Wednesday, March 5, 2008

Teaching Kids about Money Management

One discussion I run into all the time when talking to people about teaching financial skills is the idea of allowance. Jonathan Clements, one of my favorite financial fitness authors, has some good advice in his Getting Going column in today's issue of The Wall Street Journal. He discusses four tips to help your children become better money managers. I'll let you read the article and delve into the details. In summary they are:

1) Delayed gratification (saving)
2) Perceived value (slowing spending)
3) Prioritize (make a wish list)
4) Keep the change (spending changes when it's your money)

I've had luck with all four. The perceived value lesson has proved especially valuable. I try to give the allowance in a large a bill possible. When confronted with spending larger sums, or even breaking larger bills, children (and adults) will often become a bit more conservative. My sense, and Clements' apparently, is that the perceived value of a large bill is higher than the value of a number of small bills of equal value.

I've also had luck with a variation of "keep the change." Clements specifically talks about giving children money for field trips and telling them to "keep the change" instead of returning it. He noticed that, at least for one of the children, the amount spent on the trip dropped. My variant was that when we went shopping for gifts for family members, I told my youngest how much of his money he was required to put into the gift, instead of just saying I would buy it and put his name on it. He became a more careful shopper because it was his money, at least in part. As he got older, he chose to spend his own money on gifts, but he was still looking for good deals. Again, perception of value plays a role, but also a sense of equity is developed early on. I essentially create an economic institution - a rule to guide decision-making and choice.

What lessons do you have to share?

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