MSNBC.com

Sept. 12, 2005 issue - How to teach kids about money ... hmm, that ought to be easy. In just a week, I piled up a stack of tools: cute piggy banks, kiddie debit cards, advice books, money DVDs and interactive Web sites. The experts pretty much agree that your child should write budgets, list "wants" versus "needs," record his expenses in notebooks, save receipts, go over his accounts every week and set goals for saving—just the way Mommy and Daddy do.

Huh? Is that really what Mommy and Daddy do? If so, don't worry—your children will pick up your meticulous money habits by osmosis. If not, why would you push them into financial busywork that you wouldn't do yourself? They'll see pretty quickly that, if they humor you for a couple of weeks, you'll quit.

Besides, life's early money lessons don't require receipts. Children need to learn what the things in their world cost, how to make choices (magazine or poster, DVD or movie?), how to live within limits and how to save. That means muddling their way through failure and success with an income of their own (and without your slipping them $20 to fix mistakes).

Parents differ on how children should be "paid." Some give allowances, others require chores. Some start kids on plastic at 16, others shudder at the thought. Any choice is purely a question of values—there's no evidence that one path or the other makes for more successful adults. But the simpler your system and its incentives, the better. How to teach them depends on their age:

THE YOUNGER KIDS

You can start with games. In the grocery store, give them a couple of items from your list and ask them to find bargains. At the gas station, show them how the price mounts as you fill the tank (that is, if you can bear to watch it yourself). At the movies, tell them that they can have popcorn or $3 in cash, and let them choose. At home, let them see you pay bills and think aloud about whether you can afford a particular thing (for teaching purposes, a useful answer would be "no").

Provide a small allowance as soon as it's meaningful. Carrie Schwab-Pomerantz, coauthor of the family-finance book "It Pays to Talk" (written with her father, discount-broker pioneer Charles Schwab), says she started giving her 5-year-old $1 a week, "but she left it on the counter, so I knew she wasn't ready yet." By 7 or 8, it's pin money. Susan Beacham, CEO of Money Savvy Generation, which offers a program of financial-education tools, thinks that children don't grasp the concept of budgeting and spending before 10 or 11. How big their allowances should be depends partly on their friends. They should be neither too rich nor too poor.

Past the pin-money stage, an allowance should carry only two conditions: First, it's entirely the child's to spend within the limit of family rules (you can still run a "no candy" house). Second, it ought to be for something. The child takes responsibility for items he or she used to get from you—a snack at the grocery store, fruity shampoo or plastic cars. You both should agree on what those purchases will be, so the child doesn't get the money and shampoo, too (that would defeat the purpose). But make the allowance large enough for a couple of extras. That gives the child choice. He or she may make a dumb choice, but that's the child's to discover, not yours to preach.

Saving money also should be the child's choice. Many experts say otherwise. They think that parents should insist that children put part of their money away. But what does that teach, except that parents can make a kid's cash disappear? And where's the pleasure in seeing a $50 birthday check grow by 2 percent in the bank? You hate bank rates, too, which is one reason you don't save much.

For an idea that might get your kids to a nest egg voluntarily, take a look at David Owen's book "The First National Bank of Dad." He set up a "bank" for his kids on his computer (a plain pad would also work) and paid them 5 percent a month. A $50 birthday check could grow to $90 in a year. That hooked his kids on saving money, Owen says (it would hook me, too, but his bank wasn't open the day I called). His kids could also withdraw their savings at any time, no questions asked. They had the pleasure of saving for something, buying it, then starting to save again.

Most experts also say that kids should be forced to donate a portion of their allowance to a church or charity, but again, I disagree. If you're a giver, your children will watch and develop do-good hearts themselves.

Thumbs down on plastic—these kids are too young. Marketers push prepaid cards for the kiddie set. You load them with a fixed dollar amount and send your little mall-rat-in-training off to spend. Supposedly, the limited sum will teach her to budget. More likely, she'll learn that Mom will give her more when the card runs out. "Kids present the card and don't see the end," Money Savvy's Beacham says. "The sudden end is a surprise. Bankruptcy comes as a surprise to adults, too."

TEENS AND COLLEGE

For teens, allowances go up. Your children should also be taking on more responsibility for the things they need. Maybe the budget can include a couple of lunches a week at school. There might be money for hobbies, entertainment, a small clothing allowance and Boy Scout dues. Look over the things you purchase and think about what your kids could manage by themselves. Tweens might get $10 a week to spend, plus the expenses they've taken over; midteens, $20 a week. When my kids were teens, I asked them to do a rough budget for themselves and tell me what they thought they needed. The budgets were always fair, and I never argued (or asked for receipts!). When your kids are 16, start paying them once a month instead of once a week, to help them learn to budget over longer periods.

To avoid misunderstandings (that is, fights), write a list of all the expenses you both expect the allowance to cover. Always pay it on time—this is your child's paycheck, and he should be able to plan. Don't advance any money, except for a rare (and real) emergency. Advances should be repaid over the following two to four weeks. If the allowance keeps running out, re-examine the budget. Maybe your son is profligate; on the other hand, maybe he needs a raise.

What about paying for good grades? No—that's a terrible idea. If your son works hard for B's, he'll justly resent the $100 a pop your daughter, who's smarter, earns easily for A's. If he gets a B-plus, he may beg the teacher to raise it. What kind of incentive is that? Kids should simply learn to do the best they can.

