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Carrie Schwab Pomerantz Money-Smart Families

Carrie Schwab Pomerantz, Money-Smart Families

Preparing Your Kids for the World of Money

by Carrie Schwab Pomerantz

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Posted on Friday, March 30, 2007, 12:00AM

From an entirely personal, even selfish perspective, I dread the day my oldest child -- now 18 -- heads off to college.

If you have teenagers preparing to leave the nest, you probably know how I feel. Naturally, I want him to find his path in the real world, the path to work and a life he enjoys; I want him to become independent. But I'll miss him, I'll worry about him, and I'll wonder if I've prepared him well enough for the challenges of adulthood.

Teaching Financial Literacy

One of those challenges has to do with money. My son, along with my two other children and every other kid out there, needs to know how to handle financial matters responsibly. And he needs a set of financial values -- a framework for staying grounded in an affluent society and an age of ever-increasing consumerism.

These topics aren't taught in school, though I'm convinced they should be. And even though personal finance is very much in my blood, and my husband and I have been teaching our kids about money matters since they were quite young, I'm convinced we could have done more.

But it's never too late to teach your kids about the challenges of money. What follows are some ideas for giving your children the values and the tools to make good financial decisions about budgeting, spending, how to use credit, and investing.

Dollars and Sense

When my father was a boy, the lesson to be learned was "the value of a dollar." While that may seem a bit archaic in today's world -- even a metaphoric dollar hardly holds much value these days -- it's still a great concept.

If you want your child to succeed in building a responsible financial life, he or she needs to understand the value of money: The challenges of earning it and spending it prudently, and the challenges of saving it and investing it for the future.

One of the best ways for young people to grasp the value of a dollar is to get a job. They'll learn the basic responsibilities of the working life, and the importance of showing up on time every day and doing their best. They'll also experience the rewards of getting paid. Getting a taste of the world of work at a young age can be immensely valuable -- a superb first step on the journey to financial independence.

The Wisdom of Budgeting

Whether your kids work or not, they need to learn about spending wisely, and that requires some experience with a budget. Say your high school senior is heading off to college next fall, and you plan on giving her a fixed sum each month to cover everything but room and board.

Now, while she's still at home, is a good time to get her accustomed to living on a budget. You could give her a monthly allowance with the provision that she can only come to you for extraordinary expenses.

Help her create a budget that reflects her actual spending patterns and needs (and your financial realities, of course). It only takes a time or two of running out of money on the 15th of the month to drive home the wisdom of budgeting.

Credit Pros and Cons

When I was a teenager, no one my age had a credit card. In fact, few adults had them. Today, credit cards are ubiquitous; they've become indispensable financial tools. Not surprisingly, credit card debt has emerged as a real issue for college-age kids and young adults, and for many, it has become a substantial problem. When freshmen arrive on campus, they receive countless credit card offers, and kids who aren't prepared to use credit wisely often fall into a debt spiral at a painfully early age.

Your children may already have credit cards, but do they fully understand the pros and cons of using them? Do they realize the potential liabilities when compound interest works against them? Do they know the consequences to their credit rating (and their wallet) of late payments?

I believe that teens and college kids should have a credit card, which is useful in emergencies, offers some degree of consumer protection, and is essential for online purchases. But it should be viewed as a financial tool, not as an extra source of cash.

You can start them off with a credit card with a spending limit. Be sure to monitor their credit card statements to ensure that they're using the card responsibly. Teach them to pay off the balance every month before the finance charges start to mount up. These lessons are vital now, while your kids are still under your roof.

A Taxing Situation

Obviously, most high school and college kids are not going to pay substantial taxes, unless they have a great deal of investment income. Even if they have part-time jobs, the taxes are withheld automatically and the IRS paperwork is trivial.

But learning about this particular inevitability of life is an important aspect of financial maturity. If they do work, help them fill out their tax forms. You might even want to consider sharing your own tax return with them to help them understand the substantial burden that taxation poses, as well as the mechanics of dealing with the IRS.

