Crises help create a teachable moment

PERSONAL FINANCE

October 26, 2008|By EILEEN AMBROSE | EILEEN AMBROSE,eileen.ambrose@baltsun.com

Unemployment is rising. The stock market is setting all sorts of records - mostly bad. And the economy might be headed into a prolonged recession.

What better time to teach your children about finances and managing money?

I'm not suggesting you explain credit default swaps or option ARMs to tiny tykes. The financial world changes so fast that by the time children are old enough to invest on their own or buy a house, today's products will be out of date.

Instead, use this time to teach the basics, especially how to save. If one thing is clear in this confusing economic crisis today, it's that those who have a savings cushion are in a much better position to weather the storm than those who are overextended and have nothing to fall back on.

There is a lot of talk these days of requiring schools - which are already stretched - to teach personal finance to youngsters. It sounds good, but the evidence so far suggests that classes tend not to work.

"Unfortunately, the data is now showing that kids who have taken courses in high school for the most part have rarely retained the information they got," says Lewis Mandell, a finance professor at the University of Washington who has studied kids and finances for years. "They tend to treat courses on personal finance as a course in trigonometry. It's something that is endured and forgotten right after you have taken the final exam. How many of us remember anything about trigonometry?"

(Frankly, I can't recall whether I even took trigonometry.)

That leaves the job to Mom and Dad.

One way to establish sound financial habits is to be a good example. From the earliest ages, children learn by watching how you spend money and listening to your conversations about finances.

"The lessons may not be what they want their kids to learn," says Adele Brady Bolson, a certified public accountant in Bellevue, Wash. "If you shop to make yourself feel better, kids notice that."

Besides being a good role model, talk to your kids about money and how to make the right choices. You don't need a global financial crisis to get the discussion going. Everyday purchases can be a springboard for a conversation.

The earlier you start these talks the better, says Gregory Hall, a psychology professor at Bentley University in Massachusetts. Children are more likely to heed your advice if you have been talking to them about money all along rather than springing it on them when they're well into their teens, he says.

The key lesson for children is how to become a saver. Get children in the habit of always putting away a portion of every dollar they get, and they learn to live below their means.

Kids retain more of what they're told about finances if the lessons are interactive and fun, Mandell said. That's one reason why the Stock Market Game - where children buy and sell stocks in a make-believe portfolio - has managed to succeed where other financial lessons have failed, he says.

To make saving more active for children, take your child to your bank or credit union and open up a passbook savings account. Make it a regular routine to go with your child and deposit part of an allowance, birthday money or other earnings.

Yes, passbook savings accounts are old-fashioned. But these interest-bearing accounts have a lasting impact on kids.

When I interview financially savvy adults about how they became that way, they often recall opening up a savings account as a youngster and the thrill of watching their balances grow. Brian Rogers, chairman of T. Rowe Price Associates, still has the savings account his parents opened for him at age 6 - 47 years later.

You decide whether your children save half, one-third or 10 percent of their money. But be consistent.

And if you do give an allowance, tie it to chores, Mandell said. He does research for the Jump$tart Coalition for Personal Financial Literacy, which regularly tests teens' financial know-how. Students who receive money with no strings attached fare worse on the test than those who have to do chores or have a job, he says.

When children are in their teens, they can handle more complex concepts. This might also be the time to clue them in on what it takes to run the family household.

Cynthia Shore, an assistant dean in the University at Buffalo's business school, says she and her husband disclosed their finances to their children after their daughter couldn't understand why the parents sometimes would refuse to spend money even though both had good jobs

The teens were amazed by the family's gross income, and then "blown away" by how quickly it disappeared after taxes, saving for college and retirement and paying household expenses, Shore says.

Also, don't send your child to college without an understanding of how to use credit cards responsibly. Otherwise, credit card companies will prey on them like fresh meat.

Hall suggests opening up a low-credit-limit card with your child during the junior or senior year of high school. Teach your child under what circumstances to use a card. For example, use the card when you have money to pay the bill at the end of the month, for necessities such as school books and for emergencies, he says. Don't use it to buy something you want but can't afford.

If teens don't get this guidance, they will open up accounts when they hit campus. And it will be harder for you to have regular credit card discussions with them when they're away from home, Hall says.

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