The Five Rules of Money for Children

Teaching young people these essential concepts now can help them make smarter financial choices as they grow up

by Karyn McCormack

It's never too early to start teaching your kids about money. Toddlers can be introduced to the value of money using toy piggy banks and cash registers, while older kids can learn to manage cash and pretend to be real estate moguls by playing Monopoly. To get a taste of trading stocks and mutual funds, there are online games and contests, as well as investment clubs. And more importantly, high schools and colleges around the country are now offering personal finance courses, with some making the class a requirement before graduation (see BusinessWeek.com, 3/7/07, "Finance Courses Get Personal").

The first step for parents, say financial planners, is to start talking about money matters at home. "Having conversations about money at a young age lays a good foundation," says Phyllis Silverman, vice-president and senior trust advisor at PNC Financial Services (PNC) in Pittsburgh. "That's going to create the attitudes and lay the foundation for their future actions."

One planner, Charles Massimo, president and founder of CJM Fiscal Management in Garden City, N.Y., says he has hired a psychologist to establish a proper way for his wealthy clients to communicate with their kids, because many parents worry the knowledge of their wealth will create complacency. "They worry their kids will be lazy and not motivated if they know they'll have money coming their way," he says.

This week's Five for the Money offers some golden rules about money to pass along to your children. With the right lessons and planning, your kids, as they grow older, may be able to avoid money traps like getting deep in debt from those alluring but deceptive credit card offers—and embrace sound strategies as they save for big purchases such as graduate school, car, and a home.

1. A penny saved is a penny earned.

Parents can start teaching kids about earning money as early as elementary school, Silverman says. Set a weekly or monthly allowance for chores done around the house, and offer extra for helping neighbors and performing other tasks. "Allowance should not be seen as an entitlement; it should teach responsibility," Silverman says.

Then show your kids how to split their earnings into four money jars: for saving, spending, giving, and taxes. While younger children may not necessarily owe Uncle Sam a portion of their earnings, an awareness of taxes can be useful. "As they get older and get into the workforce, they'll find that what they earn and take home are two different things," she says of the importance of setting aside tax funds.

2. Stick to the budget.

Show your kids your monthly bills such as car payments, mortgage, and utilities, says Robert Wasilewski, a financial advisor at Baltimore Washington Financial Advisors in Columbia, Md. This will not only teach them about your family's cost of living, but also get them involved in the process. "Teaching people about money is a lot like poker," he says. "No one will play until their money is in the pot."

Make a list of wants vs. needs with your kids. When it comes to spending, parents need to ask why their kid needs something—or if they just want it, Silverman says. "It's a conversation about values," Silverman explains. Granted, this list will change as teenagers start driving and working part-time, and have busier social lives. They need to learn how to budget their monthly earnings to cover expenses.

3. Learn the power of interest.

Take your child to a bank and open an account that earns interest. Let the child decide how much to put in and let him or her calculate the interest the account is earning over time, Wasilewski says.

Or, rather than hand kids cash to spend each week, parents can put a set amount in the bank account. In a survey done in January, 2007, PNC found that 63% of parents set up a banking or investment account, but only about 21% of teens put money into the account or make investments.