MONEY

Debt-Proof Your Kids

By Mary Hunt
Cheapskate Monthly

Think of this chapter as a menu of basic money facts your children need to know, along with ideas and suggestions for how you can present them in a kid-friendly way.

Not a one-time lesson, this information will be best taught—with the intention that it will be caught—as it is lived out in your home.

Money Management

At the foundation of your children’s financial intelligence should be this undeniable truth: It is not the amount of money you have, but what you do with it that matters. This is true for a child managing a five-dollar-a-week allowance or an corporate executive with a five-thousand dollar-a-week salary.

For many years of my life I didn’t know this truth. On the contrary, I believed that more money was the answer. I was convinced that if we just made more money, won the lottery, or received some unexpected inheritance, all of our money problems would vanish. But the more we made the worse our problems became. Because I didn’t know how to manage what we had, more would have never been enough. We didn’t save, we didn’t give, we didn’t plan, and we had no idea where all the money went.

Unless your children learn simple, wise money management techniques, more money will never be enough.

Teaching kids money management

Tell stories. A great way to teach this basic of all financial truths is through storytelling. Here’s one of my favorites—a true story—that you can tell your kids.

A man who lives in Ohio went to work straight out of high school for minimum wage. He was a common laborer, a blue-collar worker. He didn’t make much money, so every time the local electricity company raised their rates, it was a major financial struggle for him and his family. It didn’t take long for him to become discouraged; the harder he worked to make a living, the more it seemed his money was being gobbled up by this big, rich utility company.

One day he had an idea about how he could change his attitude toward this greedy company. He would become a part owner in the company, not because he was wealthy but because he was a smart money manager.

His electricity company, like most utility companies, has a program that allows customers to purchase stock in the company. The man decided that each month when he paid his electricity bill he would send a second check equal to one-day’s wages to purchase stock in the company.

In some way, sending that second check every month made paying his electric bill easier because he knew he was actually making a payment to his company and at the same time increasing his ownership. The secret is he never missed a month. Over the years whenever he received a raise, he increased his monthly purchase so that it always equaled one-day’s wage.

I am told this man is now one of the largest stockholders in that local electricity company—a multi-millionaire—not because he switched to a big paying job but because he learned how to manage the small amount of money he made from his regular, low-paying job. It was all a matter of wise and consistent money management.

Troll for stories. Share with your kids stories you read and hear about people who, like the man from Ohio, illustrate this principle of money management. Negative examples are also effective. Watch for stories of people who win the lottery, live like a king, and in no time at all file for bankruptcy because they just didn’t know how to manage money. Stories like that are amazingly common.

The jar system. It’s simple, it’s cheap, and it works really well. Take empty, clear glass or plastic jars and label them appropriately: Needs, Long-term savings, Short-term savings, Giving, Spending and so on. Even preschoolers understand the jar system. Teach your kids how to split their money according to your family’s basic money management rules.

The least kids need to know about money management:

1. It’s not how much money you make, but how you manage what you have that matters.
2. You don’t need a lot of money to be a good money manager. Even a small amount of money well managed is far more important than a lot of money wasted.
3. In the same way you have life rules by which you live, you need money rules that guide the way you handle your money.

Giving

I believe that God has designed a perfect plan when it comes to money. It’s simple. We are to give back the first part of everything we receive. Giving away part of the money that flows into our lives exposes our lives and our finances to God’s supernatural intervention. Giving proves we trust God to take care of us, builds our faith, and acknowledges our dependence on God’s mercy. It is an affirmation that every good thing comes from God.

The conduit through which God chooses to deliver the money we need may be a job, an investment, an inheritance, or some other means—but he is the source. The delivery system may change a thousand times during our lives, but God is unchanging. All he asks is that we give back the first part of everything he gives to us.

Teach your kids to always give back to God 10 percent of their income before they save or spend. Teach kids a value: I always give away part of my money.

This giving principle is really simple to teach to young kids. They don’t question, they don’t try to reason. They will simply believe you when you teach them that spending all of your money is a selfish thing to do. Because kids are anxious to please, they respond very well to the idea that it makes God happy when we are thankful and give him part of everything we get. It is a good habit to become a giver.

