Teaching kids about money...!

Some very practical ideas about teaching financial responsibility to kids. There are several books on this topic, but this article from Wall Street Journal captures some very simple, yet powerful ideas.

How to Teach Your Kids About Money
June 1, 2005; Page D1
Will they bite the hand that once fed them?

Unfortunately, it's all too easy to raise financially irresponsible children. Many teenagers learn nothing about personal finance in school, and they learn all the wrong lessons from their free-spending friends. Yet surveys indicate that 11% of teens and 76% of college undergraduates are now wielding credit cards.

The danger: Your kids will grow up to be financially reckless, and you will feel compelled to bail them out. Don't want to spend the rest of your life footing their bills? Here's how I have tried to protect myself -- by instilling good financial habits in my kids.

• Dress for success. Make no mistake: Your children will make some appalling financial blunders. But it is a lot better if they make those mistakes while they are young and the sums involved are modest.

To that end, it is important to give youngsters financial responsibility, starting with a toy-and-candy allowance when they are five or six years old and then, once they are teenagers, stepping it up with a clothing allowance and a bank account.

The goal: to get your kids to make tough financial decisions. If they are always asking you for money or they are merrily racking up charges on the credit card you gave them, their desires will be limitless and spending will seem painless, because they aren't paying -- you are. What to do? You have to set up a system where, instead of you saying "no," your kids have to say "no" to themselves.

I try to do this with my two kids. Every three months, I deposit $200 in my 16-year-old daughter's bank account, which is meant to cover clothing and entertainment. Our agreement is that I will pay for bigger-ticket items, like winter coats and running shoes. For everything else, Hannah either has to limit herself to the $200 or earn extra by babysitting.

My daughter, of course, buys idiotic items and struggles to make ends meet. And I, of course, want to guide her decisions and bail her out. But I don't. The reason: If I bail her out now, she won't learn responsibility -- and I will end up bailing her out later.

Eventually, I plan to use the same system with my 12-year-old son, Henry. For now, however, I just give him $100 every three months, and I don't expect him to buy clothes. Frankly, if he had a clothing allowance, I am not sure what bizarre outfits he would buy -- or whether he would even bother with new clothes.

• The buck stops somewhere. Over the past decade, I have salted away $25,000 in a low-cost variable annuity for each of my kids, to give them a head start on retirement savings.

But lately, I have also been giving some thought to Henry and Hannah's financial needs over the next 10 or 15 years. With that in mind, I recently took them out to a local diner for lunch and told them precisely what they could expect from me financially.

I promised they would graduate from college debt-free. But I said that, if they went to graduate school, they would have to take out loans. I also promised $5,000 upon graduation, $20,000 toward a house down payment and $5,000 for a wedding or at age 30, whichever came first. Depending on how rapid inflation is over the intervening years, I may boost the numbers somewhat.

Are these sums reasonable? Some folks will think they are high, while others might view them as stingy. Henry thought $5,000 upon graduation sounded pretty good -- until I explained what it cost to rent a New York City apartment.

But, to be honest, whether the numbers are adequate or not is beside the point. Instead, my goals are twofold. First, this is about setting expectations. As with today's allowance, my kids now know what they will get from me -- and everything else will have to come from them.

Second, it's about values. I want my kids to get a great education, which is why I am happy to pay for their undergraduate studies. But I don't want them turning into perennial students, which is why graduate school is on their nickel.

Similarly, I think helping my children buy a house is more important than paying for some outrageously expensive wedding. In fact, if someday either kid wants to pocket my $5,000 and elope instead, I will happily drive them to the airport.

• Don't bank on it. The most important financial skill a child can learn is the ability to delay gratification. What's the second most important? Kids need to become comfortable taking risks.

Today's children face a world of 401(k) plans, individual retirement accounts and possibly private Social Security accounts. If they aren't comfortable investing their savings in something riskier than a money-market account, they will have a tough time amassing enough for retirement.
Yet kids seem naturally drawn to the sedate world of banks, certificates of deposit and savings accounts. By contrast, stocks and mutual funds seem abstract and uncertain. Somehow, you have to get kids comfortable with this riskier world, while ensuring they don't go to the other extreme, viewing investing as some sort of testosterone-infused trading game involving turbocharged stocks.

To get my kids comfortable with investing, I regularly show them financial statements, talk about the stock market and, for a while, even ran a mutual-fund game, where we all picked funds and I invested $50 or $100 a month for each of us. None of these efforts has been wildly successful. But I am hoping that, cumulatively, they do the trick.

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