Learning How Money Works - It Makes Sense

Whether its birthday money, compensation for raking leaves, or Chanukah gelt, children often receive loose dollar bills and lots of jingling change. Yet rare is the yeshivah or Bais Yaakov that offers a class teaching them how to manage their small fortunes.

And so, the money ends up stuffed into a desk drawer, or worse, spent at the next possible occasion be it the vending machine, a trip to Toys R Us, or those quarter machines in front of the local grocery depending on the childs temperament and the spending habits witnessed at home.

Since children wont learn how to manage their finances through osmosis, its important for parents to have a big picture plan for teaching their children to lead a financially fit lifestyle. The lessons ingrained in them as children such as the importance of saving for a rainy day will be carried with them through life.

Heres the basic long-term plan, which can be customized to suit your familys financial situation:

Step 1: Begin with mason Jars
Step 2: Open a Bank Account
Step 3: Invest in a Fixed-rate CD
Step 4: Switch to an S&P Index 500 Fund

(Please note: We will discuss steps one and two in this issue, and steps three and four in the next issue.)

Step 1: Begin with Mason jars

Start early to teach your children the importance of saving.

As soon as your child receives some cash, ingrain within him the importance of dividing his money into three categories:

10% maaser, to be donated to the tzedakah of his choosing.

Short-term savings encourage your child not to spend his money immediately. The pleasure of a new game is often short-lived. In fact, children change their minds so frequently that you may find it helpful to get them into the habit of waiting 24 hours before buying something, to see whether they still want it.

Long-term savings at least 10% should be placed in his piggy bank for safekeeping, with a long-term goal in mind be it a bicycle, new sefer, CD player, or anything else hes been dreaming of.

The way we educate our clients to teach their children about saving is to use a simple, visual system of mason jars, says Kraig Kast, the CEO of Atherton Trust, a wealth management firm. By using jars they can see how they are using their money, see their savings grow they learn about saving and investing using this system and relate it to work and effort.

To incorporate Kasts recommendation, set aside two mason jars for each child (recycled glass or plastic mayonnaise jars work well) and a tzedakah box. Reinforce math skills and teach the importance of chessed by first calculating 10% of the total sum, to be donated to tzedakah. (Consult your local Rav regarding specific questions regarding giving maaser.)

Then, discuss with your children how they would like to spend the remaining 90% of the money. At least 10% should be saved for a long-term goal. Still, the percentages are less important than the observation of where money is going and the discipline of putting the money into the jars and spending only what is in the jar, Kast says.

Step 2: Open a Bank Account

Open a passbook savings account for each of your children, and watch as their money grows.

When your child turns five or six, schedule a trip to your local bank, suggests Stanley Kershman, a respected bankruptcy attorney who wrote Put Your Debt on a Diet: A Step-by-Step Guide to Financial Fitness and who is also known as the Debt Doctor.

Open up an interest-bearing passbook account with a few hundred dollars (make sure you meet your banks required minimum deposit), advises Kershman. Be sure to show your child the passbook every month so that he can see his money growing every month, and learn the value of delayed gratification.

This gives them a start to setting up a savings program, says Kershman.

Also, encourage him to make regular deposits at least a few times a year. At this point, you can begin depositing the long-term goals money in the savings account, since any long-term savings should be earning interest.

Hoarders and Spendthrifts: How to customize your teachings to your childs nature

Just as with all other forms of education, financial education needs to be suited to each child. As Shlomo Hamelech stated, Chanoch Inaar al pi darko educate each child according to his nature.

When it comes to money, children typically fall into one of two categories: hoarders or spendthrifts. Often, two siblings will treat money entirely differently from each other, despite the fact that they are growing up in the same household.

Chaim is a serious and thoughtful twelve-year-old. He never seems to spend any money. When he receives a few dollars, he hides it in an envelope in the back of his dresser, where it never sees the light of day except, of course, when Chaim routinely retrieves the envelope to count his growing wad of dollar bills and coins. When Chaim is asked to contribute to a birthday present for his mother, he begrudgingly hands over the requisite sum, reluctant to part with his hard-earned money.

Yosef, on the other hand, loves to give money away. Generous by nature, this ten-year-old frequents the local kosher grocery near his school during recess and brings home handfuls of fruit-roll-ups as presents for his sister. But money burns a hole in Yosefs wallet. As soon as he receives money, he quickly spends it often on unnecessary items such as soda from the vending machine (which his mother isnt too happy about).

Though they are brothers, Yosef and Chaim have very different attitudes toward money. Its important to note that neither boys temperament is better; each has its good points and its challenges. Chaims thrifty ways mean that he saves money which is good. But it also means that he has a tendency toward frugality. Yosef is very generous and thoughtful both qualities that should be reinforced and acknowledged. But his generosity can get out of hand, causing him to be a spendthrift who never has money saved up for when he really needs it.

Its their money, so I let them decide [what to spend it on], advises Carrie Carter, the author of Think Your Way to Riches, Kids Style, who wrote the book to help her three granddaughters become financially fit. Still, I reason with them.

You also need to take into account the nature of the child youre reasoning with, Carter says.

If you child is like Chaim, a hoarder, encourage him to have a long-term goal. Ask him: What are you saving it for Money should be seen as a means to an end, not and end unto itself.

If you child is more like Yosef, a spendthrift, understand that he enjoys the fast fix. Reason with him by giving him clear choices: You can have a cheap toy at the counter now, or Ill give you money towards a bike later, is one example she gives.

We should be teaching them from an early age to have long-term goals, Carter emphasizes.

Quick Tips for Teaching Your Kids to Save

1. Be a good role model. Set a good example being on top of your finances; its the best assurance that your children will do the same.
2. Play games. Encourage children to save by playing games like Monopoly and Life, which reinforce the skills of saving and investing and require others like addition, subtraction and counting. You could also set up a pretend bank with paper Monopoly money or spare change.
3. Share your family finances with your children. You dont need to whip out that Excel spreadsheet. But when your child asks you to write a check for a field trip or school event, take the time to explain the concept of the money behind the paper you are signing.
4. Budget and comparison shop. When you run halfway across town to stock up because theres a sale on pasta, casually mention the price difference to your children and explain why its important to be budget-conscious. When purchasing big-ticket items like a new camera, encourage your children to help you comparison shop for the best price.

Should you give your children an allowance

According to financial expert Stanley Kershman, the answer is yes otherwise, you are leaving yourself open to becoming the worlds biggest piggybank.

Allowances teach children the value of money and help them learn how to budget smaller denominations.

Plus, any mistake they make will be minimal, Kershman says.

Theyll learn how to make spending choices, and prioritize their needs and wants, he adds.

Naturally, parents must decide whats best for their children, taking their financial situation into consideration. But even meager allowances, or paying children for helping out around the house, shteiging away or getting good marks, can pay off big-time when it comes to teaching them the basics of healthy finances.

Carrie Carter:
Author of: Think Your Way to Riches Kids Style

For more information or to arrange an interview with Carrie Carter at 810.714.3338
e-mail: ThinkYourWayToRiches@yahoo.com or visit: www.ThinkYourWayToRichesKidsStyle.com