At a recent parent gathering, in between sips of chardonnay, I casually mentioned that I’m working on a new book, Make Your Kid a Money Genius (Even If You’re Not).
The book offers parents a GPS for teaching life’s essential money lessons to kids of all ages—whether they’re three or 30. The good news is that you, the parent, need not know much about money yourself.
While I talked a bit about the book, everyone sort of stopped and stared. “We can sure use that,” one mom sitting on the couch boldly admitted. And then a flood of conversation about kids and money ensued.
That’s great news for me and Simon & Schuster (my publisher) in terms of sales. But it was also, frankly, a little startling how many of these smart parents didn’t know the basics—and how that meant that there was no way they were passing along any pearls of financial wisdom to their kids.
It’s interesting that these are the very same parents who are well-versed in texting and Instagram. Savvy about talking about sex. And even candid with their kids about drugs and alcohol.
But mention money and kids, and even the PhDs, MBAs, and MDs in the room start to stammer.
As the headiness of the holidays and the new year start to calm down, I wanted to serve up five small things you can start doing this month that’ll hopefully take the pressure off of you, and start your kid down the path to becoming a money-savvy adult.
In this column, from time to time, I’ll clue you in on some of the latest findings and behavioral research on this topic, but for now, here’s a peek at some of my favorites:
1. Use this simple rule of thumb: “Save a quarter for every dollar you get.”
Savings should become a habit by age two, in the same way that you’re getting your kids to brush their teeth. Don’t nag your kid to put money in her piggybank every time she gets some. Make it automatic instead, with a formula that you pass on to her.
Just keep it simple and it’ll be invaluable. Every time your kid gets a dollar from Grandma or a few bucks for feeding the neighbor’s cat, have her automatically put a quarter of it into her savings jar, or in her savings account at the bank.
Our impulse is to over-explain, thinking we need to provide an overdose of info to drive home a point to our kids.
But the truth is, people remember and use rules of thumb more than fancy financial formulas, according to a January research paper from ideas42, a NYC-based behavioral economics lab that studies how we make choices in order to find simple solutions that improve our lives.
Why are rules of thumb so successful?
The researchers point to several reasons: (1) they help us whittle down today’s overwhelming amount of choices (often leading to bad decisions or total paralysis); (2) they’re easy to do (keeping us from procrastinating); (3) they clear the clutter of information overload (think: all the fine print documents you never want to read); and (4) they’re just plain easy to remember.
So when it comes to teaching your kids to save, less is more.
2. Give up on paying allowance.
Want to see your fellow parents squirm? Ask them how they handle allowance with their kids.
Many parents I know hoped to dole out weekly money as a teaching tool, complete with grandiose delusions of sentimental TV-like moments—in which they impart profound advice on values and choices unto their kids.
The result: Allowance is one of their biggest financial flops. They don’t have a system, they started and then (whoops!) forgot, their kids have to nag them to fork over the dough, etc., etc.
If you’re like them, I’m here to let you off the hook. After reading dozens of studies on the topic, one thing became clear: Allowance is not the key to the money genius castle.
One recent study from the University of Sheffield in the UK found that kids who get allowance are actually worse savers than kids who work part-time to earn money.
And another study from the University of Minnesota found that giving kids allowance made them less likely to value their future careers—perhaps because those crisp dollar bills distract kids from the satisfaction of work itself.
So, skip the guilt trips and stop trying. How about this radical thought: When your kid needs money for something that you know he needs and you can afford, give it to him.
If it’s something he wants, he can take on little jobs (shoveling snow for neighbors, babysitting younger siblings, etc.) to save up to buy it.
3. Make your kid use cash.
People are prone to spend more when using credit cards instead of cash—a lot more. I’m talking about 100% more.
For example, in a classic MIT study, people were willing to spend $29 on average for Celtics tickets if paying in cash, but would shell out $61 if paying by credit card.
Okay, the study was from 2000 when ticket prices were that low, but it’s crazy what the simple ability to swipe will convince us to do!
So I know this advice makes me seem insanely out of sync with the times, but listen: Paper beats plastic when it comes to teaching your kids about spending.
That’s right. Don’t give your kid a credit card—or even a debit card—for as long as you possibly can.
I know a mom of a middle school kid who hands the kid her own cards to shop at the mall, and that’s a recipe for future disaster. The kid never has to see the charges she makes, much less pay for them.
We already know that credit cards dull “the pain of paying” compared to cash, according to a study from NYU’s Stern School of Business, so paying with someone else’s credit card is essentially pain free—and that’s why it’s so dangerous.
A lot of parents are now giving their teens debit cards, either prepaid or tied to the parent’s accounts.
But instead of riding herd on your kid and checking his account every day, better to give cash. That way, instead of you being the one who’s worrying about his charges, he will.
Running out of money is what I like to call hard-stop budgeting.
4. Save the saving speech—just tell your kid to download the Oldify app.
To stress the importance of saving, you have to help your kid see the big picture. Literally.
So try this: Have your kid picture himself old.
Researchers at Stanford ran a fun experiment in which they showed college students age-progressed computer renderings of themselves—and those kids chose to save twice as much for retirement, versus folks who only saw their current selves.
Your kid can try this at home using the app Oldify. Suddenly, your youthful spawn will be giggling at the old, bald, potbellied version of himself.
Guaranteed to get some laughs—and be an easy lesson kids remember.
5. Show older kids how to make savings automatic.
Behavioral economists have discovered the “magic” of automatic savings and 401(k) deductions. When we never see the money in our checking accounts in the first place, we don’t experience the pain of “losing” it once we take some out to put into savings.
Basically, we trick ourselves into saving.
For example, companies that automatically enrolled new employees in their 401(k) programs raised participation rates from roughly 40 percent to nearly 100 percent, according to the National Bureau of Economic Research.
Even President Obama recommended auto-enrolling folks in IRAs in his State of the Union speech!
So this year, remind your grown-up kid to sign up for her company’s 401(k) and/or arrange for her employer to deposit part of every paycheck into a separate savings account.
Or her bank may have a system in place to make regular transfers from checking to savings.
Virtually every top economist I know—including, most recently, Sendhil Mullainathan, an economics professor at Harvard and a MacArthur Foundation “genius” award winner—says saving isn’t about exercising will power.
It’s about automatic bank drafts. You get my drift. Saving isn’t something you—or your kid—should be spending too much time thinking about.
What other money lessons do you hope to teach your kids this year?
© 2014 Beth Kobliner, All Rights Reserved
Beth Kobliner is a personal finance commentator and journalist, author of Make Your Kid a Money Genius (Even If You’re Not), and a member of the President’s Advisory Council on Financial Capability who spearheaded Money as You Grow. Visit her at bethkobliner.com, follow her on Twitter, and like her on Facebook.