Great article about finance & kids

Making Kids Money Savvy: Try These Four Financial Tricks

Give them a few dollars -- and some financial common sense.

Want to make sure your children grow up to be money-smart adults? Check out the four experiments below.

My advice: Try these tricks on your kids, talk to them about the lessons to be learned -- and then quietly muse about whether you, too, fall prey to these financial traps.

Favoring today.

If children are to save diligently once they're adults, they need to learn to delay gratification. Yet this skill doesn't come easily.

Want proof? Let's say you give your kids $5 a week in pocket money. When it's next time to fork over their allowance, offer them a choice: They can have the usual $5 right away -- or they can have $7, equal to a whopping 40% more, if they're willing to wait a week.

"It's about immediate gratification," says Shlomo Benartzi, an economics professor at the University of California at Los Angeles. "Getting nothing right now doesn't sound good, so they'd probably go for the $5."

That doesn't necessarily mean your children want their pocket money all at once.
Prof. Benartzi, cofounder of the Behavioral Finance Forum, also suggests offering a choice between, say, $7 right away and $1 every day.
He suspects children might favor the daily $1 -- because, like adults, they prefer a series of small gains to a single big win.

Slowing spending.

We think about money differently, depending on its form.
For instance, we're usually more careful about our spending if we are paying with cold cash rather than a credit card.

To test this in your kids, try varying the form of their pocket money.
One week, give them five singles.
The next week, give them a $5 bill.
You will likely find your children are slower to spend the $5 bill.

"It seems to be perceived as having more value," says Dhananjay Nayakankuppam, a marketing professor at the University of Iowa.
"The subjective pain of parting with the $5 bill is greater than the subjective pain of parting with five $1 bills."

Adults show the same tendency.
In a study that appeared in the March 2006 Journal of Consumer Research, Prof. Nayakankuppam and his co-authors, Arul Mishra and Himanshu Mishra, found that people were less inclined to spend if they had, say, a $50 bill rather than 10 $5 bills.

Making a wish list.

We have all hankered after items we've seen at the mall or in an advertisement.
Sometimes, we buy and end up disappointed.
Sometimes, we wait a few days and the urge passes.

Want to deter your children from impulse purchases? Consider the strategy used by reader Helane Becker, a financial analyst who lives in Millburn, N.J.

When her two kids mention things they want, Ms. Becker adds the items to each child's wish list.
A few days or weeks later, she goes over the lists with her kids -- and sees which items they still want to buy with their own money or receive as birthday or holiday gifts.

"When they were little, it surprised me that, by Friday, they sometimes couldn't remember a specific toy they so desperately wanted on Tuesday," Ms. Becker says.

Keeping the change.

Children seem to have endless desires, which shouldn't be a huge shock.
After all, their purchases usually aren't costing them anything, because they are spending their parents' money.
The trick: Make your kids feel like they're spending their own money.

I learned this with my daughter.
When Hannah went on her first school field trip, I gave her $5 and told her I wanted the change. She returned with a bag of trinkets and a few pennies.

On the next trip, I gave her $5 again. But this time, I told her she could keep any money that was left over. She came back with $5.

I later tried the same trick with Hannah's younger brother, Henry.
It wasn't nearly so successful. Still, it provided another chance to talk about money -- which, as long as parents don't overdo it, is probably a good thing.

"You don't want to turn them into money-saving automatons," warns Meir Statman, a finance professor at Santa Clara University in California.

"It's good to know when to put money into the piggy bank. But it's also good to know when to take it out."


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