By David Hawkins
Kids are fascinated by how many pennies are in a dollar, or how much candy they can really buy for 75 cents. But teaching them the value of money and the importance of saving – now that’s another story. Children (and many adults) tend to live in the moment, so encouraging them to save for a rainy day can be challenging, though not impossible. Setting the right example and instilling good money management habits while kids are still young is the first step towards raising financially literate adults.
Allowance Basics: The 10-10-80 Rule
As soon as children are old enough to handle small amounts of money (typically around first or second grade) they should be allowed some of their own cash to manage. Once you’ve establishes the amount, frequency and guidelines of allowances in your home, sit with your children to discuss a plan for saving, sharing and spending. A good rule of thumb is the 10-10-80 allocation: 10% to savings; 10% to charity/church; and 80% to keep and/or spend.
Like many of us, most children will not be initially thrilled at the idea of saving 10% of their money. But teaching them that saving isn’t what we do with money that’s leftover, rather, it’s what we set aside right off the top, can establish a positive money management pattern that will carry them into adulthood. It helps to give young children a reason to save by identifying some goals they may have. Inspire their desire to save by brainstorming about big ticket items the child has been wanting – a computer game, microscope, etc. Then sit down and figure out a savings plan that will help them achieve their goal. If you believe in paying your child for odd jobs and chores, help him come up with income producing ideas to accomplish his goal. Not only will this help instill a lesson on the value of money, it will also make the purchased item more meaningful once it is finally obtained.
You can also teach your children about the magic of compound interest by offering to add interest to their savings for each week or month they leave it untouched. Watching their money grow will do more to motivate them than any number of lectures on the subject. (Saving $5 a week at 6 percent interest compounded quarterly will total about $266 after a year, $1,503 after 5 years, and $3,527 after 10 years!)
Teaching children to share begins in pre-school so applying it to the financial arena may not be as difficult as you may think. Encourage your children to set aside 10% of their allowance for charity. Allow them to contribute to organizations that help families and children within your community, and also allow them to participate in food, clothing and toy drives. Be sure to track their contributions in a notebook you review at the end of the year so they can see the many ways their generosity impacted others. Pint-size philanthropy pays off in later years by establishing a healthy attitude towards money and the many good things it can accomplish – not just purchase.
Lead by Example.
At the end of the day, children are going to learn more from what we do than what we say. The best way to teach our children good money management habits is to practice them ourselves. Walk the talk by sticking to an established savings plan and budget; pay off debts in a timely manner; live within your budget and resist impulse shopping; give to charitable causes that are meaningful to you; help protect your family’s future with adequate insurance coverage; and finally, maintain a teachable attitude yourself. Make wise money management choices that you can pass on for generations to come.
0218083-00001-00, Ed 2/6/2012, Exp 8/6/2013
Provided courtesy of Prudential. For more information, contact David Hawkins, a Financial Professional with The Prudential Insurance Company of America’s CMDA agency located in Vienna, Virginia. David Hawkins’s private office is located in Vienna, Virginia. He can be reached at (703)245-5014.