There's a big payoff to raising financially savvy children. Kids who learn about money early are often pretty good at making it later. Consider John Bogle Jr., manager of Quantitative Numeric, a top-performing mutual fund. He didn't become a market wizard just because his father is Jack Bogle, founder of mutual-fund giant Vanguard. But it helped that his dad forced him to start buying stocks on his own at 13.
It was easy for Bogle senior to teach his kids about money--it's his business. But most parents don't know how much of an allowance to give their kids, much less how to guide them into the stock market. If you think kids don't need to know about money, look at the toll of financial illiteracy today. Bankruptcies have more than doubled, to 837,797, since 1984. The national savings rate has fallen to less than 4 percent in recent years, down from more than 7 percent in the 1970s.
The great trick to teaching kids about money is to let them use it the way they want. Only by investing in Amdahl, a mainframe computer company whose stock was near its all-time high, did Bogle junior learn how risky growth stocks could be. But the damage was limited because his investment was so small. "Kids have to make mistakes in order to learn," says Linda Barbanel, author of "Piggy Bank to Credit Card." You already know what your kids need to learn: saving, investing, budgeting and wise spending. The key is to feed out age-appropriate experiences in each area. Here's a blueprint for raising money-smart kids.
It seems ridiculous to many parents, but experts think kids should start getting an allowance of $2 to $3 a week at age 3, with a dollar added at every birthday. The reason? From ages 3 to 5, pre-schoolers need to discover that money can be exchanged for goods. The allowance can't be so small that trying to spend it is an exercise in frustration. Linking chores to an allowance is a hotly debated issue. Some experts believe kids should do chores because they're members of the household. Others think learning to earn money isn't so bad. It's up to you.
With or without an allowance, pre- schoolers need practice spending. Put the cash in their hands before a shopping trip so the purchase decision is theirs. Don't expect to enjoy hearing your son scream for the Power Ranger he can't afford. You won't. But eventually your kid is going to figure out how to get it: save.
Little kids have no idea what parents can afford. When a request for a trip to Disney World comes up, don't brush it off by saying it's too much money. Explain that it's not in the budget now. If the family makes it a goal, maybe you'll go in the future. Also try to help preschoolers distinguish between what they want and what they need.
These are prime ages for establishing a full slate of financial skills. First get serious about an allowance. Decide how much to give by reviewing your child's expenses, even if they're limited to milk money and Sunday-school donations. A rule of thumb experts suggest: match the weekly amount to their age--$6 or $7 a week for a 7-year-old, for example. Talk about what an allowance should cover. This is beginning budgeting, so write it down. Include savings as an item, as well as offerings to charities, if you like.
Help your kid set up a system for storing the money for each category. Give her an extra incentive to save by paying her interest or matching every dollar she squirrels away. Opening a passbook savings account will give you a reason to talk about how investing can make money grow. But don't use it as a control feature. Kids should be able to take the money out when they want. If she has enough to meet the bank's minimum, show your daughter how she can earn a higher rate of interest with a certificate of deposit. Kids also love school-based savings programs. If your school doesn't have one, Save for America (206-746-0331) will help your Parent-Teacher Association start one with a local bank.
At this age kids are thrilled about making extra money. Beginning at home, you can keep a list of extra tasks, and what you're willing to pay for them, posted to the refrigerator door. Kids should learn to work for someone else, too. Suggest that your neighbors might also be willing to pay to have them pick up sticks, fertilize shrubs or clean car windows. Just be sure to coach kids on their sales pitch and price list. The lemonade stand is a huge cliche. But guess what? It still works. So do kids' flea markets and concession stands at garage sales. After a few successful ventures, point out the costs of their business. Consider asking them to pay for the lemonade if you spring for the cups. While advances on an allowance are a terrible idea, be willing to make a working capital loan for these enterprises.
As they buy more, kids naturally become more discriminating consumers. Help them out by showing them how to research and comparison-shop. Visit a couple of stores to find out who has the best price for a pet gerbil and supplies.
Here is where the allowance issue begins to get complicated. In addition to what you have been paying your child, you should begin turning over money that you would have spent on his behalf. If you put him in charge of sports uniforms, for example, you'll have to increase his monthly allowance by one twelfth of their cost. The grand plan: by the time he leaves for college he'll be handling all expenditures. You might decide to begin requiring that he pay some of these expenses from his own earnings. He should be making more from outside jobs than from his allowance by age 13 or 14. Sit down and create a budget showing all sources of income and all expenses, including saving. When you're sure he can cover everything, let him try it. The hardest part of this plan: if he can't pay for something, you can't bail him out. If you do, he's not learning how to handle money--he's being trained to ask you for more.
One key tool is a checking account. You'll probably be most comfortable with a joint account, which requires two signatures on checks. But kids over 12 can get a single-signature account from Young Americans Bank in Denver (303-321-2265) if their parent signs a "sponsoring-adult agreement." Your kid may write only four checks a year, but he'll learn how to balance a checkbook. Also get your kids interested in investing now. Dedicate a gift of money to buying the stock of a company whose products your kid likes. It's expensive, but taking possession of the stock certificate is important. So is tracking the stock's price and giving your child the dividend checks.
If you've followed the script, you now have a child who's saving regularly, managing all expenditures and earning much of her income. The last major hurdle is credit. Sophisticated as it sounds, kids need experience with it before they're bombarded by credit-card applications at college. A major credit card with a low charge limit is the best option. (Young Americans Bank offers a MasterCard with a $100 limit for kids with savings accounts.) Before you cosign the credit application, explain what credit histories are and how a bad one can ruin your life.
By freshman or sophomore year, if not sooner, begin discussing college costs. Look together at how tuition and room-and-board costs vary from school to school. Talk about the expenses you expect him to cover and compare those with the budget he's on now. This is an excellent time to refine investing skills. If your son wants to put his college money in the stock market, but diversify for safety's sake, introduce him to mutual funds. Many, such as Nicholas funds and Vanguard STAR, have $500 minimums. If your kid becomes part of a monthly investment plan, the minimum is as low as $50 to $100. (Kiplinger's February 1995 issue has a list of such funds.) If he wants to be absolutely sure he won't lose any of his savings, teach him about Treasury bills, which are short-term government obligations.
This may not be the kind of financial upbringing you had--but think about the upside. If your child turns out as financially literate as John Bogle Jr., you may end up with a new spot to park your nest egg.
Doling out cash helps teach kids about money. Here's the average weekly sums kids got, spent and saved in 1994.
AGE EARNINGS[*] SPENDING SAVINGS 4 $5.87 $3.23 $2.64 5 7.42 4.16 3.26 6 7.62 4.65 2.97 7 10.63 7.44 3.19 8 10.65 7.34 3.31 9 10.69 7.48 3.21 10 12.01 7.81 4.20 11 13.79 8.55 5.24 12 20.19 13.33 6.86
* ALLOWANCE, CHORES, WORK, GIFTS.