You’re shopping with your niece, when all of a sudden she makes a beeline for the Silly Bandz—again. That girl can’t save her allowance to save her life, you think. And you wonder if it’s your place to say something. After all, the earlier kids are schooled in responsible money management, the better. Then again, there is something to be said for learning from your mistakes, right?
Financial Health Is Health, Too
It's absolutely appropriate to call attention to a child’s careless spending, says Manisha Thakor, a LearnVest investment expert, just as you would any other subject. “If you saw your daughter or niece eating 10 cupcakes in one sitting, or loafing on the sofa all day and getting absolutely no exercise—you wouldn't think twice about saying something," she advises. "It should be the same with personal finance. We can't expect to have financially fit children if we don't actively teach them what good financial behavior is.” She recommends adults lay out guidelines for spending, saving and donating to charity.
Teach Them to Spend, Save and Give
Parents, with help from their kids, can set the dollar amount or percentage that kids allocate toward each of these goals. For example, a rule could be to donate 10%, save 20% and have the remaining 70% to spend. The important thing is that kids get acquainted with the notion that every penny earned can’t be spent. And getting used to paying themselves first is a habit that will serve them well throughout life. There are even multi-chambered piggy banks designed for this purpose. Or, for $30 per year, you can automatically allocate allowance dollars for different purposes with Threejars.com.
Mistakes Are to Be Expected
Most experts say it’s normal—and healthy—for kids to make money mistakes. “They should be allowed to make their spending errors,” said Dr. Mary Gresham, a LearnVest psychology of money expert. After a couple of weeks, ask your niece if she is pleased with the Silly Bandz purchase, or if most of them are misplaced, torn or stretched out of shape. If she clearly wishes that money was still burning a hole in her pocket, ask “What would you do differently next time?” Gresham suggests. Nathan Dungan, who works with kids and parents on this very issue as founder of Sharesavespend.com, would step in if the child routinely makes the same mistake. “But rather than shift into lecture mode, engage your child or niece in a conversation about the choices she made and more importantly, why she made those choices and what impact they have on her ability to save.”
Remember: You Make the Rules
It can be tough to convince a child, especially one with few wants, that it pays to save. What’s the incentive if she wants an American Girl doll and Grandma is asking for her holiday wish list? Some experts suggest parents pay an above market interest rate on money she saves. That way kids can see a sizable change in short order, driving home the point that saving is worthwhile. If a child tends to overspend, you also reserve the right to pull the "Because I said so" card: “Parents have veto power over any spending choice their child makes," says Dungan, "especially if a pattern of spending is emerging that’s only about ‘scratching the itch’ of immediate gratification.”
How were you taught to save? Would you employ the same methods with your kids?