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Teaching Your Kids Money Management Skills

Children are hardwired to learn from their own mistakes. A painful fall might teach them not to run on a slippery floor. A bruised finger might teach them to be more careful around closing doors, windows and drawers. A blood-drawing nip from the family dog or cat might teach them that even cute animals don’t like to be tormented.

Money ManagementOn the other hand, some skills and life lessons are too important to learn by trial and error. Money management is one of these skills. Kids who never learn the consequences of poor financial decision-making may grow up to make potentially catastrophic mistakes with their own funds. As second chances are rare in the complicated and unforgiving world of personal finance, these mistakes can have far-reaching implications. Don’t let your children enter the job market without a keen understanding of money issues. Let them make their mistakes when the consequences are small and you can monitor them.

Teaching Kids Money Management Skills-

Kids Money Management Tip #1

As soon as your kids are able to comprehend the value of money, give them a small weekly allowance to use as they see fit. This allowance doesn’t have to be large. You shouldn’t expect your children to make all of the purchases necessary to ensure their comfort and survival. At the same time, this stipend must be large enough to promote meaningful decision-making processes. Encourage your kids to be frugal by offering to double any funds that they have left over at the end of their allowance period.

Kids Money Management Tip #2

To build on the educational power of their allowances, the next step is to open checking accounts for older kids and show them how to read their balance statements. Since checkbooks are rapidly becoming obsolete, teach them the basic functions of online banking. You might even demonstrate the proper procedures for contesting suspicious charges. Don’t forget to show your kids how to transfer funds between two electronic accounts. If their account is in the same bank as yours and associated with yours you can easily transfer their allowance to their account (even automatically). You can also get them a debit card attached to their checking account so they can learn to manage money in their account and have easy access to their money. Just be sure that money can’t be automatically pulled from savings to cover checking over-drafts or they may unknowingly deplete their savings.

Kids Money Management Tip #3

As they enter their teens, instead of taking them shopping and paying for their clothes,  consider giving them a quarterly clothing allowance and letting them budget to buy their own clothes. At first they may decide to blow the entire quarter’s allowance on a single outfit or new pair of sneakers but if you refrain from bailing them out, this will teach them quickly how to shop for the best deals and budget according to how much they have to spend. Some kids who wouldn’t be caught dead in Good  Will or Salvation Army when their parents are footing the bill, have learned the value of buying things like Jeans there, because it can double or triple the number of outfits they can purchase.

Kids Money Management Tip #4

Once your kids are old enough to trust with credit, you can open a low-limit credit card account for each one. You will probably have to co-sign for the card since they won’t have a credit history or income yet. Lest they go wild with their new-found freedom, set a few ground rules, and monitor their monthly statements. Offer a few tips before handing off these cards. Be sure to stress the importance of fully paying down their balances each month. If they run balances on their cards for more than two consecutive months, you can revoke their card-carrying privileges.

Start teaching them about the importance of credit reports. As a consequence of the Fair Credit Reporting Act of 2003, every American is entitled to receive one free credit report from each of the country’s three main consumer credit reporting bureaus. Teach them what’s in a credit report and how to read one effectively. Show them how to request these free reports online and join a service that can help them stay on top of events that may alter their credit profiles. Remind them that financial knowledge truly is power.

Kids Money Management Tip #5

Finally, give your kids a peek into the complex world of “adult” financial products. The fact that they lack large savings shouldn’t stop you from giving them a primer on insurance products, investing through brokerage accounts, long-term investment strategies, and common mortgage terms. Teach them about the tax benefits of retirement accounts and the long-term impact of interest rates. You might even consider opening an IRA for each of your gainfully-employed teenage children. You can even help fund their IRA by matching their earned income so they can save 100% of their income (up to the IRA limit) and spend your gift instead.

Teaching your kids to make smart financial decisions can be a frustrating process. After all, money matters can be boring. Your children are liable to question your wisdom or ignore your advice altogether. However, it’s a safe bet that this won’t be the most difficult parenting project that you’ve undertaken. Using these five bits of no-nonsense financial wisdom, you’ll have done your part to prepare your kids to handle their own personal finances.

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Photo Credits: By kenteegardin