The Money Class

by Suze Orman

  Be patient but strong. I am not going to pretend this is going to be in any way easy if your kids have grown accustomed to having everything they want, when they want it. They are going to be upset. There will likely be tears. I realize that can be excruciatingly hard to impose—on all parties—but please focus on your long-term goals. You are not punishing them. You are not punishing yourself. Just the opposite. I think you will be surprised at how quickly your kids will adapt to your new ways, but you need to summon the strength to stand firm during the transition. Resist caving. Keep reminding yourself that by standing in your truth today you are creating a better future for your children, and you are also instilling in them an attitude toward money that will help them reach their dreams when they are adults.

  IMPARTING GOOD VALUES WHEN IT COMES TO MONEY

  Talk about what you love. The first and most important money lesson you need to teach your children is to put money in its place. Ask your children—even children as young as four or five—what they love most. Do not guide them, just listen to what they value. Is it people or is it things? Did they talk about loving you, and their grandparents, a sibling, a pet? A favorite food? Or was their list about possessions? It is perfectly natural for every human being—child and adult—to desire and enjoy material possessions. But you need to make sure you are raising your children to have a broad view of what is important in life. Many of you know my motto: People first, then money, then things. If your child has moved things to the front of the line, that’s a clear sign you have some work to do. I would start by making sure you communicate, through words and actions, what you love most. If you are clear that you care most about your family, about the well-being of others, rather than what you own, you are telegraphing an important lesson.

  If you don’t particularly like what you hear, I have to point out that you are the issue here. Kids don’t do as you say, they do as you do. They are watching and mimicking your behavior. If you are constantly shopping, or ordering things online, or focusing on your latest mall conquest, what else can you expect than for your young child to assume that is the absolute best way to behave? After all, you are the all-knowing and all-wonderful parent they worship and take all their cues from. Including your cues about how to value material possessions.

  MONEY LESSONS FOR YOUNG CHILDREN, AGES 3 TO 6

  Establish the work-pay-purchase connection. As far as I am concerned there is no age too young to start learning that money must be earned to buy the things your family needs.

  Explain why you work. It makes me absolutely nuts when I see parents kiss their young children goodbye in the morning and say, “I hate that I have to leave you to go to work, but I need to make money.” All that does is teach your child that work and money is a bad thing. What your children need to hear from you is that you are incredibly grateful that you get to go to work and get paid money and that that money enables you to take care of them. Also let them know that you personally get satisfaction from your work.

  Explain how you earn money and what it does. Unless you make a concerted effort to explain how money is earned, your children will think it is simply something anyone can get by punching a few keys at the ATM. Or worse, they will have no concept of real money—actual dollar bills—because you are always using a credit card. You must explain that your work earns you money, that money goes into the bank, and that you can only take out as much money as you have earned at your job.

  Explain that the groceries in the refrigerator and the toys in the playroom were bought with the money you earned. The electricity that keeps the computer humming has to be paid for too. Once your child is old enough to understand the concept of dollar bills, I want you to have them join you on your errands from time to time, and have them pay the cashier with real dollar bills. Physically connecting to money—real dollar bills—helps us focus on what we are spending. That is a lesson you should be teaching your kids from an early age.

  Teach giving. Two times a year sit down in your child’s room or the playroom and together sort through all the clothes, toys, books, and crafts that they no longer use. Whether you give these away to a friend, a charity, or a thrift store, I want your child to be the one to make the physical transfer. It is such an important lesson to learn the power of giving. A friend recently made her five-year-old’s birthday party into a pajama party, asking children to come in ther PJs and to bring a new set of pajamas instead of a gift. The pajamas were donated to the Pajama Program (www.pajamaprogram.org), a charity that gives new pajamas and books to children in need, in the United States and around the world. I thought this was a great idea that created a real opportunity to teach small children about our obligation to help those less fortunate.

  Have a clear toy/gift policy. This is one area where I see so many parents completely drop the ball. Instead of reserving gifts for special occasions such as birthdays, they have become your go-to solution to help you get through your way-too-hectic day without an upsetting meltdown (yours or theirs). So you promise a gift for good behavior, or you hold out the carrot of a stop at the toy store if your child behaves well while you are running other errands. Toys—big and small—have become pacifers at home. When your child starts to get a little cranky and your first line of talking it through doesn’t work, you pull out a “little something” from your hidden stash in the closet to shift their energy and attention.

