Shut Down the Parental ATM

Kiplinger’s Janet Bodnar dispenses some free advice on how to teach your kids the value of a dollar and how they can budget their cash.

Meet Janet Bodnar. She’s an authority on teaching your children sound money-management skills.

As the mother of three, Bodnar knows a lot about kids. As deputy editor of Kiplinger’s Personal Finance magazine, where her column “Money-Smart Kids” appears regularly, and the author of Raising Money Smart Kids (Kaplan, 2005), she knows a lot about money.

You might have seen her on the morning news programs (NBC’s “Today,” CBS’s “Early Show,” ABC’s “Good Morning America”), or chatting with Oprah, or giving expert opinions on Fox, CNN, and PBS. She’s also frequently quoted in publications such as The Wall Street Journal and Parents and Glamour magazines.

Bodnar’s down-to-earth advice “avoids the patronizing finger wagging,” as Time magazine once put it, to distill her knowledge and experience into solid strategies that families can use—right now.

In this recent interview with Scouting magazine, Bodnar discusses a wide range of issues related to kids and money.

SCOUTING: Why is it important that parents teach their kids the principles of sound money management?

BODNAR: So that someday they can function independently. You want to teach them that money is a useful tool, that it can be used for practical things. But you don’t want them to get too emotionally tied up with it, or be afraid of it, or hoard it, or covet it, or overspend. You just want them to have a healthy attitude toward money.

SCOUTING: You want to teach them the value of a dollar, right?

BODNAR: Yes. But you also want to teach kids certain values that are attached to that dollar. And different values may be important to different families. You might want to teach them about charitable giving or generosity with friends, or maybe you want to teach them about personal responsibility or deferred gratification and saving.

SCOUTING: At what age should parents begin the process?

BODNAR: You don’t want to introduce sophisticated concepts too early, especially about money, which is so abstract anyway. Whatever you do should be done in an age-appropriate way.

SCOUTING: Such as?

BODNAR: Such as starting when they begin to ask financially oriented questions. Say they want to go to McDonald’s, but you tell them that you don’t have any cash, and they ask, “Why don’t you just go to the cash machine and get some?” Instead of responding with something like “Do I look like I’m made of money?” you can use that opportunity to teach them a lesson.

SCOUTING: How?

BODNAR: Well, you can ask them where they think money comes from and see what they say. They probably think there’s a little printer in the ATM machine because that’s what they’ve seen all their lives. But try giving them a little explanation about the machine being just like their piggy bank at home. Sometimes, you can tell them, the ATM gets empty until Mom or Dad refills the bank with a deposit. That gives them an easy-to-understand idea of how a bank works without getting into the whole Federal Reserve System.

SCOUTING: What are some effective methods of teaching kids how to manage money?

BODNAR: Giving an allowance is one of the most effective methods. You can start an allowance at about age 6 or 7. Once kids get into first or second grade, they start learning about money in school and have a better psychological sense of how much things cost and how far money will go.

SCOUTING: How much should parents give their kids?

BODNAR: That’s going to vary from family to family, depending a lot on your economic circumstances. If I had to give a guideline, I’d say you should start with a weekly allowance that’s equal to half a child’s age. Obviously, that amount can go up as the kids get older. By then, though, you’ll know how well they handle money and whether they can live responsibly with it.

SCOUTING: Should allowances be linked to chores?

BODNAR: No. I find that many parents have a tough time managing a system where the allowance is tied to chores. They lose track of what the kids actually have done, so the system falls apart. I recommend a two-part allowance system.

SCOUTING: How does that work?

BODNAR: The first part is the basic allowance, which is not tied to chores—at least, not regular household chores such as taking out the trash, or cleaning their rooms, or unloading groceries from the car. But that doesn’t mean the kids get money with no strings attached. The allowance has financial strings.

SCOUTING: What do you mean by “financial strings”?

