A funny thing happened amid the fallout from the economic downturn: Kids became more money smart while moms and dads buried their heads in the sand.
According to recent surveys, 71% of children between 6 and 16 say they know how bad the financial crisis is; however, less than 40% of parents have turned it into a teachable moment by driving home some timely lessons on dollars and sense.
"Studies show that most parents don't talk to their kids about money nearly enough," says Beth Kobliner, author of Get a Financial Life (Fireside Press). She's also a co-commentator, with daughter Rebecca, 15, on the public radio show Marketplace Money, where the pair have discussed everything from negotiating allowances to setting credit card limits. "Money is no different from sex and drugs—it's something kids should learn from their parents," says Kobliner, adding that those who do are far less likely to spend irresponsibly or end up in debt as adults.
"You're also teaching them bigger concepts—how to make smart choices, delay gratification and have over the long term—that will last a lifetime." Here, some ways to get the conversation going.
1. "Like most families, we have to watch what we spend and stick to a budget. I'd like to tell you more about ours."
Beginning at around age 8, children begin to understand that their parents really aren't made of money. Explaining the basics of your household budget instantly helps them grasp just how much goes toward necessities—the mortgage, groceries, gas and clothing—and how little is left for luxuries. You'll be on firmer ground the next time you say no to the latest toy or tech gadget they ask for, and your decisions will no longer seem random, but part of an overall plan. "You don't have to share specific dollar amounts for income or spending," says Kobliner.
2. "You've been getting an allowance for a while. I want to be sure you're not only spending wisely, but also saving and giving to others."
As soon as kids start earning money, it's time they learn a little fiscal responsibility. Experts recommend that parents encourage children to divide their earnings into three categories: one-third for using as they please, one-third for a savings account, and the rest for charity. Once they're in middle school and making purchases on their own, kids need adult guidance on spending. "At this age they become outrageously brand-conscious and face an enormous amount of peer pressure to have just the right cell phone or clothing label—no matter what the price," says Linda Sherry, director of National Priorities for Consumer Action, a San Francisco-based education and advocacy group.
She suggests telling your tween to wait a day or two before buying something trendy; she may well realize she can live without another Aeropostale shirt, and the urge to splurge will pass. Another strategy is to have her make a list of pros and cons of the item before forking over her hard-earned cash. She still wants it? Go online and show her how to comparison shop. Kids love scoring a good deal but often don't have the patience or know-how to scout out the best buy. "You want to give your tweens freedom with their money," says Sherry, "but you also want to help them make smart decisions along the way."
3. "I think you're ready for a debit card. Here's how it works."
Plastic is an indispensable part of your child's money education. Bill Hardekopf, founder and CEO of the credit card information website Lowcards.com, says a good first step is giving your tween an ATM card tied to his savings account. He can draw from funds he's stashed himself (from his allowance, birthday and Christmas presents, etc.) or from deposits you've made for essentials like school clothes or sporting goods. "Debit cards teach kids how to spend responsibly," says Hardekopf. If your tween splurges on, say, a new video game and doesn't have enough for new sneakers, that's his mistake—and he'll learn from it. Plus, you can track his purchases online and steer him back in the right direction whenever he veers off course.
Make sure to opt out of any automatic overdraft protection programs—and turn that into a teachable moment as well. Explain to your child that drawing on funds you don't have is the same as borrowing from the bank, and that the interest rates are sky high. Having purchases denied at the cash register will drive home the point that he has to stick to a budget. Hardekopf and other experts also advise steering clear of prepaid debit cards—especially those marketed directly to kids—that require you to deposit a certain dollar amount. The high application, monthly maintenance, deposit and transaction fees quickly add up, and simply aren't worth the cost.
4. "Here's your first credit card—congratulations! Now I'm going to spell out the rules and your responsibilities."
By the time your child is a junior or senior in high school, you may want her or him to understand how credit really works—including interest rate hikes, teaser rates and other tricks banks and some issuers use to milk you of your money. The Credit Card Act of 2009 eliminates some of the worst abuses, but there is still a lot for teens to learn. "Sit down and show your teen your own credit card bill so you can point out everything from grace periods to minimum payments," suggests Hardekopf. If she's been managing her debit card well, go ahead and make her an authorized user on your credit card account, but only for purchases you've preapproved or in case of emergency. Continue to go over your monthly statements together, making clear that if she runs up charges she shouldn't, you'll ask her to return the items or you'll take the card away.
5. "Do you know how much college costs? Let's talk about how we're going to pay for it—and what we can afford."
It's a good idea to start this conversation as early as middle school. No need to get into dollar figures at first—let's face it, those numbers are scary no matter what your age. But you should plant the seed that college is a major investment and that most families have to borrow money for it. Later, when your child is in high school, you can take a look at specific institutions and tuition costs, then talk about how that fits in with your income and savings. "Be clear about what you can realistically afford and how much she'd have to take out in student loans," says Kalman Chany, author of Paying for College Without Going Broke (Princeton Review). "Better to be brutally honest, even if it means lowering expectations, than to disappoint your child when the acceptance letter comes in." Remind your teen that there are other options, like going to a state college or living at home while attending a nearby university. And stress the importance of taking on summer jobs, especially now: The amount of money a student can earn before it is counted against you for financial aid requests will gradually increase over the next four years, from $3,000 to $6,000. "That change makes student earning more important than ever," says Chany.
When a Parent Loses a Job
It's natural to want to protect children from worries about layoffs. But if you fear that you or your spouse is at risk, chances are they've already sensed it. Being honest about your circumstances is the best way to help them cope, say experts. Let them know that traveling, eating out and even new jeans are luxuries that are temporarily suspended, and ask that they pitch in by bringing lunch to school, suggests Linda Sherry. If cutting back isn't enough and you're getting help from relatives, it's okay to tell your kids so they'll know you aren't alone during this tough time. But if you're facing severe setbacks, like losing your home or moving out of state for job opportunities, don't say anything until you're certain a change is taking place, advises Jean Chatzky, author of Not Your Parents' Money Book (Simon & Schuster Children's Publishing). Whatever the circumstances, be sure to offer constant reassurance. "It sounds obvious, but kids do imagine the worst," says Beth Kobliner. "Let them know that no matter what happens, you'll be there for them."
Originally published in the October 17, 2011, issue of Family Circle magazine.