Raise your hand if you learned about how to be smarter about your finances the hard way.
Yup, same here. For a lot of us, learning more about the huge role that money would play in our lives would have been helpful earlier on. While some ideas might be too complex for the younger set, a code of guiding principles about the value of saving, balancing wants and needs against income, and avoiding onerous debt are simple even for a 10-year-old.
This is the first in a series of advice posts about financial decisions that will appear at various points in your life. Let’s start by thinking about a few ways that parents of pre-teenagers can help their kids get a headstart on #FinancialLiteracyMonth.
Many kids start asking for an allowance in first or second grade, and when they do, there are three main questions to askdecide: when to start, how much, and, should allowance be linked to household chores?
Some strongly held opinions on those questions come from Ron Lieber, who recently wrote the New York Times bestseller The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous and Smart About Money.
According to Lieber, many parents have been going about it all wrong by starting allowances too late and actually giving kids too little! Lieber believes parents should start giving allowance as soon as children start asking about money. The child-development Ph.D.s who createddeveloped Sesame Street have determined that preschool-age kids can already distinguish between wants and needs, Lieber says, which is a familiar part of a budget’s framework.
As for amount, Lieber advises starting with a dollar a week per year of age. If your child is 9, that’s $9. Then, he says, have your kids divide their allowance into three pots – spend, save and give. Those divisions roughly approximate an adult budget, Lieber says.
Once your children hits 10 years old, allowances should go way up, Lieber says, with parents eventually handing over a lump sum that covers a child’s needs that they’re responsible for. No bailouts! Lieber’s general philosophy is this: gGive your kids just enough so that they can get some of what they want but not so much that they don’t have to make anya lot of difficult trade-offs. Let them own those, so they know what it’s like to make financial decisions that resemble grown-up ones.
As for chores, Lieber believes kids should be doing them for free, just like parents 👍🏼
Time to save
Similar to allowance, there’s no magic age for when to teach your child about saving – or when to open their first savings account. One idea is that it might be time for a savings account when your child has more money in their piggy bank than you feel comfortable with them having access to.
A good way to introduce your child to the concept of a bank is to explain that they keep our money safe, -- and pay us interest. Even younger children will understand the safety and security part, and they can probably understand the concept of how we get paid interest from the loans that banks make to other people and small businesses. A more detailed conversation about how compounding interest works should probably wait until adolescence.
It could be helpful for your kid to actually see where their money is. The next time you go to your bank or credit union, have them come along. Show them the vault and introduce the tellers. Ask about interest rates on savings accounts and open an account. Have your child help you find the best savings account with low initial deposits and no minimum monthly balance.
Finally, let your child check their balance online from time to time and discuss the factors involved in trying to make it grow.
College costs are rising, and parents are struggling to keep up. In the University of California system, for example, tuition has risen about 350 percent since 1980, with graduating seniors carrying an average debt of about $20,000. Unfortunately, even that amount of debt is below the national average.
A recent survey by Fidelity also highlighted the problem. It found that the number of parents saving for college has risen sharply, with 72 percent of the survey’s respondents now putting away money for their kids’ college. In 2007, it was 57 percent. The majority of parents believe a college education is required to land a decent job, but three-quarters of the families said their children will graduate with so much debt it will hurt their chances to be financially independent.
The cost obstacles mean parents need solid strategies. For starters, make it easier to transfer funds into a dedicated account for college savings. Treat it like a bill that has to be paid every month. Consider a 529 account, which allows for more aggressive investments, and isn’t taxed as long as you spend it on educational costs. Sites like savingforcollege.com let you find a low-cost provider with an expense ratio of less than 0.5 percent, but your own bank or credit union may be a good place to start.
Remember: Even a little savings goes a long way. If you put away only $50 a month for 18 years, you’d have nearly $20,000, assuming a 6 percent% average annual return. Save $100 a month and it’ll grow to $39,000. Add even more to the account with “found money” like birthday gifts, rewards from cash-back cards and tax refunds.
Bottom line: Start saving for college as soon as possible.
Introducing money concepts to children who may not even yet be in middle medical school might seem premature. But these same pre-teens are on the cusp of making huge financial decisions about where to go to school – and how to pay for it. Getting a solid grounding in the concepts of saving and financial security can never come too early.