September-October 2009 Selected Content
Teaching Money Smarts and Financial Responsibility - Carron Armstrong
As I write this, the country continues to grapple with economic woes, mounting unemployment and a partial collapse of the financial services industry. Congress's multi-billion dollar bailout, necessitated by risky investments and riskier decisions by Wall Street gurus, was precipitated in part by uneducated consumers taking on more than they could handle. In other words, a lack of financial literacy.
Financial literacy? Probably not something at the top of your curriculum shopping list. But, as record foreclosures strike every segment of the American population and consumer prices skyrocket, the need to teach our children effective consumer smarts becomes imperative. Yet, even public schools have been reluctant to tackle such "real world" issues. The need for financial literacy is more vital than it has ever been. Consider these statistics:
• In 2005, the nation's teen population was expected to spend more than $159 billion, according to surveys conducted by Teen Research Unlimited.
• According to the Jump$tart Coalition for Personal Financial Literacy, a third of high school seniors reported having a credit card of their own or one co-signed by a parent.
• 30% of teens have checking accounts, many with ATM or debit card privileges.
• In 2004, Creditcards.com reported that 76 percent of undergraduates had at least one credit card and 32 percent had four or more. The average outstanding balance for these card holders was $2,169. The average graduate student had six credit cards with one out of seven of them having more than $15,000 in credit card debt.
• It would take a student making minimum payments (4%) almost 10 years and $1,217.07 in interest to pay off that $2,169 average with an 18% annual rate.
• The number of 18- to 24-year-olds declaring bankruptcy has increased 96 percent in 10 years, says the Credit Abuse Resistance Education Program.
The result? Students who can ace calculus or make a 720 on the Math SAT, but can't balance a checkbook or don't know what APR means.
For most of us growing up, the only financial education we received from our parents came in the form of one oft-repeated comment: "Money doesn't grow on trees." Other than that, we received no financial education until we were faced with how to spend the first paycheck from that first summer job.
I'm a lawyer who focuses on bankruptcy and consumer issues. When I began to represent individuals in bankruptcy cases, I was surprised at the number of young people coming through the doors. These were people, hardly out of college, struggling to pay car loans, furniture loans and credit cards that had often been opened when they were still in college. You might remember seeing the vendors lined up in the Student Union with signs offering LOW INTRODUCTORY RATE and GUARANTEED ACCEPTANCE FOR FULL TIME STUDENTS.
Mind you, the incoming students were 18 years old. Did these kids know how to handle a credit card? And what are they charging on those accounts? Consumables like pizza, iPods and purple passion nail polish, as well as big ticket items like spring break trips and auto accessories. They don't realize how quickly small charges can mount up or that they will be paying off that ski trip years after the photos have been forgotten.
"Ten percent of college students will drop out of school because of credit debt," notes U.S. Bankruptcy Judge John C. Ninfo II. "The bottom line is that kids today are not getting [financial education] at home or at school to the extent that they need to be. Sixty-eight percent of high school and college students say they've never had a meaningful conversation with their parents about personal finances." To combat that lack of financial literacy, in 2002 Judge Ninfo launched Credit Abuse Resistance Education, a program directed at high school juniors and seniors.
I've heard some of my homeschooling friends say, "That's not true in our house. We haul the kids to the grocery store. They're with us as we shop for cars, maybe even when we pay our bills. We talk about money all the time." Fabulous! I would venture to guess that many homeschooled students are quite knowledgeable about money. Then again, maybe not. Recently, at the beginning of a homeschool co-op class I teach on consumer law issues, I gave my middle and high school students a survey to determine their financial literacy. The average score was 44%. My survey was based on a similar one offered to high school seniors across the country by the Jump$tart Coalition for Financial Literacy. In 2006 those seniors averaged a score of 53%.
You exhaustively researched math curricula, phonics programs, foreign language courses and science lab materials. But will your child be ready when bombarded by credit card offers when he reaches 18? Does she understand the consequences of taking out $40,000 in student loans? In this issue of HEM, we talk about some tips and materials that will help you in guiding your younger children on the road to financial responsibility. In Part 2, which will appear in the Nov/Dec issue, we will concentrate on resources for older children and teens.