  I am asking you to think about the message you are sending your child: If they act up, you will give them a toy. Then you wonder why when you are at the toy store your child has a meltdown because you have just said he can have one (less expensive) toy, not the big toy he has his eyes on. Your kid is doing exactly what I would expect him to. He has learned from you that if he gets cranky he will get what he wants. You are the problem here, not your little one.

  I understand how overloaded your life is; trust me, I know how exhausted you are after a full day. But please try to find your way through to a better approach to how you use toys and gifts. They are for celebrations. Not behavior modification.

  And if you do find yourself in the midst of an in-store meltdown, I am asking you to please find the courage not to cave in. Your first impulse, understandably, is to make the spectacle stop. But if you don’t deal with this properly, it is just going to keep happening. My hope is that you can take a deep breath, usher your child to a quiet corner—or out of the store—until they are calm enough to listen to you explain—clearly and gently; no scolding—why it is you are saying no. Will a lightbulb miraculously go off inside that little head and everything will be instantly okay? Not likely. At least not on the first try … or the second … but try you must. You have to start somewhere. I am asking you to stand in the truth of how your actions affect how your child sees the world.

  I would also suggest that one way to reduce the likelihood of those unfortunate meltdowns is to set expectations before you head into a store. Talk about what you are going to be shopping for. Set parameters—in an age-appropriate way. Then, if your child’s eye wanders off to something inappropriate, you have that conversation to turn to as a reference point for both of you to “discuss” the situation.

  MONEY LESSONS FOR CHILDREN, AGES 6 TO 10

  Introduce work-pay into your family. I am vehemently anti-allowance. In my opinion, it is such a disservice to your children to mindlessly hand over money week after week, just because they are your kids. And the notion that their allowance should increase just because they get older breeds a ridiculous sense of entitlement. You have an opportunity to instill a work ethic in your children, even at this young age. Tell them that you will pay your children for doing household chores. I recommend you substitute the term work-pay for allowance. They work, you pay. The more work you do, the more you get. And the better you work, the more you get. That’s how you earn a raise in real life; why not introduce that concept now?

  I have a few important ground rules:

  First, establish nonpaying chores. These are the basic courtesie
s you all do for the benefit of the family.

  Never pay for good behavior or good grades. You do not reward a child for meeting your expectations.

  Draw up a list of work-pay chores. Show the potential earnings for each job. Allow your children to choose their jobs—but make it clear that they have to work their way up from the smaller to the greater chores; they can’t just cut right to the higher-paying ones. And the job must be done well, not just done. Teach them that they must start with the lesser tasks and work their way up the ladder. I promise you, your kids will learn to work more quickly and efficiently to get to the higher-paying jobs—and they will look forward to working in order to earn more.

  Make payment a weekly ritual. Bring some formality to the process by setting a date and time for when you will review the work from the past week and make the payment. Maybe it’s Saturday morning when you are all around.

  MONEY LESSONS FOR TWEENS AND TEENS

  Stretch out their work-pay payments to every two weeks. And add in money for specific expenses you will expect them to cover out of this payment: after-school pizza, movies on the weekend, etc. The idea here is to give them more responsibility for handling money. By paying them every two weeks you are requiring them to make that money last for two weeks. It’s an introduction to budgeting. Will they probably run through all of the money in the first week when you start this system? Of course! But don’t punish them. Teach them. Agree on extra chores they can take on if they need money before the two weeks are up.

  Have them pay the bills. Until your kids see the cost of the gas and electric bill or the credit card bill they have no way of comprehending what it costs just to keep your family going. There’s no need to lecture here. Show them. If you don’t yet use online bill-pay, get it up and running right now. (It should be free.) Then sit down with your kids once a month, hand over control of the mouse, and have them pay the bills with you. It will be a great conversation starter.

  The great utility challenge. Pull out your utility bills and make your kids an offer: If you are able to reduce your monthly costs by at least 15% you will split the savings with them. So if this April’s bill is 15% lower than last April they will get 50% of the savings. You will be amazed how quickly the lights are turned off in rooms they are leaving, showers miraculously shorten, and everyone is happy to put on a sweater and cozy pair of socks in the winter so the thermostat can come down a degree or two or three. It’s a fun challenge that also connects your child to how it takes money to live, and how they can have an impact on your family’s expenses.

