Household finance spreadsheet

For many moms and dads, teaching financial literacy can feel like one of parenthood's greatest challenges. Unless you have a financial background, it's only natural to feel that you don't know enough about the topic.

Relax. The truth is, if you're able to stay on top of your bills and you keep reasonably good track of how much money you have in the bank, you have all the knowledge necessary.

"You don't need a Ph.D. to teach kids about money--there are plenty of resources out there to help you along," says Jayne A. Pearl, author of Kids and Money, Giving Them the Savvy to Succeed Financially. "It's about preparing for life, being financially independent and responsible. Parents need to model and demonstrate good spending habits."

Unfortunately, too many children aren't getting that parental guidance. A nationwide survey on the financial knowledge of 12th graders revealed that, on average, participants answered only half of the questions correctly on a variety of personal finance topics, according to the Jump$tart coalition for Personal Financial Literacy, which conducted the survey. The fallout from this financial ignorance can be a real problem as kids get older.

"In 2001, more than 120,000 young people under the age of 25 filed for bankruptcy. Today kids can graduate from high school and not know how to make change. Why? Because we never taught them. So why are we surprised when our kids get into financial trouble?" asks Neale S. Godfrey, chair of the Children's Financial Network, Inc. If children don't learn solid money skills at home or at school, then they are on the path to a lifetime of financial instability, Godfrey says.

One the easiest ways to avoid this slippery slope is to create a home environment where money is a common topic of family conversation.

"Talk about it as much as possible," says Dara Duguay, executive director of the Jump$tart Coalition. "Talk out loud when you are doing money transactions. Calculate in public and see if your children can help you. Make them part of the bill-paying process."

MAKING ALLOWANCES

Most experts agree that kids should have regular, uncompensated responsibilities in the home, simply by virtue of being "citizens of the household." But if kids are going to learn to manage money, they will need some source of income. Often as not, parents are that source, whether it's just to give kids pocket money or as payment for household jobs above and beyond the normal range of duties.

Obviously, the amount you give your child will depend on his age and level of maturity. But even young children will benefit from knowing what things cost. So, as a first step to figuring out how much money to put your child in charge of, make a list of child-related expenses over a period of one month. Include such personal items as clothing, school supplies, activities, and treats. Don't worry about calculating to the penny; just try to come up with a reasonable monthly estimate.

Once you've got a list together, categorize each item as discretionary or nondiscretionary. Candy would be a discretionary item while school lunches are nondiscretionary, for example. Finally, add another 20 percent to 25 percent for savings, charitable giving, and emergencies, and then divide the total by four to determine the weekly amount.

Your child's age will determine how much of this amount they are actually responsible for. If you have younger children, you'll want to start by only giving them discretionary funds, just to get them used to the idea of handling and spending money. Make sure they understand that once it's spent, it's spent, and that there are no advances against next week's amount. As they get older or demonstrate a greater ability to handle money, you can turn over more of the nondiscretionary money. By the time they reach high school, they should be able to handle their total budget.

BUDGETING BASICS

"Spending money should be a conscious, deliberate, well-thought out action," says Godfrey. "Advance planning helps prevent impulse purchases."

Godfrey suggests following the 'MESS' system:

* Make a list.

* Evaluate what are necessities.

* Shop the ads.

* Stick to the agenda.

To develop a workable budget with your child, have her divide the total amount of the allowance into three categories: spending, savings, and giving. Then have her list the items for which she is now financially responsible. This will eliminate any confusion (or arguments) about who pays for what and places a limit on the amount of discretionary spending. You can also encourage her to keep track of where her allowance goes by using a blank check register or a spreadsheet program. (Kids' budgeting software can be found by clicking on such Web sites as www.kidsandmoney.com/familybank.htm.)

Pearl suggests that you have your child develop the habit of saving by first putting away money for a short-term goal (such as a toy) and then move on to bigger goals that take longer to save for. You might also offer to pay a nominal "interest" on the savings as long as the money is left untouched.

MONEY WITH MEANING

Finally, children need to learn early that part of their financial obligation includes making donations to causes and charities, or religious organizations that interest or affect them.

Discuss with your child where the money should go: Help them understand that there is an organization or initiative related to just about every interest they have. For example, if they love animals, they should see about donating to the local American Society for the Prevention of Cruelty to Animals chapter (www.aspca.org). Do they collect comic books? There's even a Comic Book Legal Defense Fund that accepts donations (www.cbldf.org). Using Web search engines, such as google.com, and entering terms like "charities" or "donations" along with their interest or hobby should yield plenty of results. Or find an organization supporting their cause or interest through philanthropic-focused Web sites, such as the Better Business Bureau (www.bbb.com) and Volunteer Match (www.volunteermatch.org), which will make your child feel a connection to the recipient organization and a sense that he can actually do something about issues that are important to him.

In the end, says Pearl, there are five key values children need to learn if they are going to become fiscally responsible adults:

1. Develop a healthy skepticism with regards to advertisements.

2. Learn to make trade-offs.

3. Be able to tell themselves "no."

4. Distinguish between "wants" and "needs."

5. Tolerate delayed gratification.

Once they've mastered these values, Pearl says, kids are well on their way to a lifetime of financial independence, which is perhaps the greatest inheritance parents could ever leave them.

AGE-APPROPRIATE FAMILY ACTIVITIES

PRE-K Trace and label the outline of a penny, nickel, dime, quarter, and half-dollar on paper. Using a pile of coins, have your child match the coin to the correct outline, and then teach her the name of each coin. Make a chart that displays the value of each coin and some simple calculations: five pennies equals one nickel, two nickels equals one dime, and so on. Using the same group of coins, help your child make a pile of pennies to equal a nickel, nickels to equal a dime, and so on.

AGES 5-8 Teach your child how to make change. Set up a mock cash drawer, put together a few items marked with prices, and then, using real money, take turns with your child being the shopper and the cashier. (Check out Summit Products, Inc., at www.summittoy.com for a line of kid-oriented financial toys.) You can also teach them the basics of using an automated teller machine (ATM). The first lesson should be that money doesn't just magically come out of the ATM. At some point, you have to put money into it.

Discuss the variety of services offered by banks, and then take your child to the bank to open his savings account. (For a wealth of information about the banking process, check out the Federal Deposit Insurance Corporation's (FDIC) Web site at www.fdic.gov/about/learn/learning/index.html). Some banks have kids' clubs with newsletters and various incentives for making a deposit (you can always come up with your own treat or reward to offer the child after every deposit).

AGES 9-12 Have your child research different ways of saving money, from paying less for items because of Sales or coupons to reducing utility costs by being more energy efficient. Set up an incentive plan where you give her a percentage of the savings for each idea the family implements.

Together with your child, analyze different advertisements to listen for the "hidden message" (you'll be more popular or happier, for example). Talk about how marketing and advertising can influence our financial decisions.