For The Young Child:
Using Allowances Wisely
For many families, the weekly allowance is the primary teaching tool for financial awareness. When to begin and how much to give can become an issue for some parents. Is age five too early? Is $5 too much? What if my son wants to spend all his money on candy or Pokemon cards? Do we force him to set aside savings? Do we tie the allowance to chores, or is it "free" money?
Of course, there is no "right" answer. There are as many opinions on the issue as there are parents. To make the most effective use of this tool, I suggest that parents consider some factors before they dive in.
Identify your money values
What is your goal in providing an allowance? Do you just want to turn off the "gimmes," or do you have values that you'd like to share, such as saving for the future or sharing your resources with others, proper budgeting, the difference between wants and needs, or that we all have to work for our keep?
Defining your values and answering these questions will help you determine what you will expect of the child in return for the paycheck you'll provide each month. It will also help you articulate your values to your child so he will understand what's expected.
The right time to start
Does your child understand that money is used for purchasing items and services? Would you be surprised to learn that most children understand by age three that bills and coins are exchanged for goods?
If saving money or providing for charity is an important goal, age three may be little young. At this age, children are still very concrete thinkers and have a hard time connecting with anything they can't see or touch. So, don't be concerned if money just burns a hole in your daughter's pocket. That's what it's for. The way a child learns power over money is to let her exercise it.
By the time a child reaches six or seven, he has a much better grasp of what happens to the money he doesn't spend. He may not like the idea of putting away for a rainy day, but he can imagine a time when it would be nice to have a pool of savings from which he can draw to buy something more expensive than his weekly allowance. He can also appreciate what happens to money he may put in the collection plate or donation jar, especially if you make it real for him by visiting the charity or volunteering time, too.
What items or expenses the allowance will cover
Some families expect from early on that a child's allowance will pay for sundries, like candy, sodas and CDs. In other families, the children are expected to pay for their clothing, social activities and even skating or music lessons.
This is also the stage at which you will want to decide whether it's a good idea to have your child save a portion of his allowance and/or give some to charity.
We never had hard and fast rules about what we expected our children to use their allowances to purchase. We let our children use their money as they saw fit, but we covered their needs, physical and social, and anything having to do with education. Outside of Christmas and birthday gifts (and an occasional surprise), we made it clear that our children were to use their money for many of their wants.
Our son was about five when we started giving him an allowance. It took years for him to grow beyond the desire to visit the candy store or the game store on payday. It took a lot of effort for me to bite my tongue on these trips. Then, one day, magic happened. When his father and I declined to buy him a game console when he already owned a perfectly good one, he chose to begin saving his money. That $100 console was probably the best $100 he ever spent. Not only did he choose to purchase an item with a shelf life (perhaps not a long shelf life, but at least he had something to show for his hard work), he demonstrated his maturity by delaying his gratification.
Now that you've begun to define your values and how you want your child to use her money, it's time to pick an amount. How much your child will receive depends on your values and your resources. Many parents look to surveys or rules of thumb, like $.50 or $1 for every year of age. That usually works well for a younger child who will be buying incidentals like candy or toys. For an older child, it might be more productive to base the allowance on how much you expect your child to spend for the items you considered in the previous question.
Start by listing what you would ordinarily spend on him for the items you want to include in the allowance. It might look something like this:
Clothing: $50 a month
Athletic equipment: $100 twice a year
Snacks and sodas: $10 a week
CDs, other entertainment: $15 a week
Add to those any savings or charitable giving, plus a fudge factor for unexpected items. Divide by the number of paydays, and you have your amount.
A parent might also base the amount of the allowance on chores or other work accomplished. Although it's a popular approach, many experts in the field of child development believe that it undermines the sense of community parents inherently want to foster in their children. After all, these experts agree, Mom and Dad may work outside the home for pay, but the chores they accomplish at home are for the benefit of the family and are unpaid. Therefore, the children should learn early that their contributions, although not monetarily compensated, are valuable nonetheless.