Investing in the Future

My own children were "early adopters" when it came to investing -- must be something in our family's DNA -- and I believe that every child should learn to save and every teen should learn the basics of investing through hands-on experience.

Teaching children to save is best started when they are very young -- six or seven, say. We encouraged our kids to save part of their allowance and gifts; we wanted saving to be second nature to them. When they reached their teenage years, we opened small custodial accounts and taught them about investing -- the potential to make their money grow significantly over time and the basics of stocks, bonds, and mutual funds.

Now I often talk about the markets with my kids, and while their interest level waxes and wanes, they understand the basics of asset allocation and portfolio diversification. It's not just an issue of building wealth, either. I strongly believe that being involved in the markets engages people with the world. News takes on an added dimension when you've got something invested.

I may be overstating it, but I think investing helps teens become better, more informed citizens. And it certainly helps prepare them for another aspect of adult financial life.

The Value of Good Values

Practical lessons about money and personal finance are obviously important, but financial responsibility also means having good values. Whether you're conscious of it not, you set a financial example for your kids every day in the way that you earn your living, spend and invest your money, and contribute to society through charity.

I'm not saying you need to change your financial habits; I'm saying you need to be aware of what your children learn from your habits. Believe me, they notice!

Ultimately, money is a resource that can be used well or badly; its real value is that it gives people choices in their lives. I know I want my son and his siblings to use their financial resources well. By teaching them the basics of personal finance now, while they're still at home, I'm trying to give them a foundation for making their way into the world.

I hope it makes the transition away from home a little easier -- for all of us.

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34 Comments

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  • Yahoo! Finance User - Tuesday, April 10, 2007, 10:11AM ET  Report Abuse

    • Overall: 4/5

    I thought the article was pretty good but basic. The discouraging part is the responses to this article. Are the school systems so bad now that kids can no longer write correctly or coherently?

  • Yahoo! Finance User - Sunday, April 8, 2007, 8:56PM ET  Report Abuse

    • Overall: 5/5

    I think this article is totally for parents, not for the teens, who is looking for simple ways (eg use credit card if you don't have money and so on). Whats the big fuss all about?it's not hard to understand this if you have a child, maybe it's hard if you're the child...

  • Yahoo! Finance User - Sunday, April 8, 2007, 4:06PM ET  Report Abuse

    • Overall: 2/5

    It was kind of boring. You have to read deep to understand what you are talking about, and teens don't want to do that. Next time maybe use a list and shorten it up. We teens want quick answers, and to be able to look and see what we need to know. If you wrote this for parent so they can teach their kids, then brava. But if it is for teens, it was a little hard to read.

  • The Doc - Sunday, April 8, 2007, 10:50AM ET  Report Abuse

    • Overall: 1/5

    im 21 and the way my parents taught me about money is i bought everything myself. when i turned 16 i got my own job by my self, bought my car, paid for driving lessons, paid for insurence, paid for my cell phone. all right of the bat. you learn a lot more then when parents buy everything for thier kid..most parents buy them cars, which is a really bad idea, because you'll end up paying for all the repairs and they won't appreciate it because they didn't buy it themselves.

  • Geico - Sunday, April 8, 2007, 12:35AM ET  Report Abuse

    • Overall: 1/5

    Im not an adult, but i read this article to get advise. I found it boring and poorly written as an advise peice. next time, I think she should try to explain strategies on how to teach managing money, rather than this. I also found it boring and confusing!

  • ny - Saturday, April 7, 2007, 11:58PM ET  Report Abuse

    • Overall: 1/5

    She couldnt make that article more boring if she tried. Talking to teens about diversifying portfolios? Yea...her kids must be extremely excited about that.

