Enseñando Finanzas a Los Niños

Raising Money-Smart Kidsby Linda Leitz
LDS LIVING by Linda Leitz Saturday, June 07, 2008

Sometimes the financial demands from your children make you feel like money flows through your fingers like water. Educating your family about not just money, but money management, can lead to independence for them and peace of mind for you.
Money is a tool. Just as you wouldn’t turn your child loose with a chainsaw without giving him a few pointers, you shouldn’t assume that he will learn about money when he gets his first job.
One of my children asked the other day how we learned how to do everything. Digging into what she meant, she gave us some examples. How do we know how to put gas in the car? How did we learn what to do at the grocery checkout? And the answer is, a combination of seeing what others do, asking some questions, and giving it a try. That’s also the best way to learn about money.
So what can you do to set up that type of financial learning environment for your children? First, give serious thought to what you can include them in and show them how you and the family receive and use money. Second, encourage your kids to ask questions about money and ask them questions that make them take finances into their decision-making process. Third, give them opportunities to make financial decisions and experience the outcomes. The foundation of this method of teaching kids about money is that you make information available to them, set up the ability for them to make choices, and allow them to learn from experience how their choices affect them.
In the case of your child’s first exposure to money, let her know that it’s not up to you to get her every toy she wants. Give her a budget of her own money and let her decide—within limits—what she gets and what she doesn’t. As she gets into middle school, she’ll be able to take a greater role in deciding what discretionary purchases she makes. By high school, she can begin to make her own clothing purchases and be involved in whether or not she has a car. This helps avoid battles about whether she gets the pair of designer jeans or the generic brand, two dolls or one, the muscle car or a safe, modest sedan. Most importantly, it establishes early in your child’s life the idea that she will ultimately be financially responsible for herself.
We’ll talk about two basic principles: savings and debt. These tips work, but make sure you adapt to your family and your kids’ needs.
Savings
There are a couple ways to set up savings. One is to have one place where your child keeps her spending money and another where she keeps her savings. Try two jars, one jar and one bank, a purse and a piggy bank—whatever makes sense for her and lets her still feel in control. The next step is to discuss how much she is saving. If she takes a fourth of everything she gets and puts it in savings, she’ll see it add up pretty quickly, but still have a good chunk of change that she can spend when she wants. Another method is to put money in a bank account, probably a traditional savings account. Look around for the highest compound interest rate. Many banks or credit unions have policies that allow minors to have accounts without the minimum balance requirements. The important part is to convey that if money is saved, it can make money while the financial institution is holding onto it. When interest rates are low, that’s pretty hard to get excited about, but it’s still a better return than keeping money in a can or spending it.
My son actually brought up the idea of having a savings account before I introduced it. He was about ten years old and said he wanted to put some money in the bank. I asked him if that was because he felt the money would be safer there or if it was so he could earn money on it in a bank. He said, “The second one!” Then he asked about how much he would earn. Rates were abysmally low then, and I was afraid that he might lose his motivation. I explained that he would probably only get about one percent, which meant that if he had one hundred dollars in his account for an entire year, he’d get about one dollar.
“Well,” he said, “that’s one dollar more than I’d get if I didn’t put the money in the bank.” This would be a rewarding moment for any parent, but for a parent who is also a fi nancial professional, it bordered on euphoria.
Debt
Children can start getting the concept of debt very young. In all likelihood, it’s not a concept you need to introduce—she’ll do it. At some point she’ll want to buy something she doesn’t have enough money for and she’ll ask if she can borrow some money from you.
First of all, have her think through why she believes waiting isn’t a good option. Also, the purchase should be something that will last longer than it takes her to pay you back. For instance, you probably wouldn’t want to lend her money for a dessert, but you might be willing to lend her money for a CD. Once you and she agree that borrowing may be okay, you can go to the next step, which is determining how much to borrow.
Up through elementary school, I suggest never lending more than half of a purchase price. Also, the loan should be an amount that can be repaid in no more than a month. So if your daughter wants to buy a doll that costs ten dollars and she only has one dollar, no loan. If she has six dollars, you can loan her the other four. If she wants an iPod for one hundred dollars, she has sixty, and her allowance is only five dollars a week, that would stretch the loan out too long for someone her age.
When kids get into middle school, they should start paying interest. You don’t have to use market interest rates; a simple monthly charge works well. If she borrows thirty dollars, every week she needs to understand that one dollar of every weekly payment goes to use as a finance charge. By the end of high school, she needs to be charged regular interest, just like she would be at a bank.
Through the debt-learning process, your child needs to be exposed to two concepts: repossession and credit.
When you loan her money, you’ll need to establish up front what her minimum payments are. If she gets more than one payment behind, the item she bought with the loan needs to be repossessed.
Children also need to learn about credit. If your daughter gets behind on a payment, don’t lend her money the next time she asks. The next time after that, you might lend her the money, but require her to save up more of the down payment and charge her more interest.
Remember to explain that the basic tenet of debt is that you shouldn’t take longer to pay for something than its useful life. You don’t want a twenty-year car loan, but you could probably feel comfortable with a twenty-year home loan.
All of these principles mix three basic techniques for teaching your kids about money: hands on experience, example, and conversation. When combined properly, they can work toward your child having a thoughtful process of how he or she deals with money.
PLAYING IT SAFE
Here are four points to keep in mind as you embark to teach your children about money:• Give them a few alternatives for how to earn and spend the money. All the choices need to be ones that you’re okay with.• Respect the individuality your kids express with their financial decisions. It’s not important that they make decisions you would make. It’s important that they learn to make their own choices and live with the consequences.• Don’t bail your children out of bad financial decisions. Many people learn best from their own experiences. When they are young, the mistakes are less expensive and more likely to change future behavior than later in life. If you do bail them out, you’re teaching them that you’ll always be there to save them.• The hardest lesson for you may be that you can’t save people—even the ones you love the most—from themselves. Allowing children the opportunity to learn from their own experiences while they’re young lessens the chance they’ll need saving later.
Linda Leitz has been a financial professional since 1979. She is a certified financial planner and enrolled agent with the IRS. She is the founder and co-owner of Pinnacle Financial Concepts, Inc. in Colorado Springs, Colorado, where she helps families and individuals with their personal finances. She is also the author of The Ultimate Parenting Map to Money Smart Kids, from which this article is excerpted.
LDS Living, May/June, 76-77