If you decide that your children's allowances will be tied to the types or effort they put into household chores, be prepared to negotiate - perhaps every time you ask Davie or Sally to take out the trash or wash the dishes. It might go something like this: "Mom, there are twice as many dishes tonight as there were last night. I think I should receive more that $1." Of course, you might also find yourself doing all the chores when Davie and Sally decide that they'd rather give up the allowance than sweep the floor.
If you're looking for more guidance on the issue of allowances, I suggest you check out Making Allowances: A Dollars and Sense Guide to Teaching Kids About Money by Paul Lermitte (McGraw-Hill 2002).
Another interesting resource for parents teaching their children to manage allowances is the KidsWealth Money Kit (www.kidsweathmoneykit.com), a curriculum/activity kit that can be customized for children ages 4-12 by selection of an age-appropriate workbook to accompany your order. The kit retails from the website at $39.95 plus shipping and handling.
A website worth a look is www.activeallowance.com. Geared toward families of children ages 6 to 15, Active Allowance provides tools for managing not only a child's allowance, but also her chores (or responsibilities, as they're called on the site). The site provides suggestions for chore lists and for allowance accounts (recreation, savings, etc.), and offers guidance on setting appropriate amounts. After the accounts are set up, the site works like an online bank. The child can add to her accounts by fulfilling responsibilities, or the parents can "deposit" a periodic allowance. If you're inclined to tie the amount of a child's allowance to chores, you can do that on the site, or you can keep those separate. When the child wants to withdraw money from one of the accounts, she can print off a non-negotiable "check" from the site to give to her parents, which reduces the balance.
Although the site offers some basic elements to visitors and a basic membership with reduced access, the full membership is $19.95 per year and covers the entire family. Monthly and three-year memberships are also available.
Other Resources for Children
The Allowance Game ® provides a great way to teach young people about earning and saving money, as well as wisely making special purchases. Game cards indicate a task like mowing lawns and cleaning the garage. Choices are made, as in real life, whether to spend money on ice cream or put it into savings. Allowance, published by Remedia Publications, is designed for 2 - 6 players, costs about $20.
According to Parker Brothers, the creator of Payday ® , "Household finances have never been so much fun!" I know some kids who would agree. The board is a month-long calendar where something happens every day, just like in real life. Buy groceries, fix the car, start a business, pay bills, take out a loan, and more. You might even hit the lottery. The 30th Anniversary Edition is published by Winning Moves Games, for 2 - 4 Players, Ages 8 and up and retails for about $16.00.
Cashflow for Kids ® is a board game in the same franchise that brought us Rich Dad, Poor Dad. Retailing for about $39.95 (with a computer version for $29.95), it teaches fundamentals of finance and money management. It's an updated and real world alternative to Monopoly ® that goes beyond how to split up an allowance. The goal of the game is to escape the rat race through investing assets and creating passive income. These are pretty advanced concepts for the younger elementary school set, but older kids might enjoy this. Cashflow for Kids is available at www.richdadpoordad.com.
Speaking of games, as a younger video game player, one my son's favorites was Runescape ® . This is a massive multi-player game played over the Internet. It is set in a middle-ages/middle-Earth venue of the type popular in fantasy game playing. Runescape allows players to take on roles, travel from place to place, and initiate adventures. For our purposes, Runescape wasn't just a fun role-playing game, it was a consumer education tool.
How does it work to teach children money smarts? Runescape, like many online role-playing games, has its own economy. Players take on roles that earn them money, like fisherman or blacksmith. They use that money to purchase tools, weapons, and even houses. At age 12, my son was earning a living and making choices about his spending, for better or worse. Of course, if he wasted his money on some trinket which got him nowhere and left him destitute later, nothing was lost, but he learned that he can have more fun, and doesn't have to work as hard, if he makes wise spending decisions and lives within his means.
Runescape is a subscription based service that costs $5.95 per month. There is a no-cost option for those who would like to check out the action, but it has limited options. No personal information is necessary for the free option except for a username and password.
Editor's Note: The second part of Teaching Money Smarts and Financial Responsibility will concentrate on resources for older children and teens and will appear in the Nov-Dec/09 issue of HEM.
© 2009, Carron Armstrong