Why Money Mistakes Matter
Resist the temptation to rescue your child
Let your kids find a hole and fall in it because there's no teacher like experience.
Allowing your children to make mistakes is the best way to teach them the smart use of money.
Pointing out the pitfalls to a spending decision and allowing your kids to fall – or jump in – is contrary to the thinking of most parents who want to protect their kids from obvious goofs. With encouragement from you and a little luck, learning from small financial mistakes now will prevent them from making big mistakes as an adult.
A $5 or $50 misstep as a kid or teenager may prevent a $500 or $5,000 mistake as a college student or a young adult.
The key: you can't bail the kid out. As difficult as it is for you, the child must live with the bad decision – even if it crimps other activities. This will lead to yowls, especially if friends are going to the movies and lack of cash means your kid stays home. But you've got to say: you decided to spend your money on other things and that means you don't have money for this activity.
Forcing your child to live with a decision will help the kid sort things out and make better choices in the future. Bailing the kid out kills the lesson and sends the wrong message: there are no consequences for bad choices.
Take the time to discuss the decision with your child before the purchase is completed. Ask questions. Discuss quality. Raise possible problems. Point out problems your child may have overlooked. Then stand back and let your child make the decision, even if it's a bad one.
If your child overspends on clothing, buys a cheap product that will wear out quickly or overpays for a heavily hyped item, that's OK because with your guidance, the kid will learn from the experience and the long-term lesson is more important than an error made now through inexperience.
Start the financial lessons early and peg them to the age of your child. Teach your child the differences in coins at age three or four. Most kids are ready for a piggy bank at about five. Think about opening a savings account at nine or 10 and consider giving your child a clothing allowance by age 12.
Remember: none of this is carved in granite and ages will vary depending on the maturity and interest of your child.
- Help your child set goals, but don't issue edicts from the mountaintop. Encourage your child to establish a budget. Make household expenses a lesson and remember that children learn from your example.
- Don't criticize your child for making mistakes. Give the kid room to roam and time to learn. Establish spending guidelines, but don't prohibit spending on video games, cheap jewelry or whatever your kid's passion of the hour might be.
- Never withhold the weekly allowance as punishment for poor grades, staying out late or other kid transgressions.
- Take the time to tell your child about the importance of saving and charity.
The Web sites of many brokerage firms offer solid financial tips, including T. Rowe Price (TROW), Merrill Lynch (MER), Goldman Sachs (GS) and Morgan Stanley (MS). Major banks also offer helpful information, including JP Morgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).
Finally, think back to your early efforts to learn about money and come up with a funny story that shows how you learned from your mistakes. This will reassure your child by underscoring a basic point: learning how to manage money comes from experience and isn't an adult secret.
Parents sometimes forget that they look supremely competent in everything to young children who can't imagine ever matching their skills. A funny story about a misstep with money when you were young will show that you weren't born with financial skills and you learned by making mistakes – just like your kids.
In short, you chose your hole carefully, and jumped in with both feet.
Get more Kids and Money tips here.
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