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Smart money: 7 ways to raise a financially literate child

With schools focused on core subjects, there isn't a lot of room for teaching financial literacy. If you want your child to be smart about money, it's up to you.

By Marian Wilde

The need for children to receive a basic education in money matters is all too apparent now that the nation is facing what some experts are calling the most serious economic meltdown since the Great Depression. Not only do students need to understand how the economy works, but - because our current situation came about in large part when many adults did not fully understand how their home loans would work over time and if they could afford them - young people today need to learn the basics of personal finance.

American citizens are exhibiting other signs of financial disarray, as well. According to the National Association of State Boards of Education (NASBE) Commission on Financial and Investor Literary, "American consumers now owe about $1.7 trillion in credit card and other debt, an amount roughly equal to the gross national products of Great Britain and Russia combined."

As credit card debt increases, savings rates fall. In 2005, the personal savings rate crossed into negative territory for the first time since the Great Depression. Western Europe, on the other hand, has a savings rate of 14 percent.

Fortunately, the drive to teach financial literacy in schools is gathering steam. Highlights of a survey of states, published in 2007 by the National Council on Economic Education (NCEE), showed that:

  • Economics is now included in the educational standards of all states (up from only 38 states in 1998)
  • Seventeen states require students to take an economics course as a high school graduation requirement (up from 13 states in 1998)
  • Personal finance is now part of the educational standards in 40 states (up from 21 states in 1998)
  • Seven states require students to take a personal finance course as a high school graduation requirement (up from one state in 1998)

Teaching children financial literacy has a positive impact on their later life. According to a 2006 report from NASBE, "Individuals graduating from high schools in states that mandate personal finance education courses have higher savings rates and net worth as a percentage of earnings than those who graduate from schools in states without such a mandate."

However, the vast majority of schools today emphasize reading, writing, math and science in preparation for standardized tests, and that means there isn't a lot of time left over for other subjects. If parents truly want their child to become financially literate, it's up to them.

Eileen and Jon Gallo, authors of The Financially Intelligent Parent: 8 Steps to Raising Successful, Generous, Responsible Children, identify eight steps that parents can take to provide a basic foundation in money skills for their children.

GreatSchools asked the Gallos to describe these seven steps for our readers.

Step 1: Encourage a work ethic.

Eileen: We think that it's really important for children to develop a work ethic. That involves helping kids to focus on schoolwork and to contribute by doing family chores. Extracurricular activities are also very important - if the child is not over-scheduled - because kids learn how to work with others as a team. Also, part-time jobs are appropriate, if the kids are old enough.

Jon: There's a fascinating study out of Harvard which studied adult mental health. It studied not what makes people mentally ill, but what makes people mentally healthy. One of the findings was that the single biggest predictor of adult mental health was the ability to develop a capacity to work between the ages of 6 and 12. What Harvard calls a capacity to work is what we call a work ethic, namely the ability to be able to feel that what you're doing is important, that you're responsible for what you've accomplished and what you've failed to accomplish. So by helping our kids develop a work ethic between the ages of 6 and 12, we're really helping them to be better prepared for life. Our eight points are really designed to help our kids to grow up to be responsible, self-sufficient and happy adults.

Step 2: Get your money stories straight.

Jon: What we mean is to understand your own relationship with money. As parents we're teaching our kids about money all the time by the way we deal with money. It's really important that we as parents understand what money means to us psychologically and emotionally. Is money something that scares us so we try to avoid dealing with it? Is money a scorecard for us? We recommend that parents actually sit down and figure that out.

In some cases what money means to you is something that you don't want it to mean to your kids. If you grew up in a family in which your parents went through bankruptcy two or three times, or one of the parents was a compulsive gambler and they lost the house, then money can be a topic that is filled with frightening emotions. If that's what money means to you, you won't want to convey those emotions to your kids.

Step 3: Facilitate financial reflection.

Eileen: If you give a child an allowance you're giving him the opportunity to reflect and to think about the consequences after spending the money. "Am I happy with what I bought? Now I don't have enough money to buy this other thing. Maybe I should have done something differently." It gives them practice in making decisions and making choices, and in really experiencing consequences.

Jon: We make the comment in the book that children are naturally impulsive. Kids often do things without thinking about the alternatives. "Could I have done something else and what would have been the consequences if I did?" Our point of facilitating financial reflection is to help kids to learn to think in terms of choices, alternatives and consequences. That's something that you can start doing when they're quite young, like 3 or 4 years old. It's a skill that is helpful to them their entire lifetime. You can use an allowance to help kids learn to think in terms of choice.

Eileen: Parents need to answer questions that kids ask. "Are we rich? How much did this house cost?"

Jon: "Why can't I spend my allowance on anything I want? Why don't we take vacations to Europe every year? Why don't we buy a new car every year?" Kids ask questions about money and parents should be able to answer them.

Eileen: And have discussions. Ask the kids questions. Find out why the kids want to know this. Explore why they're asking this question right now.

Step 4: Become a charitable family.

Eileen: That's so that kids begin to understand that there are other uses for money besides just buying things for yourself. I think it's really important to do it as a family. Children need to have charity become concrete so that they can experience it.

Step 5: Teach financial literacy.

Jon: That's everything from giving them an allowance to introducing them to savings and checking accounts to introducing them to plastic. [The Gallos recommend introducing teens to credit cards. As they say in their book: "We make this recommendation not because credit cards are wonderful but because they are everywhere, and we can no more ignore our child's need for credit card education than we can ignore his need for sex education."]

Step 6: Be aware of the values you model.

Eileen: Eighty to ninety percent of all communication is nonverbal. Do you as a parent spend a lot of money? Do you have to have the latest thing? Just be aware, very conscious of your behavior. How you spend your money is based on values. Do you spend a tremendous amount of money on clothes? Do you have to have a new car every year? Do you save for charity? Do you invest? All of those things are values.

