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University of Massachusetts Amherst

Family Business Center

Training Kids to Handle Money Decisions

by Shel Horowitz

At what age should children get an allowance-and how much? What happens when they hit college and have to walk past dozens of credit card vendors? How much should you tell them about your finances?

Jayne Pearl, author of Kids and Money: Giving Them the Savvy to Succeed Financially (Bloomberg Press) ommentator for Marketplace and a columnist for the Oxygen.com website, addressed these and many other issues at the Family Business Center's April 2000 program, held at the Inn at Northampton.

Pearl, who was a founding senior editor for Family Business magazine, offered many tips to train children about money: skills they will have the rest of their lives, and that will be put to good use as they eventually become managers and owners of family businesses.

Pearl called an allowance "learning capital-the main tool" to teach children responsible money habits.

How old should a child be to begin receiving an allowance? "When your child can differentiate between coins and understand that the things they see on the shelf have to be bought with money." She believes most children area ready between 6 and 8 years old.

How much to give? Pearl says the formula of a dollar per year of age per week is too arbitrary. "Five dollars may be too much for a five-year-old. And $15 may not be enough for a fifteen-year-old."

Allowances should not be tied to school grades or chore performance, Pearl believes-instead, tie it to the actual financial needs of the child. Make a list of every purchase you make for your child: every bar of candy, Beanie Baby, pair of shoes. Focus on goals, and help the child meet them with incentives such as partial matching grants or challenge grants.

Once you've started giving an allowance, let the child pick up some of the luxuries and necessities you've been paying for-and resist the temptation to bail the child out with loans. An exception: if a child has been diligently saving for a few months toward a specific goal (i.e., $100 for a bicycle) and the item goes on sale.

For major shopping, such as back-to-school, one powerful way to establish good money habits is to sit down with the child-before you go near a store-look at store fliers and catalogs, and determine a fair and reasonable budget-together. Once you've established that you'll buy, say, five t-shirts at up to $12 each, the child gets to keep any money saved while shopping. So if you're able to get the t-shirts for $8, your smart shopper gets to pocket (or spend) $32. "You're on the same side, working toward the same goal."

For teenagers, a major issue is "the cost of cool." If your teen just has to have a certain designer label, let the child pay the difference between a generic and the trendy item. And walk together through the teen's room, looking at how much was spent on things that are now totally out of fashion and gathering dust but still serviceable.

Kids as young as 12 have succeeded as investors. There are several kid-friendly mutual funds, but children can also learn to follow stock performance, especially if the companies they invest in match their passions in other areas of life-so an athlete might want to invest in Reebok or Spalding. In fact, a Holyoke High School student recently placed first in a stock tournament (in which teens make investments from an imaginary portfolio, at real prices, and compare their performance)-with a 77+ percent return in a week!

What do you do when your child asks how much money you make? Pearl's son was eight when he asked. She decided to tell the truth, but first make it clear that this wasn't public information-and second, she told him, "'let's figure out how much it costs to run our home.' So the sticker shock was on the expense side."

Finally, don't micromanage: let your kids make $20 and $100 mistakes now, so they know enough not to make $20,000 mistakes later.

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