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When you tell your child she has to wait for her birthday before getting a new toy or computer game, she's not usually happy to hear it. When adults see something they want, they often dash out to make the purchase, even if they can't afford it. So it's no surprise that the idea of saving for a goal can be challenging for kids to grasp.
Challenging, but certainly not impossible. You can teach your kids to understand the value of saving, and if you try, there really can be a pot of gold at the end of the rainbow.Money Lessons For The Ages
The first step is to help your child understand that goods and services cost money. How do you do that?
Your 5-to-8 Year-Old: When you go to the store, show your kids the price tags on items they want, whether it's their favorite snack or a new toy. Show them that some items cost more money than others, and have them help you at the check-out counter. At age 5, kids can start to identify cash money, such as quarters and nickels, or $1 bills and $5 bills. When you pay, show your child how you count your money, and how to count the change you receive from the cashier.
But where does that money come from? Your child may not think that money grows on trees, but she might think it just pops out of an ATM when you need it. Instead of only withdrawing money when you're with your kids, bring them with you when you deposit your paycheck or other checks, as well. You can discuss how you worked for the money you use to make purchases.
Now is a good time to help your child open her first savings account. Crack open the piggy bank and head to the bank. Your child will see that the money she sets aside in the bank will be available when she needs it. And when she wants to take money out, she'll understand she can only take out as much as she's put in.
Your 9-to-12 Year-Old: Kids in this group can start to understand more complicated money issues, such as debt.
Vern Hayden, a certified financial planner with Hayden Financial Group in Westport, Connecticut. and author of Getting An Investment Game Plan (John Wiley, 2003), tried an experiment when his daughter was 10. Hayden borrowed some money from her piggy bank at a 7 percent interest rate, simulating a bank loan. When he repaid her after a few weeks, with interest, she saw that her money grew. Though the interest only amounted to pennies, it was enough to make the point. She also learned that borrowing money costs money, and she didn't want to be the one who had to pay back more than she borrowed.
To show the importance of how debt can work against you, share your credit card statement with your child. Explain that a credit card is like an I.O.U. You don't hand over the plastic and get merchandise without a cost. When your credit card bill comes in, show your children the bill and explain the charges. Let your children watch you write checks as you pay your bills (whether you pay by hand or online) and explain where the money you're spending is coming from. If you're paying finance charges, use the discussion of your credit card bill as an opportunity to explain how costly those charges can be, and why you want to work to pay down outstanding credit card debt.
If your child is excited about the idea of earning interest, this is also a good time to explain about investing. Have your child pick a favorite food or toy. Then find out which company manufactures it. Explain to your child that she can buy a portion of that company by buying a share of stock, which represents ownership in the company. You can follow the company's progress together online or in newspaper stock tables and see how the release of new products or the company's performance impact the stock price.
Once a child understands that the products you buy have a monetary value, take the next step. Give your child an allowance. And show him its value by encouraging choices about how to spend the money -- or save it.
Kids should get a regular allowance, says Steve Pomerantz, a certified financial planner based in Boca Raton, Florida and host of National Public Radio's "On The Money Radio." You can start when they're old enough to understand that items cost money -- around 4 or 5 years old.
Pomerantz says the amount should be age-appropriate -- enough for small short-term needs such as after-school candy, pizza or a movie, but not enough for more expensive purchases like a new electronic gadget. Giving smaller amounts encourages kids to save for the big-ticket items.
The amount of allowance is different for every family, depending on your income level and how much you can afford to give your child. Some experts suggest tying an allowance to household chores; others say managing an allowance is its own task that should not be confused with the completion of household duties.Some Suggestions:
When you start giving an allowance, you have to start watching what goodies you buy for your child. If you usually buy whatever your child requests when you're on line at the grocery checkout counter, change your ways. Tell your child he can buy those items himself. Or, if it's an item you disapprove of, you can set rules about how he can spend his allowance.
Kids of all ages can learn about the value of saving and careful spending.