Teaching your kids about giving

Reasons to give. Brainstorm with your child good reasons to give. It helps people who are less fortunate or who are sick. It helps missionaries. It helps you focus on the needs of others. Giving money helps you become a responsible person. When people only think of themselves they become selfish and self-centered. Giving makes the world a nicer place to live. Think about this: If everybody became a giver there would be fewer hungry kids.

Ways to give. Maybe you have seen people put money in the offering at church. That is a good way, because the leaders of the church are wise, and God helps them decide where that money in the offering should go. There are also other places you can give in your community like homeless shelters or rescue missions. Together with your child, make a list of ten organizations to which your child may give money. Help your child learn more about each organization and decide on one or more to which to contribute. Once you think like a giver, you will keep your ears open for special needs.

The least kids need to know about giving:

1. Giving always comes first, before any saving or spending.
2. Giving 10 percent should be a minimum.
3. There are many places and ways to give. You can watch your money help in many different kinds of circumstances.

Saving

Saving money means choosing to keep it in a safe place instead of spending it. No matter how small the amount of money your kids receive, saving part of it should be a given. Saving money will become a lifelong habit in no time at all if it is approached as mandatory to right living. There are several kinds of savings that your kids need to learn about.

Teaching your kids about saving

Long-terms savings. Think of this as serious savings—money that you don’t touch, borrow, or spend. Adults call it retirement savings, kids don’t need to call their long-term savings anything specific. It’s the act of always saving for the long-term that is important.

Long-term savings should be kept in an interest-bearing account and left to grow. Teaching kids from a young age to always pay themselves first before they spend will help this become a habit when they are grown.

Your child’s long-term savings should be kept in a safe interest-bearing account. Some banks and credit unions still offer simple school savings accounts where minimums and fees are waived. Once a significant amount has been saved, consider moving long-term savings into a more aggressive vehicle such as a mutual fund account where the child is the account owner and the parent is the custodian.

Short-term savings. This is the way you teach your kids to accumulate enough money to buy something that costs more than they have on a weekly or monthly basis, such as a bike, new doll, or computer game. Short-term saving teaches the joy of delayed gratification and the value of truly yearning for something. Save first, spend later is a motto your kids won’t learn at the mall or from television, but a sound principle they need to learn from you.

Because kids are so literal, providing some kind of visual aid will help them see and understand the principle of saving to buy things that cost more than they receive in a week or a month.

Collecting the money in a jar is a good idea. Here’s another idea to help visualize the joy of short-term savings.

Find a picture that represents the items he wants. Maybe it’s a bike or special toy. Make a chart or poster and attach the picture to the top. Calculate the full price of the item including tax. Divide this by the amount the child elects to put into short-term savings to determine how many saving periods will be required.

Mark off large squares below the picture representing the periods it will take to save the money he’ll need. Inside each square write the amount to be saved. Attach an envelope to the poster. Each time your child receives his income, he can place the stipulated savings amount in the envelope and mark off the square. Each time a savings deposit is made into the envelope and a square is marked off, he sees himself moving closer to the goal.

Saving money consistently is like riding a bike or learning to type. At first the activity is awkward and a little shaky. It might not feel right or even fair. But through consistent practice—repeating the same action over and over again—the activity will become automatic.

If you develop in your children the habit to always pay themselves before they spend or pay others, saving will be as much a part of their lives as anything else you teach them to do on a regular basis.

The least kids need to know about saving:

1. If you always save some of your money—before you even think about spending—you will never be broke.
2. Long-term savings (money that you leave alone so it can earn interest over a long period of time) is mandatory. It’s just the right way to manage money.
3. Short-term savings (money you accumulate for something you want) is optional.
4. Saving money can be as gratifying as spending money. The difference? The good feeling you get from saving goes on and on while the fun of spending fun doesn’t last very long.

