How Much Financial Responsibility is Enough?

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To start 2018 we bring you an article about the benefits of discussing money management with your child. Read this week’s Parenthetical post for talking points and strategies on teen financial responsibility that many parents might find helpful.

Young children often have trouble understanding why they cannot have every toy or piece of candy they see at the store. However, around age 10 kids begin to comprehend that money is a limited resource. They can distinguish that some purchases are worth making in the short term, while others are worth saving for. This new level of awareness often brings discussions about allowance, chores and financial goals. Age 10-12 is an opportune time for parents to begin working on developing financial capability with kids.

Allowance

Parents often struggle with allowances. Giving spending money for small discretionary purchases can be a good way to teach basic budgeting and money management. For pre-teens weekly allowances generally range from $1 to $5, depending on what the child is expected to pay for out of their own pocket. It is important to be consistent:

  • Set a standard day and time for allowances.
  • Sporadic or fluctuating allowances make it hard for kids to know what to expect and how to plan.

Allowance in Practice

Some parents prefer that allowances be tied to certain chores as a lesson on working for ‘income.’ They may even use a chart to document that weekly jobs are getting done before any allowance is paid. Others pay an allowance and then charge ‘fines’ for failing to do chores or certain misbehaviors. Whatever model is chosen, the most important factor is being consistent.

Saving for a Goal

Adults who are successful in managing their own money share the ability to set and achieve long-term goals. In order to build those skills for adulthood, youth need to practice. Kids need to engage in a process of discussing and eventually writing down their personal financial goals, such as saving up to buy a “bigger” item. This creates an opportunity for parents to work with their child on creating a plan to achieve that goal. It can even be useful to work through some math, adding up how many weeks or months it will take to save up enough (and remembering to account for other regular purchases that might happen along the way!). Parents can talk about what happens when plans fail, as well as help children revise their goals as they learn more. The process of setting goals and making plans is critical in life – making this activity a great learning opportunity.

Using Bank Accounts

Many banks and credit unions offer very low cost savings accounts (often called custodial accounts) for kids under 18. These accounts are in the young person’s own name, along with their parent. Having an account, even one with a low balance, is another formative experience that parents can offer to kids ages 10-12. Going to the teller window, obtaining a statement and checking balances online can help kids learn about the benefits of financial institutions and even how interest works.

Interested in teaching your child about interest?

Here is an online calculator that can show kids how much they will actually have to pay on a credit card balance over time. This is a great activity for older teens who may be interested in buying pricier items (e.g., a new gaming system). Showing them that credit isn’t actual money but rather a “loan” that can be costly over time, can teach them about spending wisely given their expected or actual earnings.

Understanding Adult Finances

Kids who receive spending money and practice budgeting and saving, begin to establish their own sense of financial independence. Parents can also begin to share more of their personal financial lives with their kids. Simply revealing how much things cost—from groceries to movie tickets to vacations is one example. Another instance is to share long-term financial goals, such as retiring from work (perhaps like the child’s grandparents). It can also be useful to explain how income taxes work each spring, and even how sales taxes work using receipts from the store. While parents do not need to offer too much detail, they also should not ‘hide’ their financial lives from their kids. Children are interested in and can learn from their parent’s experiences.

Gifts and Charity

One last area of focus is charitable giving. Some parents will offer to match (1:1 or 1:2 or more) any financial contribution kids make to a charity or toward a gift for someone else. The more kids can be engaged in giving behaviors early in life, the better they can establish patterns of charity for a lifetime.

Charitable Giving in Action

Actions such as charitable giving or volunteering can promote prosocial behavior in adolescence, which is linked to such behaviors across the lifespan. There are many ways to encourage youth to be prosocial while also supporting their growing independence. For example, rather than asking for gifts at a birthday party or certain holiday, you can encourage your child to ask guests to bring a donation for a specific organization. Teens can explore their identity and beliefs as they decide which cause that is meaningful to them.

It’s Not Too Early

Parents often feel anxiety about their own finances and often families make talking about money or money challenges a taboo. It is better to be open about finances, engage in money management with kids, and give kids opportunities to learn from their own experiences. As a recent report from the Department of Treasury suggests, a small number of steps can help kids grow up to have financially smart lives.

About the Author

Michael-Collins-1311_crop-300x300J. Michael Collins is an Associate Professor at the School of Human Ecology the La Follette School of Public Affairs at University of Wisconsin-Madison as well as faculty director of the Center for Financial Security. He studies consumer decision-making in the financial marketplace, including the role of public policy in influencing credit, savings and investment choices

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