Can our children expect the same?
Although it's too soon to predict the outcome, one thing's for sure: To prosper in the new millennium, today's kids will need to be a whole lot smarter about money when they're grown than any previous generation. "Financial rules have changed dramatically over the past 20 years," says Dara Duguay, executive director of the JumpStart Coalition, a nonprofit group that promotes financial literacy in young people. "When today's parents were kids, you couldn't get a credit card unless you had a steady job; you expected that job to last for life; and you didn't have to manage your own retirement funds, which means you didn't have to sift through all the complex savings instruments now available. It's a whole different world."
Fortunately, it's well within your power to tilt the odds in your offspring's favor. Read on, and you'll find dozens of simple, effective strategies to help you teach your children to have smart money habits, and to take firm control of their financial lives rather than letting their finances control them.
The time to start the lessons? Now. And in the process, you just might find yourself becoming a little wiser about your own finances as well.
Contributing editor Diane Harris is the coauthor, with businesswoman Georgette Mosbacher, of a book on personal finance for women, It Takes Money, Honey.
Prepare Your Child for a Prosperous Life
The earlier you teach the fundamentals of sound money management, the more successful your child is likely to be
How young is old enough to start instilling smart money habits in your child? To lay the foundation for a financially secure future, it's almost impossible to begin too soon. Research shows that by the time most children get to kindergarten, their beliefs, values, expectations, and motivations regarding money are well established. The real question, then, is whether or not they're being taught the right stuff.
The answer, judging by a number of recent surveys testing kids on their financial know-how, is a resounding no. Almost a third of 12-year-olds polled by Consumer Reports magazine last year didn't know that paying by credit card is a form of borrowing; 4 out of 10 didn't know that banks charge interest on loans. Similarly, the approximately 1,500 high school seniors surveyed last year by the JumpStart Coalition about basic facts of personal finance were overwhelmingly stumped by the questions: 95 percent of them scored below a C. It's not a pretty picture.
Of course, all children don't have to turn out this way. Certainly, yours don't -- not if you begin to teach them what they need to know about money now. "The younger you start, the easier the concepts are to grasp and the better you become at it in the long run," says Joline Godfrey, founder of Independent Means, a Santa Barbara, CA, company that develops educational economic programs and products for teenage girls.
Here is advice from Godfrey and other experts about the best ways for you to help.
Take Advantage of Everyday Opportunities
The easiest way to start teaching your kids about money is also one of the most effective: Simply talk through your financial actions and decisions as you make them. "Technology has made money transactions so abstract that they're virtually impossible for young children to figure out," says Sharon Danes, Ph.D., a professor at the University of Minnesota who has studied how children learn about money. "The littlest ones, in particular, need an interpreter."
So when you make a withdrawal from an ATM with your toddler in tow, let him know that you're simply taking out money that you had previously put in the bank for safekeeping. When you go grocery shopping, verbalize the comparisons you ordinarily make in your head between, say, name-brand and generic products or items that come in a variety of sizes. If you use a credit card to make a purchase, explain that you'll have to pay as soon as the credit card company sends you a bill in the mail. "The more concrete you can make your explanations, the better your child's understanding will be," says Danes.
Introduce Them Early to Economic Concepts
As soon as children can talk and count to 10, they're ready to begin learning the basics of saving, spending, earning, and borrowing, experts say. It's critical, once again, to use very concrete imagery and everyday examples to get the message across to preschoolers. Then, as children grow older, you can add layers of sophistication and abstraction to the ideas you're trying to convey to them.
Take borrowing, for instance. During the preschool years, you can start laying the groundwork whenever you rent a tape from the video store or check out a book from the library. As she accompanies you to pick up and later return the item, explain that she has a right to watch the tape for, say, two days ("the loan period"), but that she must return it on the day it's due (the "due date" or "maturity date"). And if she's late, she'll have to pay more for not following the rules (the "interest" and "penalties").
When she's 6 or 7, start using money in your examples to make sure your child understands the main idea: that there's a cost to borrowing. You can explain, for example, that when you make a $10 purchase on your credit card, you may end up spending $12 -- $10 for the item itself and $2 in interest. If your child badly wants a toy she can't afford, you might even offer to lend money and then charge interest for the privilege.
One caveat: Don't beat your child over the head with these lessons. Try to follow her lead in determining what she wants to know and how much information she can handle. "Keep it short and to the point. Adults tend to go on and on, while children often want nothing more than a simple, specific answer," says Godfrey.