BODNAR: Kids have to take on certain responsibilities for buying things themselves. Young children, for example, could start with collectibles, or refreshments at the movies, or items they might buy at the dollar store.

As kids get older, say in middle school, you can expand their allowance and their responsibilities: taking their own money to the mall with their friends on weekends and buying movie tickets or snacks after school.

By the time they’re in high school, they should be getting a clothing allowance so that they’re making decisions on larger amounts of money: how much to spend on jeans or athletic shoes, for example.

SCOUTING: What’s the second part of your allowance plan?

BODNAR: The concept of working for pay is one value that parents should want to teach their kids. Kids can earn extra money on a chore-by-chore basis, which is much easier for parents to track. If they wash the family car, it’s worth X amount; if they mow the lawn, it’s worth Y amount; if they vacuum the family room, it’s worth Z amount. The system is much easier to manage.

SCOUTING: Do you recommend weekly or monthly allowances?

BODNAR: For younger kids, definitely weekly. For them, you know, a week is an eternity. They’re not going to get the idea of making the money last if the time frame is too long. By the time kids are in high school, a monthly allowance will work. And they should be given the experience of managing larger amounts over a longer period of time.

SCOUTING: Do you think teens should work at an outside job during the school year?

BODNAR: I would start with a summer job and see how they manage that. I think school really should be their first priority. So the question is: How many hours can the kids handle? You know your own children, but research shows that kids can usually handle up to 10 hours per week. When they get beyond that, it’s kind of dicey because you don’t want them missing out on things they’re supposed to be doing at school.

SCOUTING: Should parents continue giving an allowance if a kid has a part-time job?

BODNAR: That depends on how much the job is paying. If kids are making, say, $100 a week, they don’t need an allowance. If they’re making $20 a week babysitting, then maybe they do because that might not be enough to cover their high school expenses.

SCOUTING: At what age should parents allow their kids to have their own checkbooks or debit cards?

BODNAR: Usually around 16 or 17, when kids get a real job. They can open an account and deposit and withdraw their own money. If they’re not 18 and a parent has to co-sign the account, that’s OK—as long as the kids know the basic responsibility is theirs.

It’s good if they can start with an ATM card, not necessarily a debit card. That way they can make cash withdrawals but not make purchases with it.

SCOUTING: To give them the feel of money in their pocket?

BODNAR: Right. I think it’s important for them to learn how to manage cold, hard cash. You have to make the money as real for them as possible.

Plastic isn’t real. Even paper checks aren’t real. Buying stuff online certainly isn’t real. Before they head off to college, they should know how to manage a checking account and a debit card.

They can keep track of their spending either online or with an old-fashioned check register or by saving their receipts. Remember, the more hands-on, the better.

SCOUTING: So you’re not a fan of giving kids credit cards?

BODNAR: Are you kidding? I would never let them have a credit card in high school—or college, either. Usually, kids who use credit cards, even for gas, are clueless about how much they’re paying. They only know that gas is $4 a gallon because it’s coming out of their bank account, and then they’ll learn where the cheap gas stations are. There’s a money-management skill right there!

SCOUTING: What are some simple methods for teaching them how to create a budget and stick to it?

BODNAR: Well, an allowance is kind of a stealth budget. You’ve given them certain responsibilities to accomplish. They say, “OK, a CD costs X amount of dollars, and I usually spend $2.50 when I go to McDonald’s,” so they’re automatically budgeting.

You can have a written agreement with your kids, which makes it more real to both of you. It doesn’t have to be fancy: I will pay you X amount per month, and you will spend it on these responsibilities and save X amount. Or you can create your own little Excel spreadsheet, or use a software program such as KidsSave at www.kidnexions.com.

SCOUTING: How do you feel about parents urging their kids to save?

BODNAR: If saving is a value the parents want to encourage, then I’d say require them to save a part of their allowance or income. I just wrote a series of columns on my Web site (www.kiplinger.com/columns/kids/archive.html) about teaching kids of various ages to save. And that’s hard because it’s really deferred gratification.

