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Raise Kids Who are Smart about Money

Most people are not born with a natural ability to make smart financial decisions. As a species we are not designed to think about the long-term consequences of our actions, and the allure of the short-term can be powerful. That is why becoming smart with money takes plenty of training along with a decent amount of self-discipline.

Although most of us recognize the importance of making smart financial decisions, it is clear that too many of today’s young people are not getting the parental guidance they need. All you have to do to grasp the seriousness of this is look at the ballooning figures pertaining to student debt and student loan defaults. Granted, much of this difficulty has to do with rising tuition costs and a bad economy, but young people nevertheless must live with their financial decisions, and making the wrong choices with money can have devastating lifelong consequences.

Early training
Let us start at the beginning, so that your child will be well-prepared for the difficult choices before he or she reaches the college years. Children should be taught the fundamentals of money from an early age. Of course, we do not want them to have to worry about money or have it add an unnecessary complication to their lives, but it is a good idea to give them a chance to learn to manage money early on.

The best and most obvious way to do this is to give the child allowance. The money cannot be for nothing, however, as this would send an unproductive message. Allowance should rather be tied to accomplishments that require actual effort. These can be household chores, school performance, or good behavior.

One popular approach that many parents find works well is to give the child the opportunity to earn the money he or she would need to buy the things that many parents give for nothing. Keep birthday and holiday presents minimal, but give your child a fairly generous allowance (tied to accomplishments) and encourage him or her to save money for coveted toys and other items. The earlier you can instill the value of saving, the better.

Approaching college
As your child gets into the high school years, it is time to start introducing more advanced money-related concepts. For one thing, do not forget about interest. Make a deal with your child in which you provide monthly or annual compound interest for money saved. This is easy enough to do if you keep records, and it teaches your child the power (and the danger) of interest.

If you do these things right, then your child will have a good grasp of many basic financial concepts by the time college-planning years roll around. It is important to involve your child in this process so that you are not sending her out into the world with no idea how her school is being paid for and no sense of what is going into it and what is at stake. Let her know exactly how much you can afford to pay and how much she will have to contribute through scholarships, grants, or loans. Carefully talk through each of the options and let her contribute in the decision-making process. If she has a solid foundation and is involved, she will be more likely to make smart decisions.

By Lisa Pecos

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