Mini Money Managers

Our three year old recently posed the question, “Daddy, why do you need to go to work?”  We explained that the purpose of work is to make money to pay for all the things we need, like the house, our clothes, school and. most importantly, toys and graham crackers.  That’s when we realised that the concept of money and its uses is quite foreign to our son, and we’ve set out to change that. Experts agree that kids are never too young to start learning about money, so if like us, you want to raise savvy savers, here are some simple, age-appropriate techniques to get you started.

The toddler years

Children at this age should have a basic understanding of numbers.  Even if they can’t yet add or subtract, once they recognise numbers and their values, you  can start to introduce them to dollars and cents. “Play money” and games involving the exchange of money for items are a great place to start.  You can then draw their attention to the same kinds of exchanges you do on a daily basis, when you take them shopping or out for lunch, for example.

Encourage early saving with a piggy bank and a goal. At this age,  children need to be able to see their savings and the money increasing in size.  Our son desperately wants a particular type of toy fire engine, so we have set up a jar with a picture of the fire engine on it.  We give him coins when he’s been particularly well-behaved or helpful around the house.  When the jar is full, we’ll take him to buy the fire engine,  Even if the amount in the jar does not correlate with the actual cost of the toy, it still introduces him to the concept of saving, and the idea that sometimes you need to wait, and work, for something that you want.

Primary school years

In the early years of kindergarten and primary school, as basic mathematics skills are introduced, children become better able to understand that each coin or note is worth a different amount, and gradually they will be able to add and subtract..  Again, games involving the exchange of money are great but you can increase the level of difficulty by requiring exact amounts – demonstrating the many different ways to make a certain amount – and then teaching them how to calculate the change.

This is the ideal time to introduce children to the concept of “needs” and “wants”.  Make list of all the things the household that “need” to be paid for each month.  Older children can then start to help with things like household budgeting.  Involve them in the process and play around with old bills, pretend cheques and cash.  Simple things like creating a shopping list together and looking at receipts can prepare them for understanding the real cost of running a house. Then you can look at the things they may “want” and show them how much money is left each month to dedicate to things like toys, entertainment or family holidays.  How you manage money is going to build the foundation for their own financial values, so it’s important to set the tone and show them how to spend responsibly by doing just that.

At this age,  many parents open bank accounts specifically designed for young financiers, Whether you choose to hand them a cash allowance, regularly deposit money on their behalf, or simply encourage them to save their birthday money from Grandma, it’s a good idea to introduce them to banking at a young age.  As part of its Premier Account Services, HSBC offers savings accounts for children aged seven and up, in their own name.  Kids aged 11 and up can also have an ATM card.

Secondary school years

If you haven’t discussed money with your children by the time leave primary school, don’t panic: it’s not to late.  However, bear in mind that at this age they may be less receptive to your words of wisdom.  The first year of university is not a great time for them to be learning about managing their money, so give them a head start and prepare them for the real world before they leave home.  You can still follow some of the same lessons as for younger children, but adapt them slightly.  Involve older children when you are paying expenses for them.  Getting involved in – and understanding the costs of – buying school books and supplies, and paying fees for extra-curricular activities and uniforms will help them in the long run and give them an advantage when they’re out in the real world.

Teaching them to budget their own money is also crucial.  Determine what they need to pay for their expenses and encourage them to spend wisely and set limits.  One technique is to negotiate how much you are willing to contribute to the items they want,  For example, your daughter needs new jeans and you offer pay $150.  If the jeans she wants cost $300, she must come up with the short fall herself. They’ll soon learn to be careful with their cash if they have to pay their own way, and this will, in turn, encourage saving.  Many children are able to take on paid employment from the age of 15, and provided it doesn’t interfere too much with school work, children can learn many valuable lessons through paid work.

The later teen years are a good time to introduce children to the concept of credit, as they can “practise” while still at home under parental guidance.  To start, they should have the sophisticated arithmetic skills required toward out percentages, and you’ll need to demonstrate to them how easily people can get into trouble with plastic.  Explain the concept of interest rates, and show them the effect that compound interest can have on a weekly budget over the years.  A Visa debit card or similar, which is linked to a cash account, is great way to start out with teens.  If they prove themselves responsible spenders, then they can graduate to an actual credit card, with a low limit and fairly strict repayment terms.  Many parents find that giving their children a loan, with a rate of interest and repayment terms, is another great way to teach them about borrowing money.  A degree of transparency when it comes to the household finances , including loans and credit cards, is also helpful.

At school, children with an interest in economics will learn about the stock market and more advanced financial concepts.  There are a number of online games that are a fun way to introduce teens to investing, and if they’ve followed all your wonderful advice this far, and have been saving for a few years, they may have enough capital to begin exploring their options in the stock market with your help.  If you’e clueless when it comes to investing, chances are you’ll find it difficult to guide them in these lessons, so it might be a good time to get more informed yourself.

Making allowances?

The decision of whether to give children an allowance is often a controversial one. Some parents connect an allowance or “pocket money” to household chores, while others feel that payment shouldn’t be given for something that should be a standard contribution to the family home. Financial guru Suze Orman says that an allowance, or as she calls it “work pay”, should be used as a tool to teach kids about having to work for money, since that’s how it works in the real world. A regular allowance may be given to some children with a bonus given for things that you might pay someone else to do, like washing the car or mowing the lawn. However you structure it, an allowance can be used as an important teaching tool. Here are some things to remember:

• Before giving your child an allowance, they should understand the value of each coin and note, and at least be able to count money.

• Be clear about how much will be paid and what they will need to buy themselves. If you want them to buy their own lunch, expect there to be times when they will ask for lunch money as the allowance has been spent already on other things.

• Expect to negotiate. Children will always compare notes with their friends, and if someone is getting more than they are, they may hit you up for a raise. Jayne Pearl, author of Kids and Money: Giving Them the Savvy to Succeed Financially, suggests that you use this as part of the teaching process. She says, “Negotiation skills are an important part of the lesson, which they’re going to need for dealing effectively with friends, teachers and, eventually, their bosses.”

• Encourage saving. Give a certain amount and agree on the amount that should be put aside for a rainy day. It helps if you give them their allowance in denominations that make it easy for them to put money aside, like $50 in $10 notes. If they need help understanding the concept of saving, help them to set some goals – both short- and long-term. Whether it’s a new video game in a month, or a new bike in six months, let them decide what they want to spend their money on. Remember that it’s their money to spend as they wish. You can guide them and discourage them from wasting it, but give them room to make mistakes.

• As further incentive for saving part of the money themselves, offer a contribution towards big-ticket items. Providing a percentage of how much is saved or matching them dollar for dollar can really get kids motivated.

There are many fun and engaging ways to teach your children about money and how to use it wisely. But ultimately the biggest lessons they’ll learn will come from watching you manage your finances.