My son Ezra, now 13, is a veteran cyber-spender. A fan of eBay, the Internet auction site, he knows all about bidding, business references, escrow accounts, and credit. He scouts there for bargain buys on bicycle equipment and computer games. Last year, he established his own business selling Magic The Gathering cards, which are collectibles among guys aged 10 to about 40. His venture went global right from its start. Checks and money orders for $1.98, $4.50, and $3.09 come regularly to our house from Hong Kong, Malmo, and other far-flung cities.
Ezra, according to Don Tapscott, author of Growing Up Digital, is a member of the "Net Generation." About eighty-eight million strong, these children use complicated technology -- computers, cameras, cell phones, VCRs, websites, and video cameras, much as my generation once used transistor radios and phones. The Net Generation's ease with technology has exposed it to more ideas and, as a result, says Tapscott, it is exceptionally curious, alert, contrarian, smart, and "ideally suited to wealth creation in the new economy."
Maybe they can create wealth, but that does not mean that they know how to manage it. As knowledgeable as Ezra is about high finance, he has never seen a buck he could not spend. Free spending is apparently common among the junior "digerati." A survey by the Jump$tart Coalition for Personal Financial Literacy, an educational consortium composed of more than 80 organizations, including the Federal Reserve, the American Savings Education Council, the American Financial Services Association, the National Foundation for Consumer Credit, and the National Education Association, revealed that 27 percent of students in junior high do not think saving is a high priority. A survey of young people ages 12 to 21 by Yankelovich Partners for Phoenix Home Life Mutual Insurance Company further discovered that children were -- well, ignorant of the financial basics. About 21 percent did not understand what a budget is, 33 percent a mortgage, 36 percent buying on credit, 41 percent life insurance, and 82 percent compound interest.
Such unawareness is dismaying because, says Dara Duguay, Jump$tart Coalition executive director, "children are going to have to be more sophisticated about finance than ever before." Why? For starters, children have more money. According to James McNeal, Ph.D., professor of marketing at Texas A&M University, who has spent a lifetime studying children and their money, children's spending has tripled in the 1990s to $24.4 billion. By 2001, he predicts their buying power will reach $35 billion. From their earliest years, they should be learning how to use their money wisely. Then, too, the world moves faster than it once did. Gratifying every wish takes little more than a click of a mouse; so children have to learn how to judge value. More than in previous generations, our children will be thrown upon their own resources to finance huge college bills, resist the lure of credit cards and other easy-money traps, and save aggressively for their own retirement, because nobody knows whether Social Security will be available to them way off in the year 2055.
As a parent, it is hard to know where to start, particularly because few of us are financial whizzes. Fortunately, for all of us, particularly those who can barely balance their checkbooks, there is more help around than ever before. If you are interested in finding out what benchmarks your child should reach by grades four, eight, and twelve, you should drop in on the Jump$tart Coalition website (www.jumpstart.org) or write to ask for their guide How to Raise a Money-Smart Child. (Send $1 to Jump$tart Coalition at 919 Eighteenth St. N.W., 3rd Floor, Washington, D.C. 20006.) It lists a daunting array of concepts that your children should be learning -- from comparing the different ways of saving to knowing what a credit report is. Don't panic, however. The Jump$tart folks are working to get schools to fold this material into current course work -- so you are not alone. With or without the help of the schools, Jump$tart, or anyone else, however, you should be focusing on the major tasks of money management: earning, spending, saving, and investing. Luckily, there are now plenty of websites, books, courses, and games that can help you learn along with your children.
To hammer home money-management skills, try using the following techniques.
MAKING THE MOST OF TEACHING MOMENTS
You are getting and spending all the time, right in front of your children. While what you are doing may seem as routine as mashing potatoes, to your children it could be as interesting as an exhibit at the zoo. So as soon as your child starts to notice your money transactions, use them to instruct and explain. For example, you can let even a preschooler pay for little items at the grocery store -- a candy bar or a juice. Carefully show your child, using small amounts, that if an item costs 49 cents and you give her two quarters, she should expect a penny in return. Not only will small children start learning denominations of coins and bills, but they will soon become hip to more complicated concepts -- for example, the sales tax. That candy bar really costs 53 cents, and you have to give her three extra pennies. You should explain right away that the tax goes to the government to pay for roads, schools, and other public goods that families could not afford to buy on their own. Your children will be paying taxes for the rest of their lives, so they may as well understand what they are, even before they have to feel the pain.
When you are shopping, explain what factors go into your decision to purchase: price, quality, durability, and convenience. Tell why you are buying the store-brand toilet paper rather than Scotts or vice versa. When you are in the store, you can show a child that a cheaper product, perhaps, is just as good as the name-brand. Television advertising is the primary source for most children's product information; so they may clamor for the high-priced brand they see hyped all the time. Do not just wave them off with a "we can't afford that" -- particularly if you can. Spell out for your children in simple language why you do not think the item is worth the money. "That cereal is full of sugar and junk. This one I buy has vitamins."
Children will also quickly notice that you sometimes use plastic cards to pay and that machines send out cash when you press certain buttons. The savvy among them, when told you cannot afford to buy a toy, will tell you to go to the machine. Such an observation is an opportunity to explain a bank account. You get paid a set amount of money, which goes into an account; the machine coughs out only as much as you have, not as much as you want. From such a discussion arises one of the most crucial financial concepts: spending limits. Unless you are Mr. and Mrs. Bill Gates, you don't have an endless supply of money and you have to make choices. "What is it to be?" you can ask your child. "An unlimited flow of toys or gas for the car?"