SCOUTING: What’s a good way to teach kids that concept?

BODNAR: You teach them that if they’re giving up smaller things now, they can purchase larger things in the future. There has to be a payoff. If you just have kids saving, saving, saving, but not having a goal or not ever allowing them to spend the money, then why should they save?

Just remember to keep it simple by having them save, say, 10 percent. That way you’re not taking away all their cash, and they’ll know that eventually there’ll be a reward.

SCOUTING: Do you think charitable giving should be part of allowance responsibilities?

BODNAR: Some people have recommended systems where you divide up the allowance into a number of parcels: spending, saving, charitable giving, maybe even investing. But you don’t have to be that formal. If charitable giving is one of your primary values, use the 10 percent rule for that, too. Say, OK, 10 percent of your allowance goes to some organization that the kids get to choose. And a lot of families tithe, so the kids are kind of used to that.

SCOUTING: How should parents react if a kid runs out of money before the next allowance payment is due? Or if he bounces a check at the bank?

BODNAR: You don’t give advances on allowances. That’s the one critical rule. Same with keeping bank withdrawals under control. The point they need to know is that there’s no free lunch. If they overdraw their account, then it comes out of their hide—they’re responsible for paying the overdraft fees.

SCOUTING: Do you think software programs like Quicken can help teach kids some useful money-management techniques?

BODNAR: Certainly not adult programs. I’m not sure that kids are all that interested in plugging in lots of numbers and things, and you’ve got to keep things simple for kids, even teenagers. If your children aren’t into this, don’t think you’ve failed. You haven’t.

I do like some online calculators. One that I always recommend is the “How much will my savings be worth?” calculator at www.kiplinger.com/tools, which gives a graphic illustration of the magic of compounding.

SCOUTING: But you’re saying don’t rush things?

BODNAR: Exactly. If kids are not ready for something, they’re just going to be bored to tears. You can teach them money-management skills with very basic steps. Small lessons have a big payoff.

SCOUTING: What are some major pitfalls parents can avoid in teaching their kids about money?

BODNAR: One big pitfall is the tendency to create a system that’s too complicated and can’t be managed. If you can’t manage it, your kids won’t be able to, either.

And follow-through is critical. If you say to the child, “You’re not going to get an advance,” you have to follow through. On the other hand, if you commit to giving him a $50-a-month allowance, you have to follow through on that, too.

SCOUTING: Are there parents who aren’t comfortable talking about money?

BODNAR: Some parents don’t feel confident about their own money-management ability. Or they feel funny talking about money because their own parents didn’t talk about it with them.

You don’t have to share the details of your personal finances with your kids, but you can say things like, “We can afford this remodeling project because we saved for it” or “We make a comfortable enough living to be able to give to other people who are less fortunate.”

If you’re embarrassed to talk to your kids about money because you don’t think you’re a good money manager, then change your habits. It’s a wake-up call for you to open a retirement plan at work, for example. So when your kids say to you, “You want me to save money. Do you save?” You can tell them that X amount is taken out every month.

SCOUTING: What about the current economic climate? Does that give you opportunities for discussing money issues with your children?

BODNAR: Absolutely. You can show them how to shop for the lowest gas prices or how to compare unit prices at the grocery store. Or tell them why you’ve changed your vacation plans to stay closer to home.

SCOUTING: And if parents don’t talk about money with their kids?

BODNAR: The kids don’t grow up with that knowledge, and they wind up in their 20’s with no money and huge credit card bills that they don’t know how to pay off.

A lot of parents have trouble saying “no.” They’re afraid the kids won’t love them anymore, or they’ll leave home. Believe me, they’ll love you, and they won’t leave home.

Well, essentially, you want them to leave home eventually. That’s what this is all about, your kids not landing back on your doorstep because they don’t know how to manage money.

John Clark is Scouting magazine’s senior editor.