Give Them the Means and the Freedom to Learn
"The greater the variety of experiences that children have in making consumer decisions, the wiser they become about managing money as an adult," says Maria Pippidis, a family and consumer-science educator at the University of Delaware. Whether you give them cash on an as-needed basis or institute a regular allowance system (usually around the time they start kindergarten), kids need money of their own to practice the financial lessons you're trying to teach.
As much as possible, let them spend at least some of their cash pretty much as they please -- even if they initially blow it on candy, gum, or cheap trinkets that break before they get them home. As Pippidis notes, "Making bad decisions with money and learning from the consequences is just as important a lesson as a child's money successes."
Empower Your Girls
Nine out of 10 women will be solely responsible for their own finances at some point in their lives, according to the National Center for Women and Retirement Research. Unfortunately, from a very young age, girls apparently don't feel as if they are up to the job. By their early teens, they're only half as likely as boys their age to feel confident about their financial skills, according to a recent study of 9th-, 10th- and 11th-graders commissioned by Girls Inc., a nonprofit group based in New York City.
As parents, we don't consciously set out to undermine our daughters' financial confidence, of course. "It's the subtleties and unconscious patterns of behavior that do girls in, from the language we use when we talk to them to the role models we provide," Godfrey says. Surveys show that parents tend to encourage boys to get paying jobs at an earlier age than girls and often give them larger allowances. When one parent is primarily responsible for managing the family's finances, Dad is more likely than Mom to do the job. Arva Rice, director of the financial literacy program at Girls Inc., sums it up in a nutshell: "We tend to talk to boys about their earning potential, and talk to girls about shopping."
Awareness is half the battle. The other half is a concerted effort to engage our daughters in conversations about money and careers, to involve them in the family's financial decisions, and for moms in particular to show that they're interested in and capable of managing money too. Says Rice, "Girls need female role models whose actions speak loud and clear."
Encourage Their Entrepreneurial Spirit
You can't know today precisely which careers will be in demand 20 or 30 years from now. But you can count on certain qualities being an advantage, no matter what profession your child ultimately chooses -- traits such as individual initiative, self-reliance, risk taking, and critical thinking. Studies show that children acquire such skills more easily than adults, but that these traits diminish quickly if they are not nurtured, says Emmanuel Modu, author of The Lemonade Stand: A Guide to Encouraging the Entrepreneur in Your Child. For instance, one study Modu cites found that 25 percent of kindergarten students demonstrate characteristics such as risk taking and high-achievement motivation, but that only 3 percent of high school students are similarly inclined.
You can start nurturing your child's entrepreneurial tendencies as early as age 4 or 5 by presenting him with opportunities to do small chores around the house in exchange for a modest reward, suggests Bill Stawski, president of Cash University, a Grand Rapids, MI, company that makes financial educational materials for kids. The tasks should be simple enough for the child to manage largely on his own (for example, watering the plants or sweeping the front steps), and the reward should be nonfinancial (such as the chance to stay up late or watch a special video). Whatever the specifics, the key is to allow your child to decide for himself whether or not to accept it. Says Stawski, "The point is to get children in the habit of recognizing opportunities and making the most of them."
By the time your child is 7 or 8, you can expand the opportunities and make the reward financial. In addition to encouraging initiative and self-reliance, such enterprises may prompt a change in your youngster's attitude toward money. Says Modu, "When kids understand firsthand that it takes sweat to make a buck, they have a far greater appreciation for the value of a dollar."
Turn Them on to Investing
In prior generations, investing was largely the province of the wealthy and those who aspired to join them. Not any more. Now that employers are increasingly shifting responsibility for financing retirement onto individuals, anyone with half a prayer of living comfortably in her golden years needs to learn the fundamentals -- and the sooner, the better.
If you think a young child can't possibly understand the ins and outs of the market, try telling a 6-year-old girl that she can own part of the company that makes Barbie dolls and observe how her eyes light up. Then watch her positively twinkle as you explain that the more people buy Barbie dolls, the more money the company will make, and, as part owner, the more money she'll be likely to make. Says Porter Morgan, a senior vice president at Liberty Financial Companies, who helped develop one of the first mutual funds specifically marketed to children, "The key is to talk to kids about investing in terms of a company that makes a product or service they really care about."
By the time your budding Warren Buffett turns 8 or 9, put your money where your mouth is by buying her a few shares of her favorite company and helping her track the stock's price in the newspaper. Alternatively, you might buy shares in one of a handful of relatively new mutual funds designed just for kids. The funds, which invest primarily in companies that children know well, regularly send shareholders colorful educational materials and company updates written in language that kids can understand.
