The proliferation of credit cards, cash machines, and electronic
fund transfers has made it more difficult for this generation of
children to understand money than it was for their parents or grandparents.
As personal finance has grown more complex (and is increasingly
handled electronically), children's and teenagers' misconceptions
about money have become more insidious. That's why it's extremely
important to teach children about the power and responsibilities
that go along with money.
The task begins by knowing which concepts children of different
ages have the most difficulty understanding. Misconceptions about
money start early. A preschooler will tell you that nickels are
worth more than dimes because they are larger, and that five pennies
that are spread out on a table are worth more than six that are
stacked on top of each other. Paper money is valued less highly
than coins at this age.
Even the slang terms we use to describe finances are confusing
to a young child. When I was four years old, I spent a day at work
with my father. That evening I told my mother that the people were
nice, but I was upset because I hadn't seen where my father "made"
the money.
By the time children reach kindergarten or first grade they understand
that money can buy things. But the intimate connections between
work and money or cash and checks are still unclear. Credit cards—which
depend on the complex idea that money that is kept in a different
place is going to be given to the store at a later time, and that
a few weeks after your purchase you'll pay a company that did not
sell you the item you bought—are terribly confusing for children.
Compounding this confusion are their observations that not only
do you give the clerk the same card whether the item sells for ten
or one hundred dollars, but that you're given the card back with
no apparent changes made to it after every transaction. (This is
quite different from paying by check, which is confusing enough
by itself!)
Parents usually use a weekly allowance as their primary tool for
teaching children about money. It's appropriate for children to
begin receiving allowances as soon as they begin to realize that
money can be exchanged for goods and services—usually when
they're about five years old. The allowance should be enough for
the child o buy something with it, be it a pack of baseball cards,
a candy bar, a small toy, or a comic book.
One financial advisor I spoke with was confused by how differently
his two children treated money when they were five years old. Each
child received three dollars per week—considerably more than
the national average of fifty cents per week when this took place
in the 1980's. Every week his daughter put one dollar in her savings
account and spent the other two dollars on books she wanted. His
son, on the other hand, apparently felt an immediate need to divest
himself of his assets as quickly as possible, especially if he passed
by a video arcade. The boy's behavior is the more typical of a child
that age.
Even the most sophisticated parents sometimes have unrealistic
expectations when it comes to their children's abilities to manage
money. Young children have a very different awareness of time than
adults do. Next Tuesday is far into the future. Next summer is unfathomable.
Saving money for college, when you're five or even ten years old,
makes no sense at all. The dollar a week that the financial adviser's
daughter put aside probably had less to do with her understanding
the concept of saving for the future than with the attention her
parents paid to her when she did it.
When you begin talking about saving money to a six- or seven-year-old,
look for an item that the child wants to buy that costs more than
one but less than two weeks' allowance. This is about as far as
a child can delay gratification at that age. Plan the purchase as
a family. Go over the arithmetic together. It's important that the
child understands that money today plus money in the future can
buy something more than either amount alone. If the child doesn't
want to go along with the idea, wait a few months. He's telling
you that his mind isn't developed enough to understand the concepts
involved.
By the time children are fourteen or fifteen, their ability to
plan for the future is usually in place. Children this age are ready
to start receiving the allowances on a biweekly or monthly basis—pay
periods that require more astute financial planning if the money
is to last.
Remember that the money you give your children to spend is exactly
that: money they decide how to spend. Although it's always appropriate
for parents to set constraints on what their children will buy,
such as not allowing certain toys or such dangerous items as firecrackers,
the basic choice of how to spend the money should be left to the
children.
Children who occasionally or even frequently squander their allowances
may, in fact, have an advantage over those who spend it all on parent-suggested
items. One value of allowances is to permit children to make relatively
small mistakes in a controlled situation. You can do less financial
damage frittering away your allowance at age eleven than making
the same mistakes with credit cards a decade later.
Parents who respond to wastefulness by cutting back on a child's
allowance or taking financial control may be doing more harm than
good. Parents who consistently give children all the money they
ask for are probably doing a similar disservice. Learning that money
spent on a hamburger will not be available for a movie—and
the Mom and Dad will not always give you the extra money for that
movie—is an object lesson in life as an adult. So is learning
that buying something you want does not always bring happiness—or
recognizing that giving some of your money away to a charity instead
of keeping it all can help you feel good.
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