Teaching Kids the Financial Facts of Life

We try to teach our kids to be street-smart, musical, athletic and even computer-literate. But teaching them the value of money can be more difficult than getting them to clean their rooms.

Consider this: 1,509 high school seniors from around the country recently took a 40-minute exam to test their knowledge of basic money management. They answered only 57 percent of the questions correctly — “a failing grade,” says the Jump$tart Coalition for Personal Financial Literacy, the Washington-based partnership of federal agencies, universities and non-profit associations that sponsored the exam. More than half of the students, for example, incorrectly said that a bank certificate of deposit is not protected by the federal government against loss. (You, and they, should know that bank CDs are protected by the FDIC up to the $100,000 limit.)

Given that adult Americans are saving too little of their paychecks and declaring bankruptcy in record numbers, it’s essential that the next generation of consumers be better prepared to face their financial future. You know the importance of teaching kids “the three Rs” — reading, ’riting and ’rithmetic. But experts who specialize in money matters for children generally agree on the need to teach them “the three Ss:”

• Saving. Putting some of their money aside so it’s there to protect them in the future.
• Spending wisely. Living within their means and being educated consumers.
• Sharing. Being generous and charitable.

To help parents, guardians and even grandparents raise financially responsible people, FDIC Consumer News offers the following suggestions:

1. Give an allowance. If used as a teaching tool and not a giveaway, an allowance can be one of the best ways to teach kids, even as young as five or six, about money, taking pride in their management skills, and becoming more charitable. There are many different ways to structure an allowance and, of course, each family has to decide what’s right for them (in terms of how much allowance to give, what kinds of things the child should start paying for, and so on). Here’s one possibility, based on the advice of experts:

First, consider basing the amount of the allowance on the child’s age — perhaps $1 per week for every year. Give the allowance money each week in small bills or coins that can be apportioned into three clearly marked envelopes or containers — one for each of the three Ss. Decide in advance that a set amount, perhaps 50 percent, should go into savings for almost any reasonable purpose. This reinforces the concept of “paying yourself first,” which means automatically saving some money before being tempted to spend it. Maybe another 25 percent of the allowance would go in the spending pile, for use as “pocket money” throughout the week. The remaining 25 percent would be for sharing — for charity and other forms of generosity, including birthday or holiday gifts for loved ones. The parent still is responsible for the basic necessities, such as food and clothing, but the child now starts paying for various “luxury” items, whether they’re $1 candy bars or $100 sneakers.