Reward Their Efforts
Of all the financial skills that children must learn, there is probably none more important than the art of delaying gratification -- that is, saving for a long-term goal. It's the skill that will keep the plastic in their pocket when they are older and the one that will enable them to achieve their life's dreams when they're grown.
While you can (and should) encourage your child to put a portion of his allowance aside for future goals, there's nothing like a little financial incentive to spark the saving habit. One way to do it: Create a mini 401(k) plan for children who are saving for a costly goal. Match every dollar that your child puts into his savings account with fifty cents or a dollar of your own, just as employers match real 401(k) contributions in the corporate world. "As important as the actual dollars your child accumulates is the shift away from an entitlement mentality," says Chicago financial planner Hope Feinglass. "You get something back only if you put something in first."
The larger the goal that your child is saving toward, the greater the psychological impact of this exercise is likely to be. "When, after a few weeks or months of saving, children can finally buy those Rollerblades or that bike, the satisfaction they feel is unbeatable," says Stawski. "They come away knowing that they are a doer, an achiever. And kids who develop that kind of self-esteem when they're young will go on being achievers for the rest of their lives."
How to Pull Your Own Financial Act Together
It's not just what you say that can give your child a fiscal head start -- it's what you do
Pop quiz: In 10 seconds or less, name the three most important financial steps every mom and dad should take to give their child the right start in life.
Okay, time's up.
If you're like most parents, building a college fund tops your list. So, what's number two? Hmmm.... What was that again? And number three? No answer there either?
Therein lies the problem. While figuring out a way to pay for college is an undeniably worthy goal, it's only one of several you should pursue -- and not even the one that should top the list. "The single most meaningful action we can take on our children's financial behalf is to reexamine how we are using money in our households," says Sharon Danes, Ph.D., a professor at the University of Minnesota who specializes in children's financial development. "Since children learn about money primarily by example, we have to make sure the beliefs and practices we're passing on are the ones we really want our kids to live by."
Here, the rest of what you need to do.
Get Your Priorities Straight
In a perfect world, you wouldn't have to choose between saving for your children's college education, your own retirement, and, say, fixing the roof; you'd have more than enough money to take care of expenses today, save for tomorrow, and perhaps even spring for a cruise to the Bahamas. Unfortunately, only a handful of parents live in that world. The rest of us struggle mightily to squeeze a few extra dollars out of already-tight budgets and make compromises on our goals along the way.
Since few of us can do it all, which financial goal should get top priority? Virtually unanimously, financial planners urge parents to save for their own retirement first. There are numerous sources of money for college besides your own savings -- grants, scholarships, work-study programs -- but only you can come up with the cash to see you comfortably through retirement. As Ray Loewe, a Marlton, NJ, financial planner, puts it, "You can always borrow money for your kid to go to college, but no one is going to lend you money to retire on."
Additionally, retirement accounts typically offer substantial tax advantages that allow your savings to grow much faster than they would in an ordinary investment account. Plus, if you invest through a 401(k) account, your employer will likely match all or part of your contributions. And colleges rarely count retirement assets when determining a family's financial-aid eligibility.
But if you need to, you'll still be able to tap those retirement accounts to help pay for college. Most companies allow you to borrow against the money you have in your 401(k) plan, and starting this year, you can also withdraw money from an IRA to pay for higher-education expenses without incurring a penalty. "Don't count on raiding your retirement plan to pay for college," says Chicago financial planner Hope Feinglass. "But if you're conflicted about saving for retirement because you're afraid you'll fall short for college, it's extremely comforting to know that IRA money can be used for a child's college tuition too."
Make Time Your Ally
No one's suggesting that you abandon saving for college altogether. Setting aside even small amounts can make an enormous difference, particularly if you start early. Time is a college investor's best friend because of the way your profits compound over the years -- as time passes, you not only earn money on your original investment but on your earnings, and then on your earnings' earnings.
Say, for instance, you manage to scrape up $100 a month, starting the year your daughter is born until she turns 5, at which point you decide that the money is needed more elsewhere. Assuming the account earns 12 percent annually (about what the stock market has returned on average over the past 50 years), your $6,000 total investment will be worth more than $35,000 by the time your daughter turns 18, roughly enough to cover the estimated costs for two years at a state school in 2016. Now consider what happens to your friend who doesn't intend to start a college fund for her son until he turns 13. Since she's waiting to save until she's at a more financially secure stage in her life, she figures she'll be able to set aside $200 a month. Assuming that college fund earns the same 12 percent a year as yours, it will be worth around $16,000 by the time her son turns 18 -- less than half what your fund would be worth, even though she'll have invested twice as much over the same number of years.