Step 7: Moderate your extreme money tendencies.

Jon: In the book we talk about one mother who would go shopping with the kids. She'd grab a handful of credit cards, give one to the clerk and say "Let's see if the credit card gods are smiling on me." She'd never know whether she'd maxed out her credit cards or not!

Eileen: The other extreme is people who are so frugal that it compromises how they live their lives. If you're overly frugal, kids grow up feeling deprived.


Comments from GreatSchools.org readers

10/21/2008:
"Hi, I really enjoyed your article. I do disagree with you on allowance tied to chores. I agree that children need to learn to contribute freely to the house for the privlege of being part of our family. To me these contributions are: Cleaning their rooms Cleaning up after themselves in the kitchen, bathroom etc Following the rules: ie no eating in the bedrooms Putting their games/toys away in a neat and orderly fashion Being respectful of one another But I do feel there are chores above and beyond the ordinary contributions that merit allowance. Examples would be: Doing the house hold laundry Picking up the dog waste Emptying the dishwasher and setting the table I view these chores as items they do for every one, not just themselves. So we assign each child a chore and they get payment IF they do the chores. I strongly feel that work should be tied into pay. This has been very successful for me as I have witheld pay for chores not done. I have even witheld pay even if they did they did the chores but I had to prompt them first. What I feel I am demonstrating is the real world. I pay if they work. I don't pay if they don't work. One son called me on it the other day. I was late on my Sunday scheduled payment and he said, 'you know mom, I didn't pick up the dog poop this week'. I said, 'why?' He said, 'you didn't pay me last week and when you pay me I'll work'. Works both ways....I PAID HIM! http://www.creditmomblog.com/kids-and-money/kids-allowance-8-tips-on-paying-for-chores.html "
10/13/2008:
"I really liked the topic of this article. It had some really terrific ideas for parents and 'food for thought'. Thanks"
10/9/2008:
"I found the article interesting. Another good thing that we do is listen to Dave Ramsey on the radio. He is on 640am from 3-6pm during the week and we listen to him on our way home from school. He also has a web site under his name. Clark Howard is also a good source of information and has written books about kids and finance. I just want them to be aware of how detrimental spending more than you make can be and how it can ruin your life. Too many scary stories about kids opening credit card accounts in college and maxing out on them without being able to pay the credit card company, which have caused some kids to stress out so much, they commit suicide. "
10/9/2008:
"I totally agree with the points offered to parents in this article. I lived my childhood life being raised by an entrepreneural mom, who taught us early that being poor just means working harder to break the cycle of poverty. My mother worked many kinds of jobs to help sustain her family. And while young yet, she started her own business which she then taught us to embrace. What followed was not only some prosperity to be able to afford some material things that our neighbors could not afford, but most importantly, was the lesson about valuing money and being giving and honest. At 51 y.o., I would consider myself pretty average and was on my way to financial success and independence, until almost 2 years ago. One of the most traumatic thing happened to me when my wife and mother of the three youngest of my children filed for divorce (I am yet to see the cause), lied in order to have me arrested in front of my children and had me put out of my house and branded an abusive husband! i am today still in shock, that I am unable to stay focus and get up each day with the same enthusiasm I had prior. I always tried to give my family and especially the children structure and good values, instead of just taking them out shopping every payday, as my ex-wife would often do, after ignoring them (and me) the rest of the time. She would use buying them expensive clothes and games to make up for her refusal to engage herself in their studies, extra-curricular activiities or even showing them how to pick up after themselves. I'll skip all of the middle to make a simple point. Even though I am now on the brink of filing bankkruptcy, I had started a small business, right here in Brooklyn, with an eye on a early retirement to spend more quality time with the family. My kids enjoy being in the store, watching and learning and even at times eagerly participated in providing customers with assistance. My 13 y.o can almost operate this business on her own due to her early participation and willingness to learn about the value of money. She's caused me to lose my cell phone service of over 12 years, though! The point is that my ex-wife had the idiocity to complaint to the court that my kids are at my business during parts of their visits with me. The court sided with her and the judge went so far as to admonish and warned me against taking my kids around my business (source of sustenance!) while they're visiting with me! In other words, a court can now oder a parent not to engage his/her child in the art of learning how to manage money or becoming interested in the mechanics of learning something about business from an early age! This is lunacy. I am still in a daze. Thank youa again. "
10/9/2008:
"I was enjoying this article very much, and thinking I would send it along to others until I got to Step 5. The intent is a bit unclear, by saying “introducing them to plastic�. I am all for educating my children on what a credit card is and why they should never need one. People reading this article may conclude from Step 5 that credit cards, though not the greatest things, are necessary. That is simply untrue, and a truly financially educated child will understand why. I am also confused on how Jon and Eileen teach a child a proper work ethic, which they place as #1, when they don’t pay their children for work accomplished. To have a child understand how money works we’re just going to give them some of it because they’re breathing?!?! That doesn’t happen in the real world. A person must do work to earn money. There can be plenty that is expected chore wise from a child that isn’t tied to money, but other chores should reflect the amount they earn each week. Giving a child money, just because that’s how much you’ve been spending frivolously on them, teaches them they deserve money because they are your child. This will lead to an adult who doesn’t comprehend why things just aren’t given to them. I would encourage Great Schools to look into more sound financial counsel, such as best selling author, Dave Ramsey. DaveRamsey.com Thank you, Vanessa"
10/9/2008:
"Very good suggestions. I'll make sure I share them with my daughters. Thank you."
10/8/2008:
"Fantastic! This article is as educational for kids as for parents! I emailed it to my kids (adults) hoping that they would learn something useful and convey that knowledge to their kids! Thank you!"
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