  • Yahoo! Finance User - Saturday, April 7, 2007, 11:14PM ET  Report Abuse

    • Overall: 2/5

    I am NOT an adult, and I read this article to get some tips and I found it incredibally dull, but I still got some of the messages I'm sure. It needs to be shrunken in size by at least half and it needs to be less used wiht huge words.

  • mrs.edwardcullen - Saturday, April 7, 2007, 9:41PM ET  Report Abuse

    • Overall: 5/5

    What a great article! I will use this stuff when I have kids.

  • Rick - Friday, April 6, 2007, 10:29PM ET  Report Abuse

    • Overall: 1/5

    That is so ironic, Carri'es middle name is Schwab, she is vice president at a company named Schwab, AND she is considered an expert. How ironic! I dont think having the last name "Schwab" had anything to do with getting an article on Yahoo. That being said, what is this article really about? Read between the lines: Having umlimited wealth at your disposal for the next 30 generations of your family is actually detrimental to well-being; the desire for success is removed. Darwinism reverses course and leads to a severe case of nihilsm and laziness. In other words, what is there to achieve? Nothing. Even if I spent money as fast as I could until the end of my life I would only nick the surface. The trick is keeping your kids from becoming drug addicts or social misfits while also having umlimited financial resources. You live in a mansion and have a chauffeur drive you around, but lets sit and talk about asset allocation. We own 14 houses and 30 cars, but we should actually talk about prudent saving. Should we start you a passbook so you can deposit your paper route earnings, dear? It is a tough balance; look at some of the most prominent wealth holding families and the despair and suffering. Coincidence?

  • Larry - Friday, April 6, 2007, 6:01PM ET  Report Abuse

    • Overall: 4/5

    I don't think she goes far enough. The basic disciplines are absolutely the foundation but it is not enough. The current sub-prime mortgage mess is proof that our educational system does not do an adequate job of financial education and it is an indictment of the system. I can offer myself as a prime example example although I would hope things have improved since I went through school. I graduated from college with a BSEE and knew my differential equations but did not understand such a basic concept as the time value of money. Thank goodness I went on to get a MBA but I should have learned the difference between coupon rate and APR before I graduated from High School. Ditto for things like Net Present Value, calculating payments and FV of a cash stream. It would be interesting to see how many HS graduates today can do something as basic as balancing a check book using a bank statements with a few out of sync entries.

  • Larry - Friday, April 6, 2007, 4:07PM ET  Report Abuse

    • Overall: 1/5

    Financial literacy not taught in school? In New Mexico Economics is a required one semester course needed to earn a high school diploma. I would imagine other states have a similar requirement.

  • Hai - Friday, April 6, 2007, 2:32PM ET  Report Abuse

    • Overall: 5/5

    Excellent Article. I trully believe it and I believe my sone will not have to work hard as I was. I applied this concept to start plant the seed in my 4.5 years old son since he was 4. By now he already know the concept of Balance Sheet, Income Statement, Expense, Income, and Investing. He love to play Cash Flow Game developed by Robert Kiyosaki. I am now 36 years old, and I am possitive that my son will have the same strong foundation about financing as I am right now when he reach 16.

  • Yahoo! Finance User - Friday, April 6, 2007, 2:32PM ET  Report Abuse

    • Overall: 4/5

    Your article is great! I am a single father and I talk to my children all the time about investing their money. I was not taught anything growing up but have learned the hard way and now have a good understanding. I went back to school to become a trust officer with a bank and have learned a great deal about the importance of planning and how easy it truly is if you start at an early age.

  • Rob W - Friday, April 6, 2007, 2:19PM ET  Report Abuse

    • Overall: 2/5

    This is PR for her corporate products. I agree that financial education should start young (whether the public schools are an appropriate place for this, with potential conflicts of interest, is another matter). I suggest some alternative ideas tho. Instead of traditional credit cards for students with low limits, I suggest instead PREPAID credit cards, or debit cards that act like credit cards, simply for convenience, with the student knowing how much is there up-front. Actually using "credit" cards (debt cards) is a bad idea. Borrowing money for present consumption is a bad idea. "Borgen macht Sorgen". Also, young people with no savings have no business "investing". Savings first! By definition any money "invested" is AT RISK. One invests only what one can afford to lose. What Ms. Pomerantz is talking about is not prudent investment, but gambling fever with a halo.

