This was originally published on Monday, June 24, 2013, in the Pacific Daily News. Click here to subscribe to the PDN.
Question: I have a young niece who goes through her allowance as soon as she gets it. I would like to start teaching my niece about money. Do you have any ideas?
Answer: I commend you for recognizing the pattern early. Learning the value of money should begin at an early age. As we grow up, having money is a necessity and being able to properly handle the money we make is a great skill to have. Being financially fit takes practice and it takes correcting if you see a child is irresponsible with money. Adults should layout guidelines about spending, saving and donating to charity.
Children must understand that money is something that has to be earned and not just given out for free through an ATM machine. Having an allowance can be an effective tool for teaching children that lesson. If they want to get paid more, sit down and negotiate, as they would with an employer. Help them understand that not all their allowance has to be spent at one time.
For older kids, getting a prepaid debit card can be beneficial. The child can then spend it anywhere a debit card is accepted. Some debit cards keep record of your teen’s spending so that you can track purchases or know when you need to reload the card. It is a good opportunity to teach teens budgeting skills in a real life scenario.
Help your niece set up a budget. If she has been eyeing a particular pricey item, explain to her how she would be able to get that if she waited an “x” number of allowances. As she gets older, her budget can get a little more complex, such as setting aside 20 percent for savings. You can even make a pretend tax of 10 percent that she must pay you (you can, in return, pay them back every April). For older kids in middle or high school, include their weekly expenses such as, for example, lunch and gas money in their allowance. This lesson can even be done using play money.
Expect children to make mistakes. When you take your niece out shopping next time and she once again spends her allowance on something frivolous, ask her a week later if she is still pleased with her purchase, or if the item is misplaced, or broken, or if she wishes she had kept that money for something else. If she agrees with you that her money could have been better spent, ask her how she will change it next time. Engage her in conversation; although she may make the same mistakes over and over again, she will in time get the hang of it.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.