Help children avoid life’s financial pitfalls; Is kids’ allowance helpful or harmful?
Some people wreck their credit before they even learn to drive.
“Many kids have ruined their credit by the time they are 16 years old,” author and consumer advocate Remar Sutton says in a video introduction to the FoolProof Initiative, a free online financial training program, designed by and for teens and college students and endorsed by America’s credit unions. (See foolproofonline.info or foolproofsolo.com). “Bankruptcy for people under 25 now make up a huge and growing portion of all bankruptcies.”
Bite-size saving and spending lessons should begin alongside potty training, according to parenting and personal finance experts. When young kids miss out on money lessons, the consequences are lasting as they may fall into the ranks of people who learn about money the hard way, after such financial missteps as mistaking a charge card — such as American Express, which must be paid off in full — for a credit card. Other common traps: unknowingly committing to a costly gym membership or phone contract, or playing “beat the bank” — paying for something with a check (or debit card) in anticipation of making a deposit, not after it’s deposited.
Jessica Streit had just graduated from college about 15 years ago when she filed for bankruptcy because she lacked the income to cover less than $20,000 in credit card debt.
“I did not have any financial education growing up,” says Streit, now 37. “I can remember learning to balance a checkbook in eighth grade, but that wasn’t real.”
The Columbus, Ohio-area teacher now writes the blog at thedebtprincess.com. Her blog was born out of desperation when, well into her 30s and a mother of two boys, Streit again found herself buried in bills, without savings and in crisis mode over a common car repair. Now she writes and speaks to young people about “what not to do,” including giving in to impulse spending, thinking of credit as free money, and failing to save.
As for her own kids, ages 6 and 9: “They get an allowance, a dollar for each year (of their age) and they’re expected to do what I ask throughout the week. Then they separate their money into save, spend and give.”
Streit’s kids are on the right track, according to experts. Here are four more baby steps to help arm kids for the many (hidden and often predatory) financial potholes that plague young adults.
There is such a thing as a free lunch (for toddlers)
Children never learn about money if they never have any, says Denver child and family psychologist Nahid Hotchkiss. She has taught Kaiser Permanente parenting seminars rooted in the popular “Love and Logic” philosophy. Hotchkiss also has three adult children, and began giving them each a dollar a week when they were 3 years old.
“We would get to the store and they’d have their money to decide what they wanted to spend it on. It was usually gum or cookies or a cheap toy that would inevitably break. When that toy did break, they were upset,” Hotchkiss says. “I let them, with empathy, be upset, because they were learning the tools to cope with the natural disappointments of life… Then when they’re 30 and can’t afford a house or car, they have the tools to cope.”
Such scenarios also presented the opportunity for this mom to talk with her boys about how they could wait another week for another dollar to replace their broken toy, or save up over several weeks for a sturdier toy.
Young kids especially benefit from short-term instant gratification, says Young Americans Bank CEO Rich Martinez. The child whose allowance is spent before he even gets it will suffer the long wait until his next allowance.
“If you never have buyer’s remorse and someone keeps giving you money,” Martinez says. “How will you learn? …It’s the first piece of starting to budget.”
Fess up, parents
Hotchkiss, the child psychologist, also says that when parents are struggling to manage their budget or figure out how to afford a big purchase, kids should get to eavesdrop.
And the grown-up “Love and Logic” spending lessons don’t end there. (“Love and Logic” founder Dr. Charles Fey even co-authored a book on the subject titled “Millionaire Babies or Bankrupt Brats?”)
When older kids want more money than their allowance, for instance, parents may loan it to them “under very strict guidelines,” Hotchkiss says. Those guidelines include adding interest to the loan, setting a payback due date, and keeping collateral like an electronic game.
Work is work, chores are free
Paying for chores remains a common tool for parents wanting extra help around the house. But there’s disagreement about whether this is appropriate or even helpful to kids.
“I am not going to pay them to clean up after themselves,” says Thornton mom Carrie De Guzman Trujillo. She started working in her family’s arcade at age 8. And so instead of doling out dollars for chores to her two teens, both of them started working at age 5 in another family business — their grandmother’s private counseling clinic. Reyes, 16, began his work life doing landscaping for his grandmother; Alise, 13, still handles some of her grandmother’s clerical work.
“I’ve witnessed both of my children stress about not having money for Christmas,” says De Guzman Trujillo. “But it’s important that they understand that you’ve got to save it before you spend it, that money is a tool that can bring happiness, not a toy.”
A penny saved …
Ellie Wroble, 16, still remembers the peanut butter jar saving plan her parents began working on with her at age 2. There were four jars for the tot’s change: one for big toys, one for candy, one for college savings and another for charity.
The contents of the college savings jar became Wroble’s first savings account at the Young Americans Bank. Now this East High School junior sits on the bank’s Youth Board, and manages her own savings account, checking account, credit card and CD.
“I pay my own credit card bills, which has taught me to be careful with money,” says Wroble, whose income comes from baby-sitting and house sitting. “And I searched for the right phone plan instead of just taking the first one I found.”
But those behaviors are in sharp contrast to the spending habits Wroble observes among many of her peers.
“Teenagers,” she says, “most of the time, they get handed their parent’s credit card and just swipe, swipe, swipe.”
-Elana Ashanti Jefferson
Kids’ allowance: helpful or harmful?
“Allowance is really a budgeting tool… The key is it has to be something that (kids) can use to make decisions. Without being able to make decisions, you don’t learn.”
Rich Martinez, CEO Young Americans Bank
“Allowances give children the opportunity to experience and manage money. They give them a sense of independence. They also give children an opportunity to learn that when they spend money, it’s gone.”
Christine Agro, author of “Seen and Heard : An Inspiring Guide to Parenting Consciously” (Haldi Press, July 2012)
“I am a huge advocate of teaching kids usable skills, but hate allowance. I instead believe we need to teach our kids they have earning potential. I have taught my son entrepreneurial skills that will serve him for life. In addition, he has learned he has a responsibility to his family and our household. Allowance is nothing short of a bribe and as the kids grow, so too, do the bribes.”
Ann Morgan James, co-author (with her son, Jack James) of “How to Raise a Millionaire” (self-published)
“Allowance is not just good it is critical to our children’s long term financial success.”
Denise Winston, financial educator
“Allowance is neither good or bad. The key is that work be associated with earning money.”
Matt Kelly, columnist and personal finance coach
“Don’t give your children an allowance! It builds into them a “welfare mentality” that money should come to them simply because they exist.”
Brian Solik, financial advisor and founder of Wealth Preservation Strategies of NJ