What about stopping an allowance for punishment? This gets tricky. You'll still have to cover your child's expenses, and he may shrug off the loss of the rest of his money that week (I'm speaking from experience here). Taking away a privilege works better, and you won't have to figure how much of the allowance you still ought to pay.

What if she loses the money? Replace it the first time (you've lost money yourself) but not the second. Taking care is a lesson she's supposed to learn.

Parents often sabotage the plan by buying things the children were supposed to buy themselves. Kids think that's fine and might whine for more. But their allowances are supposed to be teaching them how to manage choice. Dad "teaches" them not to bother, if he can't help popping his wallet out.

Many parents prefer to pay in exchange for chores. But you don't want the kids finking out on laundry and dishes in a week they decide they don't need the money. Chores are part of what everyone does to keep the household going. You should tell your kids that chores are boring for parents, too (for some reason that surprises them; they think we love to clean the blinds). You might give an allowance plus extra pay for special jobs, such as mowing the lawn, baby-sitting for younger children or unscrambling your computer. Kids know that those chores usually aren't optional, but everyone pretends.

Saving money gets more important as teens grow up. The daddy bank has to close, because 5 percent a month starts getting pretty expensive. The kids will need a bank or credit-union account. Because they're minors, most states (not all) will require you to act as custodian on the account. But they can get their own checkbook and ATM card. This is your moment to show kids how to balance a checkbook and pay bills online.

They'll also have to start thinking about saving money for college. When figuring student-aid packages, many schools presume that students can contribute at least $1,150 from earnings in the summer before freshman year. That should be motivation enough to put money away. If not, you might offer to save an extra 50 cents for every dollar your child puts into a college account. Come to think of it, are you saving at all? A recent study done for four-year private colleges in Minnesota and Washington state found that 25 percent of parents wouldn't or couldn't pay. (Memo to kids: keep an eye on Mom and Dad's savings, too.)

Kids don't need to know how much money you earn, says psychiatrist Lisa Cohen at Beth Israel Medical Center in New York. You need personal boundaries when children are young, to maintain your authority. Also, you're entitled to privacy (you don't tell them about your sex life, either).

Should you get your kid a credit card? Kids normally can't get their own cards until they reach 18, so they'd have to be separate users on your personal card. That's fine, says Lewis Mandell, finance professor at the State University of New York at Buffalo. In college, they'll be urged to get cards at every turn. "I want kids to be using them under adult supervision before they're off on their own," he says. He gave cards to his kids and went over their spending every month—teaching them the arcana of interest rates, unpaid balances, overlimit and late charges and, most of all, the peer pressure to spend.

But before you automatically nod your head yes, listen to Janet Bodnar, author of "Raising Money Smart Kids." Giving credit cards to high-school kids "is the dumbest idea I've ever heard," she says. Plastic of any sort is "just a direct line to Mom and Dad's wallet." When you want your kids to learn to manage spending, give them cold, hard cash. Next, let them open a checking account with a debit card. Her son went through college with a debit card and a checkbook, waiting for a credit card until just before he graduated. That gave him plenty of time to learn to handle money while using plastic (and budgeting), too. Some parents want their kids to have credit cards for "emergencies." But think about it: debit cards can handle emergencies; so can a phone call home.

Colleges and universities, especially large ones, make big money on credit cards, says Robert Manning, finance professor at the Rochester Institute of Technology and author of "Credit Card Nation.'' They may earn a sign-up bonus, plus as much as 1 percent of everything charged on the card, plus other sweeteners. They even give the card company student addresses, phone numbers and e-mail addresses for marketing. Many students use cards responsibly. Still, they're graduating with an average of four cards in their wallets and primed for future debts. Almost half carry unpaid balances at high interest rates.

To surprise young people, tell them they've got a credit history. Most of them have no idea that every transaction they make—every charge, every payment, every late payment or nonpayment—goes in a personal file. It's distilled into a "credit score," used by banks, employers and insurance companies to decide how reliable you are. Manning gave three packed workshops on person-al finance at RIT's freshman orientation this year. "I told the students that, when they graduated, their credit score would be more important than their grade-point average," he says. "Their eyes bugged."

As a parent, you must tell your kids about credit files. In fact, show them your own (if you dare). You can now get it free from annualcreditreport.com. If your student already has a card, check his or her file, too.

TWENTYSOMETHINGS

Parents get confused about what their responsibilities ought to be to their children as young adults, says Adriane Berg, author of "How Not to Go Broke at 102!" It's one thing for kids to come back home if they're out of school and hunting for work. It's quite another for them to settle in. You're heading for retirement now. You might want to sell the house and move to a condo or out of state.

If you do have a boomerang kid, he or she should start paying rent (plus a late fee if it doesn't come on time). You might also require a monthly deposit into an "independence fund," for a security deposit on an apartment. A job hunter should be out every day, not noodling through the Internet. You need a written agreement on chores, privacy, sleepovers and how loud music can be played.

Before they leave home the first time, tell them what to expect, Berg says. Will you take over a student loan? Help with a down payment? Subsidize their rent for a year? Unless they know, they can't manage their own lives. Mostly, you should say bye-bye. The best gift you can give them now is to be independent yourself.

Reporter associate: Temma Ehrenfeld