Author, radio talk-show host and financial adviser, Dave Ramsey, teaches money management skills to all ages, including children. In Ramsey's book, Careless at the Carnival, Junior learns a valuable lesson about managing money after he spends it all in one place. But it's not only Junior who needs to manage money. All ages benefit from financial know-how and the earlier the better.
Young Adults, Plastic Money and Ads
According to the JumpStart Coalition for Personal financial Literacy, an organization intent on encouraging curriculum in schools so kids learn basic personal financial management skills, out of a potential score of 100% on a basic financial literacy survey, high school seniors averaged only 52.4%.
Out of all the U.S. bankruptcies filed, the largest percentage are those between the ages 22-44. Those twenty-something’s begin their first years of independence under a dark cloud of financial ruin.
“Plastic" simplifies purchase transactions and slipping into debt. As we transition from a cash society into a plastic one, it is critical that children learn money management skills. With plastic, there is no empty wallet.
The American Psychological Association says that children are bombarded by more than 40,0000 TV commercials a year. At one minute a pop, that's almost 28 days of nonstop commercials in one year! Although over $17 billion is spent on children's advertising, nothing influences a child more than a parent.
When the Stakes are Small
A wise mom told me, "Let your children make mistakes when they are little – when the problems are, too. If you wait until they are grown, then their problems are big.” I decided that teaching my children smart money management while their problems were little was as important as good grades and healthy eating.
The only way for a child to learn to manage money and credit is to have their own cash and plastic in hand. The amount of money and limit on plastic doesn’t have to be – and shouldn’t be – a lot. It’s up to you whether allowances are tied to chores. Benjamin Spock, M.D., a classic child-rearing expert, in his book, Dr. Spock’s Baby and Child Care, says that allowances should not be tied with chores, that all members by virtue of belonging to a family should be expected to help maintain the home and themselves. Spock said that extra chores are a way for children to earn extra money. No matter how old it is, good advice is good advice. I opted for a no-strings, no-questions asked allowance that began at age 5 and matched the dollar amount to the age - $5 for age 5, $6 for 6, etc.
With his first allowance, my son, Brian, asked me to take him to the convenience store where he asked the clerk to convert the $5 to quarters. I had no idea what he was up to, but it was his money. I kept quiet as he proceeded to put every one of those quarters in those tantalizing machines that offered him nothing but cheap toys in plastic containers. By the end of the day, he owned $5 worth of rubble. He was so sad that he wouldn’t get more money until the next Saturday.
When the next Saturday arrived, he was more anxious than ever to get to the store. I watched silently as he again got $5 worth of junk. Of course the toys broke. Of course he whined for more money. All week. But it only took these two sessions for him to realize that spending all his money in one place at one time means having no money when you see something you like at another store, being broke for days is no fun, Mom does not give in and purchasing things that don’t last is a waste of allowance. Lots of lessons for only $10.
The Painful Credit Card Lesson
Next, my son fell into a pattern of purchasing real toys. Within a few weeks, his Transformer collection became the draw of the neighborhood boys. When he saved a portion of one week’s allowance to add to the next week’s for a more expensive Transformer, I knew that not only had he taught himself the basics of budgeting, it was time to introduce him to the dangerous land of credit cards.
Using an unsolicited sample credit card I received in the mail, I cut my name off of it and this became Brian’s VISA card. I was the banker and approved a $20 credit limit for him. I explained the concept of charging things including a nasty thing called interest. To keep things simple, I opted for 50 cents interest on every $5.
“When you want to buy something on credit,” I said as I handed him the card, “tell me and I’ll mark it in your charge book.” I showed him the little notebook that I’d carry in my purse. “Each time you say you want to charge something, I’ll mark it down in the book and subtract it from $20. You’ll make payments out of your allowance. For instance, if you buy something on credit for $10, you’ll owe the credit company,” I said pointing at myself, “$11.”
His eyes opened wide. I watched as the allure of spending $20 tempted him followed by confusion. “You mean I’ll have to pay you more than I pay for something?”
After a slight shift to anger, his face and head drooped. I could smell the gears working and suddenly he brightened. “But I don’t have to pay it back all at once, right?
“Correct. It’ll be up to you how much you pay but there will be a $1 minimum to pay each week.”
If adults cannot resist the siren call of credit cards, how can a child? I slapped that credit card into his little outreached hand and he said, “Let’s go shopping.”
When he pulled out the card at the cash register, which again was at a convenience store, the clerk said, “We don’t accept credit from children.
“That’s OK,” I said and smiled. “We’re learning about credit cards, and I’m his bank.” Although candy is something I wouldn’t purchase with a credit card, I paid for his purchase without comment and marked it down in the book. Brian didn’t max out the first day but before the week ended, he spent his line of credit.
Slowly paying down his debt, he learned that a credit limit and making minimum payments feels like wearing cement shoes in a pit of quicksand. Still occasionally he’d bring out the card for new purchases, and I’d pull out my book.
“Awwww, Mom, can’t you just let me put it on credit without writing it down?”
I thought about him being a man. Would a creditor let him buy something without writing it down? This lesson’s price tag had only one zero behind the two; when he was grown, it could have four zeros. “I’m not Mom at the moment,” I said. “I’m the bank.” Ouch, that hurt both of us.
Financially Savvy Child - Priceless
The seeds of money management skills sprouted in other facets of my son’s development. He confided in me about watching his friend spend all his allowance on candy. (“I didn’t say anything. It’s his money, Mom,” he said proudly.) He continued setting aside a portion of his allowance when he wanted to save for something. Of note: I did not hold onto the money for him. He kept it in his room. He asked if there was anything he could do around the house to earn extra money and, if the answer was no, he took the initiative to ask the neighbors. Even his math grades showed an improvement.
One day while shopping for school clothes and shoes, Brian zoomed in on a pair of shoes. He looked at the price tag and put them down.
“How much are they?”
“Too much,” he said quickly.
Rather than remind him that I footed the bill, not him, I envisioned into the man he would someday become. For this mom, it was a difficult moment. Treat him, even though he knows the shoes were priced too high? Respect his decision and look for shoes that cost less?
I decided to honor his decision because this was the first time the concept of something being overpriced had occurred to him. As I paid for a pair that cost half the amount of the more expensive ones, I smiled and hugged my son. I knew I’d make it up to him some other way. Perhaps a tip if he did a really good job on a chore. It’s what adults call a “bonus.”
Brian has come a long way from wasting his entire allowance on junk to not allowing himself to be influenced by all those millions companies spend on ads. He made – and learned from – the worst financial decisions while he and the problems were little.