Needs and Wants

Is it a necessity or a luxury? Essential or optional? We live in a culture where the lines between needs and wants have become terribly blurred. I communicate with people all the time who insist that cable television is an essential expense or that not one but two cell phones are an absolute necessity. No wonder kids are so mixed up on this subject of needs and wants.

Spending is probably the first financial concept your kids will understand. Even toddlers have an uncanny ability to make the connection between money and stores. Giving, saving, and investing, however, have to be taught, as does distinguishing between different types of spending. That’s where the necessity for teaching the difference between needs and wants comes in.

Needs are necessities, things we must have to live—things like shelter, clothes, food, and medicine. Wants are things that we like that make our lives fun and enjoyable. It is not wrong to want things. Sometimes it is good to want things that make our lives easier or more enjoyable. However kids must learn that needs come first, and even adults cannot have everything they might want.

Teaching your kids the difference between needs and wants

Need vs. Want Game. It takes practice to tell the difference between a need and a want. You can play informal games with your kids during a meal, in the car, or at other times to help them learn. Let television commercials, print ads, or billboards be your game material. Have the kids determine if the product advertised is a need or a want. The first one with the right answer—and explanation—wins that round. You should expect some lively conversations, especially with your older kids or teens. For example, you see an advertisement for Nike tennis shoes. Is that a need or a want? Well, shoes are a need but the Nike brand name is a want—often a very expensive upgrade. That observation could easily lead to a conversation about brand loyalty and why customers feel pressured to spend twice the price just to get a certain brand. Do they think they will be like the celebrity who endorses that brand? Is it emotional appeal? Belief in misleading claims?

What If Game. Have your children answer this question: What if I could have everything I want? First they must make a list of all the things they would have if they could have everything they want. Next they need to answer questions like: Where would I keep everything I want? How would I make sure they were safe and secure? How would I enjoy all of these things? It doesn’t take long for a child to understand that having everything we think we want can pretty much ruin our lives.

The least kids need to know about needs and wants:

1. Needs are essential, wants are optional.
2. It is not wrong to want things. Just remember you your wants will always exceed your means.
3. A true need is never realized while you are in a store. If you really needed it, you knew that before you left home.

Spending Record

A spending record is a tracking device. It shows where the money went. Money has a way of slipping through your fingers just as if you tried to pick up a handful of water.

Teaching your kids to keep a written record of where their money goes (every cent!) is a habit that will impact their futures tremendously. Tracking expenses in a written format demands focus and keeps spending on a more intelligent level. A written spending record has the effect of plugging up money leaks. Start them young and the process will become a lifelong habit.

The purpose in all of this is to teach your kids to balance income and expenses, a skill that will come in handy once they are out on their own.

Teaching your kids about a spending record

While it would not be advisable to expect a spending record from a preschooler, an older child can easily be required to keep a log of where his money goes. Some parents go so far as to replace only the amount of money the child can account for in writing. For example, a child receiving a $50 a month salary would have to produce a spending record that accounts for all of that amount (including saving and giving) in order to receive the next month’s salary. That is a severe measure, but could be quite effective.

Teach your children that to whom much is given, much is required. When we receive money, we must be responsible with it. Keeping a record of where our money goes is the way we become good money managers. A spending record keeps money from leaking out of our lives.

Get a notebook. Use this notebook as a spending record for your child. Show your child how to write down all expenditures—i.e. $10 - long-term savings, $10 - church offering, $2 - short-term savings, $3 - movie ticket, etc. The goal is that the spending record will balance with his or her income.

After a few months your child will be ready to move on to the spending plan. All of the data gleaned from the spending record (where the money went) can be used to make a written plan of where it will go next month.

The least your kids need to know about a spending record:

1. It is important to keep track of where your money goes. Write it down.
2. During the month keep comparing your spending record with your income. It won’t take long for you to make them come out the same. For instance if you get ten dollars a week as allowance, or salary, your spending record at the end of the week should add up to ten dollars, because you will have written down every cent you gave away, saved, and spent.
3. A spending record is the way to make sure money doesn’t leak out of your life without your approval.

Spending Plan

Some people call it a budget. Personally that word give me a rash, so I prefer the term spending plan. Your kids will too!