  • Yahoo! Finance User - Friday, April 6, 2007, 2:18PM ET  Report Abuse

    • Overall: 2/5

    The intent and direction of the column is quite good but lack of specifics weakens it substantially. A few well placed examples or even discussion of account types, etc would have added much more heft.

  • Yahoo! Finance User - Friday, April 6, 2007, 12:59PM ET  Report Abuse

    • Overall: 5/5

    Excellent article. As one of nine children, from a very young age my Dad taught us the value of hard work, avoidance of debt, and prudent money management. I am forever grateful. I’ve never earned over $50K a year, yet am able to retire at age 58 with $1.5M and no debt. Thanks Dad!

  • Scooter Junky - Friday, April 6, 2007, 12:30PM ET  Report Abuse

    • Overall: 5/5

    Excellent article - full of wonderful advice. We just had our first child in January, so I think I'll print this article as a reminder/talking point for when he starts earning an allowance. I love that Kiyosaki weighed in on your post. His comments can be found in the article with the following statement in it: "How about educating children about what real money is (gold and silver) vs the unconstitutional, fiat paper garbage the government prints."

  • Brian - Friday, April 6, 2007, 11:40AM ET  Report Abuse

    • Overall: 4/5

    Thanks for the reminder. I find my 12 year old is more interested in the topic than my 16 year old. I started earlier with him.

  • Yahoo! Finance User - Friday, April 6, 2007, 11:32AM ET  Report Abuse

    • Overall: 5/5

    Kids today are living much more affluently than those of us who are among the Boomers. I constantly marvel and the lack of understanding about the fundamentals. Thanks for helping - I'm sending this to my 20-somethings!

  • Yahoo! Finance User - Friday, April 6, 2007, 11:24AM ET  Report Abuse

    • Overall: 2/5

    Pretty superficial and obvious info. How about educating children about what real money is (gold and silver) vs the unconstitutional, fiat paper garbage the government prints. The perennial inflation that comes with this system is a boon to bankers and government contractor cockroaches, while wiping out average working people. Make your children take note how much money is taken out of their paycheck in taxes while reminding them that social security and medicare are utterly insolvent programs that will be little to no benefit to them. I would teach kids that the IRS is a legitimized group of thieves and thugs and that brave, patriotic Americans shirk and undermine these parasites whenever possible. Kids must have an education that goes beyond the statist tripe taught in government schools to avoid being another brainwashed victim of the leviathan state.

  • Yahoo! Finance User - Friday, April 6, 2007, 11:24AM ET  Report Abuse

    • Overall: 5/5

    This was a great article, much better than I am accustomed to from Yahoo Finance 'experts'. I am so grateful to my father, and others who taught me early, for the lessons in financial responsibility.

  • Jersey Mom - Friday, April 6, 2007, 10:29AM ET  Report Abuse

    • Overall: 5/5

    Thanks for sharing pearls of financial wisdom. Though my parents shared some of these tips with me, I didn't really understand the magnitude of financial responsibility until now, as I raise my own 2 children. I hope they will learn from me how to be financially astute and use their money wisely. I guess the fact that they each have a piggy bank where they can add some of the money they receive is a start. And they are learning that giving is just as important as earning. The little change they each gave to One Hour of Sharing last week at church won't stop world poverty but it certainly has taught them at a very young age that earning and giving are truly part of the human experience. thanks again for tips and insights.

  • Marcy - Friday, April 6, 2007, 10:09AM ET  Report Abuse

    • Overall: 5/5

    This is such a timely and important topic.

