Last week I made the point that when it comes to teaching children about money, parents should relax. Kids don't know anything about finances, so even small lessons can yield a big payoff. Here are the six money-management skills I think every child needs to master before leaving home:
1. How to handle a cash allowance. Nothing is better for teaching kids how to set priorities and make spending decisions than having to get along on five bucks a week. In exchange for the money, youngsters should take over certain financial responsibilities from you. For a 7-year-old, that could mean paying for trading cards or some other collectible; for a 16-year-old, it could mean managing a clothing allowance.
2. How to save for a goal. Nobody can be thrifty just because it's virtuous. Like adults, kids need an incentive not to spend, whether it's saving up to buy an action figure or an iPod. Consider matching all or part of what they put aside.
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3. How to compare prices. Start with unit prices at the grocery store and build up to Abercrombie versus Old Navy (which will help teens parcel out their clothing allowance).
4. How to manage a checking account (and an ATM or debit card). Every teenager should have an account and know how to balance it -- preferably as soon as he gets a part-time job. (Co-sign or open a custodial account if your child is under 18 and the bank requires an adult signature.)
5. How to appreciate the magic of compound interest. Small amounts saved when you're young will eventually grow into big piles of money. To show kids how rich they can be, let them plug numbers into a compounding calculator, such as Kiplinger.com's How Much Will My Savings be Worth? calculator or the Saving Rocks page at OrangeKids.com.
6. How to get out of debt (or not). Use this eye-opening example to illustrate the pitfalls of credit: Say you owe $2,000 on a credit card that charges 18% interest. If you pay $50 a month, it will take you 62 months to pay off the balance and cost you more than $1,000 in interest. If you don't pay more than $30 a month, you'll never be out of debt (use our What Will it Take to Pay off My Balance? calculator to try out different number combinations).
And there's one more thing kids need to know about money that only Mom and Dad can teach: They won't get everything they ask for.
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