A written spending plan is simply the easiest way to match income to expenses. A spending plan is like a road map. It shows you where you are, where you need to go and how to get there. Even a young child can learn to write down how she plans to spend her money.

Teaching your kids about a spending plan

To help your child understand the need for a written plan, use the example of building a house. It would be foolish for a contractor to go to the lumberyard, buy a truck load of wood, dump it on an empty lot and just start building. No builder in his right mind would set out to do something important like building a house without a plan. It’s called a blueprint.

A spending plan is simply a blueprint that helps you build your financial life. Kids can understand the need for making a plan when something is really important. When you plan ahead of time how you will spend your money, you have control over it. You make the decisions. If you don’t make a plan and just spend it for any old thing without much thought, you lose control. It’s not critical at first, but if you start a pattern of losing control, after a while your money will control you.

To make a spending plan, gather information from a past spending record or two. Using this information help your child plan how he will spend his money the next month. Decrease spending? Increase short-term savings? Add an additional short-term savings goal?

The least your kids need to know about a spending plan:

1. You should always make a simple written plan for how you intend to spend your money ahead of time. Your spending plan should include your plans for giving and saving.
2. A plan that is not written down is only a dream. You might think you can remember your plan in your head, but it’s always better to write it down.
3. You can make a weekly spending plan or a monthly plan—whatever works best for you. Keep it in a special place where you can refer to it often.
4. Every month when you make a new spending plan, adjust it according to what happened last month. Example: If you planned to spend $3 on a ticket to the movies but ended up spending $4.50 because you bought a snack, remember what happened if you plan to go to the movies again. Make that adjustment so your plan and your actual spending match.

Banking

Teaching your older kids the concept of banking can be done in a variety of ways. If you live close to a bank you can use the real thing by taking the older child in to meet a teller, learning about deposits and endorsing checks. Younger children, however, might respond more favorably to a family banking system as a precursor to the traditional institution.

The Bank of Mom and Dad might work like this: Set up a system complete with checkbooks and deposit slips. Let the kids deposit their allowances with you and write checks against that Bank of MD when they want to give, save or spend their money. Show kids how to keep a check register (doesn’t preclude the need for a spending record) and keep a running balance of what’s in their account. The banker’s job of course is to either pay the check or bounce it if there are insufficient funds.

One father I heard from set up the Bank of Dad. His very generous interest bearing accounts taught even his five-year-old the joy of watching his money grow. His rule was that money left in the family bank for more than one week began earning interest.

Another family followed the traditional Jamaican custom call su-su. In essence, the family forms a partnership with each member agreeing to deposit a specific amount at a specific time each month. Then, each month the entire bank goes to one member of the family partnership with everyone taking a turn. By the end of a full cycle, each family member has had the joy of receiving one large sum of money. No interest is involved, but this does eliminate the element of risk and teaches kids that consistent saving results in great benefit.

Whatever method you use, it is important that the concept of traditional banking, including checking and savings accounts, be taught to your kids early enough that they feel comfortable with it by the time they leave home.

Teaching your kids about banking

You might have to schedule an intentional trip to the bank to show your kids how it works. Call ahead and get an appointment with a bank official who will show your kids the vault and explain how the operations work.

Older kids and teens should learn the fundamentals of reconciling a checking account. If you are not in the habit of doing this, start. If you have a home computer you might consider simple accounting software that allows you to track and reconcile your checking account electronically. Your kids will pick this up quickly!

Make sure your kids know how to fill out a deposit slip and a check and how to endorse and deposit checks.

The least your kids need to know about banking:

1. There are two kinds of bank accounts: savings accounts that pay you interest and checking accounts that allow you to spend at will.
2. Banks are safe. If you put money in a bank you won’t have to worry about losing it because banks and credit unions are federally insured. That means the federal government guarantees that if the bank goes out of the business, the depositors will get their money back, up to $100,000.
3. When you are old enough to have a checking account it is very important that you keep good records. If you write checks for more money than you have, your checks will bounce and you will be heavily fined.
4. While checks are a safe way to send money through the mail, living with cash on a day-to-day basis is a lot simpler because when it’s gone, it’s gone!
5. It is illegal to write a check for more money than you know you have in the bank.

