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Personal Finance

401(k)ids - Part 2:
Teaching Kids Smart Spending and Saving Habits

By Brenda Watson Newmann
401k Forum Senior Editor

Fiscal Fitness for Tots
  • Let children learn from their own spending mistakes.
  • Involve them in comparison shopping.
  • Explain how you run your household budget.
  • Help children set and track their savings goals.

Giving children a regular allowance to manage is only the first step in teaching them financial planning skills. They also need real experience in spending and saving, and guidance from patient adults.

In a recent survey, high school and college kids said they rely overwhelmingly on their parents and/or other adult relatives for financial information.

So, adults of America, wake up! The country's financial future is at stake. This week's installment of 401(k)ids examines spending and saving exercises you can do with the kids in your life to keep them fiscally fit.

Learning to Spend - Let Your Child Make Mistakes

Learning to spend wisely involves a certain amount of trial and error. If you give your child an allowance but insist on approving all purchases, or if you give your child an advance every time she overspends, the financial planning lesson will be diluted.

So, lesson one for parents is "hand over the money and try to keep your mouth shut." (Of course, that doesn't apply if you have banned certain categories of toys from your house for reasons of principle.)

Here's an example. If little Jane immediately spends her entire weekly allowance on Pokémon cards, but three days later sees a coloring book she "really wants", you shouldn't give in to her pleas for more money. In fact, you should rejoice because this is exactly the lesson you are trying to teach - when it comes to managing money, she needs to plan ahead.

Fortunately, Jane will learn this lesson when the consequences aren't too serious. Not having a coloring book at age 7 is a lot more palatable than not being able to repay $10,000 in credit card debt at age 27.

Fun With Comparison Shopping!

If you talk to your children about comparison shopping, you might be surprised at how interested they are. Lots of children are fascinated by details and will gladly search the supermarket aisles for the cheapest package of rice, if you'll let them. To illustrate the lesson, you could try paying them the difference between a more expensive package and the one they find for you.

This writer's nine-year-old daughter is always fascinated to see how much we save at the supermarket by showing our "members" card entitling us to special prices on certain items. These discounts are marked at the bottom of the receipt, providing an excellent visual lesson in the merits of spending wisely.

Monkey See, Monkey Do

Family finances probably aren't tops on your list of topics to discuss with your children. Consequently, your child may not realize how much thought and time you put into the family budget. (If you don't put thought and time into the family budget, now would be a good time to start!)

One day when this writer was out shopping for necessities, her seven-year-old son asked for money to buy a toy. Told "no," he pointed at the shopping cart and demanded to know "how come YOU always get what you want?" Obviously, he didn't understand that toothpaste for mom was not the same as a toy car for him.

Without going into too much detail (unless you want Mrs. Smith's entire third grade class to know how much you earn) you could tell your child about your budgeting process. Explain the difference between necessities and extras, and emphasize that when it comes to extras everyone has to make choices.

Explaining that "we can't afford to buy you a boogie board right now, but if we don't go out for pizza next week we'll be able to," and then following through, could be a great lesson.

Who's Telling Kids About Money?
Other relatives
Source: EBRI Youth & Money Survey

The Satisfaction of Delayed Gratification

The goal of spending wisely is to get more bang for your buck. But sometimes your children simply won't have enough bucks to get what they want right away. What then?

It's not easy to convince a kid to wait for anything - especially today, when opportunities for instant gratification abound. Mom can't drive us to the movie theater? Let's watch a video instead - and while we're at it, how about some microwave popcorn that will be ready in four minutes? Convenient, but it certainly doesn't teach patience.

American adults as a whole aren't very good role models, either - our personal savings rate is one of the lowest among developed countries.

If you want to help your children form habits that may keep them from amassing piles of debt as adults, you need to help them practice delaying gratification. You can put them on the right track by encouraging them to save a certain amount each week towards a realistic goal.

"Saving is a habit," says David McCurrach, founder of the Kidsmoney web site. "Once kids get in the habit, they don't miss the money. It's just like contributing to a 401(k)." What's more, it's hard to beat the exhilaration that comes with buying something you've saved up for.

With your 401(k), your savings goal is a happy retirement. Your child's savings goal could be a special toy or book, a bike, or a computer.

To help your child set realistic goals, you should discuss what he wants to buy, find out the price, and figure out how much he'll have to save each week in order to buy it by a certain date. Your child might want to have short-term and long-term savings goals.

Visual aids are useful for children. For a younger child, you could cut out a picture of the desired item and tape it on a glass jar. Every week as the child puts more money in the jar she literally sees the money grow toward her objective. An older child could keep track of savings in a ledger, and redo the calculations each week.

You might consider contributing some money too, if it is a big purchase, as long as the money is used specifically for that item. Think of it as your "parental match" on your child's 401(k)!

Up next: Getting kids interested in interest…and investing.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.
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