The bottom line? "When it comes to investing for college, starting early is a lot more important than the amount you save," says Sona Haratunian, a first vice-president in financial planning at Prudential Securities, in New York City.
Get Help with the Heavy Lifting
More than half of all parents who are currently saving for college put their money into U.S. savings bonds, certificates of deposit, and other so-called safe investments, according to a recent poll in Money magazine. Big mistake. "Since most parents aren't going to be able to save enough money to meet the full cost of college, they need to leverage the investments they do make as much as possible," says Ray Loewe. "That means putting as much money into stocks as you can stomach in the early years."
Just consider: Over the past 50 years, Treasury bills and intermediate-term bonds have returned just 4.9 to 6.1 percent a year, according to Ibbotson Associates, a Chicago investment research firm. That's barely enough to keep pace with the 5.5 percent rise in college costs over the past five years, let alone grow your savings fast enough to make a real dent in tuition bills. Meanwhile, the stock market gained an average of 12 percent a year over the same 50 years.
Though it is true that stocks can suffer some alarming dips in value over short periods, in the long run they're no more likely to lose money than CDs. In fact, there has not been a single 10-year period over the past 50 years when stocks declined in value. And you can reduce your chances of short-term losses once your child gets within a few years of college by adding a bond fund to your investment mix.
To get the best returns with the least risk, restrict your purchases to stock mutual funds that have been around for at least five years, which is a long enough period to see how well the fund has fared in both good and bad markets. Then, among those, favor the ones that have consistently earned more than the average fund, while keeping volatility low. To find the information you need to make a sound choice, look over reports by Chicago fund research company Morningstar Inc., which are generally available at the library, on the Internet at www.morningstar.net, or by subscription. (For some promising candidates screened specifically for Parenting by Morningstar Inc., see "Fundamental Investments.")
Make Your Kid a Millionaire
If your son or daughter has any earned income at all, you may be able to score big by putting at least a portion of those wages into an IRA in your child's name, since you'll probably have 40 or 50 years for profits to compound in the account. For instance, an investment of $1,500 a year from summer jobs at ages 13 through 18 will grow to a cool million ($1,020,709, to be precise) by the time he turns 65, even if he never invests another penny, assuming the account earns 10 percent annually.
Of course, unless your little one is a kiddie model or actor, you probably won't be able to open the IRA until he's old enough for a paper route, babysitting job, or other legitimate form of employment. If you have your own business, though, it should be relatively easy to find jobs that even an elementary-school child can tackle to earn money, such as filing, addressing envelopes, or helping to clean the office. It's also a good idea to involve your child in deciding where to invest his IRA money. Says Feinglass, "That way the account not only becomes a powerful tool for making money, but also a powerful vehicle for teaching the rudiments of investing."
Collaborate with Your Child's Teachers
Research shows that adults who grew up in states that mandate personal finance education in high school are saving nearly 5 percent more money than their peers and have a net worth that is higher by roughly a year's worth of earnings, according to a study by the nonprofit National Bureau of Economic Research, in Cambridge, MA. And although "children are most receptive to learning economic concepts between 8 and 12," says Barbara Heinzerling, a consumer-science professor at the University of Akron, most public school programs that do exist are at the high school level.
"Lobby the school board and raise the issue with your town's PTA," suggests Dara Duguay, of the JumpStart Coalition (www.jumpstartcoalition.org), which has compiled a listing of sources for curricula for kids from kindergarten on up.
Set a Fine Example
Given the spotty nature of personal-finance instruction in schools, it's not surprising that most teenagers report that they've learned whatever they know about money at home. Researchers say that very little of that knowledge comes from formal instruction, but rather from children's observations of the way their mom and dad manage money. "Therefore, parents who want to teach their children good money habits first need to become smart financial managers themselves," says Sharon Danes.
If you whip out a piece of plastic whenever you buy something at the store, your child learns that it's normal to live on credit. If your family squeaks by from paycheck to paycheck, your child won't get a firsthand look at any of the benefits of saving.
Don't worry if until this moment you haven't been a paragon of financial prudence; few among us have. But it's not too late to mend your ways. Resolve to cut up all but one or two of your credit cards (the average American has 15); sit down with your spouse to devise a livable budget; and take a disciplined approach to saving by enrolling in an automatic investment plan.
The prospect of getting your financial act together should by itself be sufficient motivation to get you going. If not, just remember that the kids are watching.