Automatic Teller Machines

The use of automatic teller machines (ATMs) is a privilege extended to experienced bank customers. Visiting the ATM on a regular basis can be hazardous to your wealth, because it is so easy to get money from one’s account. The best way that an adult can make an ATM both convenient and safe is to visit rarely and track spending impeccably. Taking the time to go into the bank and deal with a real teller (unless of course you bank now charges a fee for such a privilege) takes extra time but does keep us in better contact with the whole concept of deposits and withdrawals.

Teaching your kids about ATMs

Looking at ATMs through a child’s eye and mind will help you understand how necessary it is for her to understand how this works. ATMs are not money-making machines. The ATM card is not a magic key. There is a limit to the amount of money a person can withdraw from their account using the ATM.

Teach your kids that convenience often comes at a cost. Using ATM machines frequently can be costly because some of them charge a fee just to use the machine. Share experiences you might have had using an ATM only to be charged a fee to take out your own money!

The least your kids need to know about ATMs:

1. Automatic Teller Machines are for adults. An ATM is like a robot. The bank can hire fewer tellers if they have an ATM to help customers with their money.
2. An adult needs a secret code called a PIN in order to get some of their money out of the ATM.
3. An ATM card is not a credit card. It’s more like a permission card that allows a bank customer to withdraw some of their money without the need for a teller.
4. It is very important to keep track of all ATM withdrawals just as if you wrote a check or went into the bank and made an in-person withdrawal.
5. Most banks do not charge their own customers to use an ATM. However, using the ATM owned by another bank will cost a fee.

Credit Cards

As a parent you should think of a credit card as a live hand grenade. In your child’s possession it could go off when you least expect it and cause some serious damage. A child or teen does not need to have or use a credit card to learn everything there is to know about them. You want to teach your children that a credit card can be either used or abused. When used, it becomes a very helpful tool that makes some things in life more convenient. When abused, credit cards—and the resulting debt—can make life miserable.

Credit card rules are simple: Never use a credit card to pay for something because you do not have enough money. If you use a credit card to secure a rental car or to pay for something you order over the phone or through the mail, always pay the balance in full within the grace period (the period of time when no interest will be due, typically twenty-five days).

An adult needs only one all-purpose credit card.

Teaching your kids about credit cards

Just because kids don’t use credit cards or observe their family living on credit doesn’t mean they cannot learn all about them.

Use credit card applications that come in the mail to explain interest rates and all of the terms and conditions. Talk about how credit cards have become the tender of choice in most retail establishments. These days only about 30 percent of those purchases made are paid in full during the grace period. The rest become consumer debt because the cardholder pays only a tiny amount every month.

The least kids need to know about credit cards:

1. A credit card purchase creates a loan. You don’t really own something bought with a credit card until you pay the bill.
2. Responsible adults use a credit card as a helpful tool and to build a solid credit history, not to buy things because they don’t have enough money. That is why they only need one all-purpose credit card.
3. Abusing a credit card means using it to buy more things than you have the money to pay for. Carrying a credit card balance from month to month is very expensive because of the high interest.
4. If you buy something with a credit card and then pay it off in low monthly payments, you will end up paying for it three times! A one-hundred-dollar CD player would cost about three hundred dollars—and it would take many years to pay for it. Chances are the CD player will not last as long as it takes to pay for it.
5. Credit card debt is the biggest reason so many families have to file for bankruptcy in this country.

Debt

There are only two kinds of debt: secured and unsecured. Unsecured debt is the killer because there is no collateral involved. If a person defaults on an unsecured obligation, the creditor comes after the person and his credit report.

Unsecured debt is dangerous because when not paid in full in a very short period of time it accrues huge amounts of interest quickly. Unsecured debt should be avoided at all costs.

Secured debts involved collateral and that is what makes them safe debts. If you can’t make the payments, the lender can take the collateral the debtor has put up to secure the loan in exchange for full payment. Secured debts include house loans and car loans.