Use of a charge card will bring up other points that are important to make. When you take out your Visa or MasterCard, for example, you are spending money you do not currently have. To do so, you have to rent that money, and the charge is called interest. When your child is in grade school, show him the true cost. If you charge a $324 bicycle ($300 plus an 8 percent sales tax), the real cost of the bike is more like $574, if you pay 21 percent annual interest and it sits on your balance unpaid for three years. If you want to go further, you could show that at maybe $14 an hour, which is what you earn after paying taxes, it will take you about a week of work to pay for the bike.
In fact, the discussion of limits, financial priorities, and goals should take place in your family from the time your children are very small until they leave for college. You do not need to tell them exactly how much income you have to make them understand. Whenever discussion comes up about the family's plans, say a vacation, you should specify: "We have $1,500 to spend. Here are the places we can afford to go." Or you could even put certain issues to a family vote: "We can hire somebody to clean the house instead of doing it ourselves or save up enough for a down payment on a car. Which do we prefer?"
REAL LIFE EXPERIENCE
Nobody appreciates the value of a dollar until she has to earn one; so it is important to give your children the opportunity to use the sweat of their brows. You might assign little chores that will earn even toddlers a few pennies. Of course, make it clear that you will not pay for the basics, however you define them -- being courteous, not beating up on a sibling, doing schoolwork, writing thank-you notes, or washing the dishes. After all, if your child starts to extort you for money every time you want him to do something, you are more likely to wind up with a miniature mobster, than with, say, Louis Rukeyser. Folding the laundry, or if your children are older, doing the laundry, raking the leaves, babysitting a younger brother or sister, or washing the car would be good tasks to pay for.
An allowance is another learn-by-doing tool. Many parents hand out a sum of money based on a child's age -- 50 cents or a dollar for every year, much like a stipend paid out to government beneficiaries. It is not a bad technique to use when children are young, just to give them the experience of handling money or being consumers. When a child gets to be 9 or 10, however, the allowance should have some relation to a budget. Before you settle on an amount, have your child lay out his expenses for school lunches, supplies, treats, and add up the amounts. After he presents you with the total, you can negotiate downward -- maybe he does not need such a hefty sum for candy -- but he will get used to living on a budget, something few adults seem able to do. Gradually, as your child grows older, you and he can add in more budget categories: for bus fare, movies, clothing, and car expenses. By the time he leaves for college, he should be in charge of all his own expenses, some of which he earns by doing things around the house or holding a spare-time job, and part of which he receives from your bounty.
BUILDING BUSINESS SENSE
Cindy Iannarelli, Ph.D., director of the Center for Family Business at Indiana University of Pennsylvania, says that in her Business Sense program, a course that she and her colleagues give children starting as young as age 3, "children learn skills that they can transfer to any situation." To figure out how much profit she will earn, she points out, a child has to calculate how much her product costs to produce and sell. "You have to learn math and marketing and everything else," she says. Parents, she adds, should encourage children even when they come up with what seems like an unworkable idea, like selling paper napkins they decorate (one of my own childhood projects). As any one of the Internet millionaires' moms would say, "You never know." And, if the business founders, parents should not let children give up right away but encourage them to persist. "Help them think through what's wrong and try again," says Iannarelli.
And, what will children do with all the money they are receiving and earning? It is a mistake to make them sock it all away in a bank account. They should venture into the marketplace and learn to be practiced comparison shoppers. They will suffer disappointments, just as you have. The great T-shirt your daughter scrimped for may fade with the first washing. Do not yell at her for buying it. Show her how to read care labels inside garments. Next time she shops, she will be more cautious.
Letting your children use their money will relieve you of the responsibility of underwriting costly items you feel you cannot afford. If, for example, your son wants some outrageously priced skateboard, you can tell him to set aside money from his earnings. "If you save five dollars a week, you'll have enough in three months," you can tell him. If you want to accelerate the project, you could also pay interest, say 10 percent a week for what he has got saved. While that may be a rate too high even for Federal Reserve Board Chairman Alan Greenspan, you will have imbued in your child a fine appreciation of the joys of compound interest. If you made him save his money in a conventional savings account, he would earn only about three percent a year, not enough for any child to get excited about. The idea is to teach your child that steady saving can help him achieve his goals. There is time enough when he is older to explain how much banks really pay.
You could make your child save some of his money toward the Big One -- namely college. And, if it is the family policy, fine. However, whether you finance all the educational savings or have your child contribute, you should involve her in the money-building process.
If you yourself are not confident about investing, then sock whatever college savings you have in something safe -- a money-market mutual fund, a bank account, or savings bonds. Then, spend six months or so educating yourself and your child. Porter Morgan, a senior vice president with Liberty Financial, a Boston investment company that developed the Stein Roe Young Investors Fund, a mutual fund for children, suggests a "family investment challenge." Each person in the family starts with a theoretical $100,000 and designs a stock portfolio of companies that interest her. Children will readily seize on Disney, Coca-Cola, Yahoo, Nike, and other manufacturers of products they know and love. But, stocks can get hammered, as any investor learns by experience, and children will learn that they have to follow the stock news and read the newspapers to follow their companies. With older children, charge them theoretical commissions every time they make a trade, which is, of course, what occurs in the real world.
Once you all understand the ins and outs and ups and downs of investment, you might want to let your children put real money on the line. One way to do it cheaply is to allow your children to invest some of their college funds in DRIPs or Dividend Reinvestment Programs. Hundreds of companies allow you to start with one share and then reinvest the dividends to buy more of the stock. With only a few dollars, your children can have a tiny piece of Bell South or Pfizer -- and, if they are disciplined about plowing in new money, they could have a significant amount of money -- enough to make the down payment on a new computer, for example, or college.
Above and beyond what you teach children is the the example of how you yourself live. If you act as though money is no object and charge extras you cannot afford with complete abandon, chances are, your children will behave the same way. So making sure that your children follow the best practices in money management could help you shape up, too.