  • Yahoo! Finance User - Friday, April 6, 2007, 10:04AM ET  Report Abuse

    • Overall: 3/5

    I like this article because I think that education about personal finance is severely lacking and needs to be addressed. However, I don't think that you can overstate the importance of teaching investment. The problem with kids keeping budgets so that money "doesn't run out until the 15th" is that most kids come away with the notion that it’s ok for money to run low by the 30th. Holding a job can teach them the value of a dollar, but kids I knew growing up and in college still spent those dollars on clothes, going out, fancy cell phones and rims for their cars. Nothing prepared them for the realities of rent, grocery bills, utilities, and student loan payments. If they don't learn to save and invest before they have real expenses, how will they once they're saddled with bills? While it may be near impossible to tell your kids how to spend their hard-earned money, you don't do them any favors be letting them develop the habits rampant consumerism prevalent in America. The single most important thing you can teach your kids about finance is the value of compounding interest, especially when they've got 50 years of potential compounding gains before retirement. My advice for teens with a job (and what I wish my parents had done for me) is set up a family retirement matching plan. For every $100 your kid puts in their Roth IRA, you give them a $50 gift. At that age, in such a low tax bracket, it’s the perfect time for them to put money in a Roth. Nothing will show them you're more serious about saving than your willingness to subsidize it yourself. Help them pick out what stocks or index funds they want. After that, let the market do the work -- as that money grows, they'll start to appreciate investing more and more.

  • Oli - Friday, April 6, 2007, 9:55AM ET  Report Abuse

    • Overall: 5/5

    I am so impressed with this article. I am in my thirties and I have no children of my own yet, though many of my friends do. Day after day I hear horrific mone-stories from older friends with teenagers. Although I do believe that financial education must begin at home and at a young age, I am convinced that financial and economic education must be a requirement for a high school diploma. Sanitation worker or stockbroker, no matter - we all must handle bank accounts,budgets,credit and taxes. With the changes our society is facing, especially with regard to retirement and health/long-term care, we all must understand how to plan for the future. Thank you so much for writing this article Carrie. I hope that you will contiue to enlighten others about this critical issue. It has been a time consuming and difficult struggle for me to teach myself about financial matters, and I am still learning many of the basics. Perhaps one day these critical life skills will be addressed in school. I can not imagine a world where they will be any less important than reading, writing and mathematical skills. Thank you.

  • InsideFortLauderdale.com - Friday, April 6, 2007, 9:42AM ET  Report Abuse

    • Overall: 1/5

    Your article has the right idea, but by the time your "teenager" is ready to leave the nest its way too late to teach them about value. Having them get a job is silly if you're just going to help them pay for things they can't afford. You need to make them start earning things they want earlier in life. Don't just tell them to get a job; tell them if they want a car, they'll have to pay for it themselves. You can loan them money at low interest, but until you stop making up the difference between what they can afford and what they want, they'll never understand about value. The world is filled with people who work, and who rely on their parent for loans to buy a home, or who help with their rent, or who pay for them to fly home for a visit. These people have a poor sense of *value*.

  • freakyz - Friday, April 6, 2007, 9:05AM ET  Report Abuse

    • Overall: 5/5

    Please tell me that Carrie has replaced RK. Great article!!!

  • Hugo R - Friday, April 6, 2007, 8:48AM ET  Report Abuse

    • Overall: 5/5

    Excelent article. I was not brought up as you propose. So neither were my children. I am sending them this article hoping that it will work for my 16 granchildren.

  • Yahoo! Finance User - Tuesday, April 3, 2007, 5:09PM ET  Report Abuse

    • Overall: 5/5

    Good article

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April is National Financial Literacy Month

Promoting financial fitness is one of Carrie Schwab Pomerantz's passions, particularly when it comes to helping families give their kids the head start they need to thrive as adults. Visit Schwab MoneyWise for additional resources.

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