Teaching your kids about debt

Make sure you kids know the difference between secured and unsecured debt. If you have debts you regret, tell your kids about it, if you are comfortable. You might want to admit that you’ve made some mistakes in the past and now you are doing everything you can to pay them off quickly. Kids don’t need to know all the details or to carry the burden of anxiety over family finances.

While kids should find borrowing money abhorrent, if it happens that you decide to make them a loan, require collateral. Make sure it is something as valuable as the amount they are borrowing and then take possession of it. The child should not have use of the collateral during the loan period in order to experience the full impact of debt.

Let’s say for example your young teen must borrow fifty dollars for some reason and offers his CD player as collateral. Physically remove the item from his room and keep it in yours. Write up a promissory note, along with the condition that if payment is not made as agreed, the CD player becomes yours to sell in order to recover the debt.

Share stories and articles you read that pertain to consumer and other types of debt.

Teach your kids what the Bible says about debt. Relate times that you’ve felt like a slave because of debts you incurred.

Make a chart of a debt-payment schedule that you feel comfortable sharing with your kids. If you have a mortgage, this might make a good visual. Post the payment schedule on the refrigerator showing how much of the payment each month goes toward interest, and how many more payments will be required to pay it in full. You’ll be shocked, as will your kids!

The least kids need to know about debt:

1. Unsecured debt is the dangerous, killer type of debt because if you have trouble making the payments you don’t have a remedy.
2. Secured debts are safer debts because the value of the collateral provides security for both the borrower and the lender.
3. Never borrow money for something that will lose its value quickly or be used up in less than three years.
4. It is always best to avoid debt, but if you cannot, in the case of buying a house or a car, make sure the debt is secured and that you pay it off as quickly as possible.
5. Debt-free is a wonderful way to live. You can live on a lot less money if you have no debts and you have a lot more options.

Consumerism

It’s a fine line we walk when it comes to teaching our kids to be smart consumers. On the one hand we do not want to glorify shopping and overconsumption, but on the other we need to teach skills such as getting the best value for the best price and knowing how to make a return. A lot of this kind of teaching can happen at home—prior to the shopping trip and away from the influence of the mall environment. The fact that your kids will be spending their own money before they are too old will help them become savvy consumers. Kids are far less anxious to let go of their own money. When they do only to end up with a junky toy or other disappointing purchase, a valuable lesson is in consumerism is learned.

You want to teach your kids how to match quality with need (don’t spend a lot for a trendy item that will be here today and gone tomorrow), to keep receipts in case an adjustment needs to be made, to shop for the best value, to anticipate sales and to shop out of season.

Teaching your kids about consumerism

It takes two groups of people to make stores work: manufacturers who make things and consumers who buy what they make. Whenever you spend your money to buy something you become a consumer. Some people become out-of-control consumers because they buy more than they need.

Responsible consumers are careful to find the best value for things they truly need or will use. Otherwise they are simply wasting their money. Let’s say you have save enough money to buy a bike.

Responsible consumers comparison shop. They check around in different stores to find the best price for the items they need. You go to three different bike stores and write down the three different prices. You compare features and guarantees. Careful consumers don’t make decisions quickly. They take time to think so they make the best choice. Sometimes the cheapest choice is not the best choice. If you are shopping for something that needs to last a short time (like a swimming suit—you’re going to grow before next summer) you should probably look for the cheapest price. This is called matching quality with need. On the other hand, if something needs to last a long time (like an appliance), it would be silly to buy the cheapest one if that means it won’t be reliable. Paying a little bit more to get something that will last would be a much better choice. A wise consumer does research to find out which products are recommended by experts.

As a consumer you should expect satisfaction. That means if you buy something and it doesn’t work or doesn’t fit right, you can take it back for an exchange or a refund. Smart consumers are polite and courteous. Always treat store employees the way you would like them to treat you.

Excerpted from Debt Proof Your Kids, Chapter 11: "Build Financial Intelligence" by Mary Hunt. Used by permission of Broadman Holman Publishers. For further information see http://www.cheapskatemonthly.com.

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