you get showering your kids with toys and gifts. You have got to show some restraint. It's good for them, and for you too.

Gifts should be for an occasion. A birthday. A holiday. An important milestone. If you simply buy everything your children wants, you are not only taking away the "specialness" of gifts, you are setting up your kid to be a financial wreck. The children who get everything they want at 12 become the 22-year-olds with huge credit card balances they can't pay—simply because they grew up not understanding moderation and living within one's means.

Don't feel guilty about scaling back the spending. It's not about saying, "No, you can't have that pair of jeans." It's all about saying, "Why don't you put them on your list for Christmas, or for your birthday?" And hey, if they absolutely must have something N-O-W, please let them "earn" it with a job or project around the house.

5. Give'em Credit

You must educate your kids about how credit cards work before they go to college. That way they won't fall prey to all the credit card offers they will be assaulted with during freshman orientation. I can't tell you how many thousands of young adults tell me their money problems began in school: they fell for the card offers and started charging away without understanding the ramifications of what they were doing.

That's where you come in. Make them card savvy when they are young and you will literally save them thousands of dollars in interest payments that they'll know how to avoid.

You have a few options in how to give your kid credit. If you have a good FICO score of at least 720, I recommend that while you child is young you simply add their name to all of your credit cards as an authorized user. Obviously you are not to give them your credit cards, or in most cases even let them know you have done this. But by doing so, your good FICO score will become theirs as well. Then when your child hits 13 or so, I think it is time to give them a debit card tied to an account you set up for them. Each month you deposit a set sum in the account and discuss with your child what expenses are to be covered under it. And because they can only charge up to the amount in the account, they are going to learn a lot about money management the first time they try to use the card at the mall and it is turned down. (A crucial tip, though: make sure the account at the bank is set up so they will not be covered by a bank overdraft policy; you want them to simply be turned down if they try to charge beyond their balance.)

I would also encourage you to encourage them to stick with a debit card while in college. Yes, I know this doesn't help them build a FICO score, but if they are on your cards as an authorized user, they're already doing that. And for heaven's sake please do everything you can to steer your kid away from jumping at the credit card offers they will be enticed with during college. As I said, thousands of young adults have told me this was how their financial life took a really bad turn right out of the gate. They just charged away in school, and then when they hit the real world they had a ton of debt and a lousy FICO score. It's better if they wait until they are out of school to get their own card. With an income and the solid FICO score they've accrued from your credit cards, they should be able to get a good deal then—and be mature enough to use it wisely.

Once again though, remember that your child's financial future largely depends on your financial reality today. You can't teach them what they need to know if you yourself are financially irresponsible. I know you may be 20 or 30 or 40 years older than your children, but that doesn't mean you are any more mature than they are if you have no respect for money. If that's the case, you need to grow up fast before you ruin your chances of raising a financially secure child.
http://biz.yahoo.com/pfg/e37children/art...

-- posted by PEIC