Weave money lessons into daily routine

by Center for Personal Finance editors

MADISON, Wis. (9/6/06)--It's back to school for kids, but if you're a parent, you're not off the hook. Think of your home as the other homeroom, and, if you haven't incorporated money lessons into some daily routines, now is the best time to start (Credit Union National Association Center for Personal Finance).

"The way children learn to make smart money decisions is through experience, and they won't get that experience without practice. A regular allowance provides a steady source of practice income that children--even preschoolers--can use to make spending and saving choices without catastrophic consequences," says Philip Heckman, CUNA's director of youth and young adult programs.

Heckman spearheaded the development of two member education seminars for parents, distributed by CUNA to about 80 credit unions since April 2005.

The fundamental purpose of an allowance is to make sure children have enough resources to practice making money decisions on their own. But don't give in to the temptation to bail out your child if she runs out of money before the next scheduled allowance. Remember that hard knocks early in life cost less than hard knocks later in life.

If you decide to dole out an allowance, put some thought into how you're going to pay it (The Wall Street Journal Aug. 26).

Not sure when to start? Pay an allowance as soon as the child understands that money buys things, and this may be as young as three years of age.

How much should you give? One rule of thumb is to give $1 a week for every year of age, but talk with your child about what the allowance is to cover, what it doesn't cover, and negotiate from there.

How often? Give younger children an allowance weekly, but make older children budget for an entire month. This forces them to manage their resources and learn responsibility. If the child runs out, that's a teachable moment to talk about low- or no-cost alternatives.

Other money lessons easily taught at home:

Teach the importance of saving. Have young children draw a picture of the item they're saving for and cut that picture into 10 pieces. Then as the child saves up, gradually add a piece of the puzzle to the refrigerator door. This gives the child a visual picture of progress, and it teaches the importance of deferred gratification to counteract the "I want it now" mentality.

Create a spending record with the child. This is the first step in budgeting, and a good opportunity to teach the child about ways to track expenses. Break expenses into two categories: fixed (regular and unavoidable) and variable (optional). Make sure saving is one of the child's budget categories.

Have the child do some comparison shopping. Make your young child a grocery shopping assistant by giving him increasingly demanding assignments, such as finding particular items in the grocery store, comparing unit costs, and comparing ingredients.