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Family Finance

Raising Money-Smart Kids: What Every Parent Should Know

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07/01/2011 - It was easier to teach children the value of a dollar when cash was a more tangible commodity. Credit, stored value and gift cards have made money invisible – creating an extra challenging environment for instilling financial discipline in your kids. But don't despair; despite the challenges, there are still ways to pass on your financial wisdom. Here are some practical tips for teaching your children about the realities of hard-earned cash:

Start early. Let's face it; your kids are much more likely to heed your advice when they are young than during those years when they seem to think they know everything. It's important to communicate your values about money during the formative years. Take advantage of opportunities to teach the difference between needs and wants. This will prepare them for making good financial decisions in the future.

Make allowance count. Correlate allowance with responsibilities like feeding pets, taking out trash or other household chores. The level of responsibility and the amount of the allowance should be appropriate for the child's age and your own financial means.

You may also want to dole out allowances in denominations that encourage saving. If the amount is five dollars, give five one dollar bills and suggest that at least one dollar be set aside for savings.

Encourage financial goal-setting. Work with your kids to create a list of things they want to save for–big and small. Then help to prioritize the list. Nearly every item children ask for regularly can become the object of a goal-setting session. It's an activity that establishes discipline and helps children grow into financially responsible adults.

Allow participation during banking transactions. Being involved in the process of depositing and withdrawing money will teach children how banking works. It's important that you don't repeatedly refuse them when they want to withdraw their savings for a purchase. If they think the money is off limits, it may discourage them from saving at all. However, it's a good time remind them about the goals they've set and to think about whether the desired purchase will derail their priorities.

Alert about the hazards of borrowing. One sure way to teach kids about the perils of debt is to actually charge them interest on small amounts you lend them. If they run out of money before their next allowance is due, loan them the cash, but make sure they know the loan comes at a cost. Agree upon an interest rate and work with them to determine the payback amount. They will quickly learn how expensive it is to use someone else's money.

Educate about credit card use. Kids should learn that every time the plastic is used, it creates a bill that must be paid each month. When making a credit card transaction, take the opportunity to explain how the process works, how to make sure the charges are accurate, and how to be protected from credit card fraud.

Teach investment basics sooner than later. The first step for young investors is to understand the concept of risk versus reward. Before putting real money on the line, your child can test his or her stock selection skills by choosing two or three stocks and then following their performance. You'll generate more excitement if your child is allowed to choose a company that he or she is familiar with.

If you jointly decide it's time to graduate to an actual purchase of stock, you'll have to set up a custodial account since minors can't own stocks or open brokerage accounts in their own name.

Don't expect that you'll have all the answers to raising financially responsible children right away. Resources are readily available online or through a financial advisor. Just remember that your determination and patience will be rewarded as you watch your kids blossom into money-smart adults.

File #119717

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