  Set a seasonal clothing budget. Before you step inside the mall or sit down for some online clothes shopping, give your child a firm dollar amount they can spend. Then have them pull aside everything they want—or put it in the virtual shopping cart—and write down the cost of every item. If you’re at the mall, ask the salesperson to put the clothing on a hold rack for a half hour and find a place to grab a drink or snack and talk through the list. Again, this is not a test. Help them decide what they need to let go of to come in at your predetermined budget. This is their first experience with living below your means, but within your needs. If they want more than they need, that’s fine. They can either pay for it themselves or you can spell out extra chores and responsibilities they must complete to earn the extra money. If they spend less than the agreed-upon amount, deposit the money they didn’t spend into their savings account as a reward.

  MONEY LESSONS FOR TEENAGERS HEADING TO COLLEGE

  Between the ages of 16 and 18 is when you should start preparing your children for being out on their own. Your child’s high school may not have a personal finance curriculum. That means you must step up and make sure your child has a solid grounding in basic money management before heading off to college. I cannot tell you how many young adults today leave college with thousands of dollars in credit card debt and a lousy credit score because no one ever took the time to teach them how to respect and handle money. To make sure your child emerges from college on solid financial footing requires teaching them what they need to know before they leave high school.

  Put them on a monthly payment schedule. This is a natural progression from paying them every two weeks when they are a young teen. Set up a checking account at the bank and give your child a debit card. Every month deposit the money into that account. Do not sign up for an overdraft service tied to another bank account. The idea here is to give your child the opportunity to learn how to handle their money. If at the end of the month they have money left over, that’s great. If they run out of money with a week to go, well, that’s great too; it’s an opportunity to learn money management.

  Spell out your spending limits. Before each school year, sit down and agree on what expenses you will continue to cover. Be very specific. If they want to upgrade to a new smartphone or an unlimited data plan, they need to pay you for that cost. If they intend to borrow the car every weekend, discuss their responsibility for making sure they return it to you with the same amount of gas in the tank. If they want more clothes than you have budgeted for, they are going to have to come up with that money. Yes, now is the time to talk about getting a part-time job. Please do not tell me they are too busy with schoolwork or after-school programs. That’s the attitude that prevents a teenager from becoming financially responsible.

  Give them access to your credit card. If your credit score is at least 700, add your teen to all your cards as an authorized user. Your child will begin to build his or her own credit report by piggybacking on your credit history. You need to add them to all your cards in order for this to work. You don’t have to tell them you’ve done this. I’d recommend you give them a debit card (without overdraft protection) or a prepaid card first; let them get used to using it before you entrust them with a credit card that reports to FICO. (Debit cards and prepaid cards do not report to FICO.) When you feel they’re ready, give them one of your cards. Have your child use that card at least once a month to make a purchase for the family. If you are out for a dinner, have them handle the bill; don’t forget the need to teach proper tipping. The idea here is to familiarize them with how to handle credit cards. Then you are to review your bill with them each month. The most important lesson here is the information on the statement that shows the interest rate you would owe on any unpaid balance, and how long it would take you to pay off that balance if you made just the minimum payment. There is no better way to teach than to show. And the good news is that all monthly credit card statements now include all that important information. Use it as a teaching tool.

  If your credit score is below 700 it does not make sense for your child to piggyback on your card. In that case, I recommend you cosign a secured credit card for your child. You will need to make a deposit to cover the card’s charge limit—that’s the secured part. I would keep the limit low, say $500 or less. Just make sure that the card you choose has the lowest possible fees and that it reports the card’s payment history to at least one of the three main credit bureaus so your child starts to build a credit history.

  Beginning in 2010, young adults under the age of 21 cannot be offered a credit card on their own unless they have the proven income to qualify for the card or if they have an adult cosign for the card. My recommendation is that you discuss with your child that you hope they will not try to get their own credit card until they have graduated from college. That’s an important four years where you can still help them build a strong score and avoid costly mistakes. Give them a wider berth than in high school; decide what expenses you want them to put on the card while at school and set a monthly credit card limit. This isn’t just about keeping them tethered while in college. The goal here is that at age 21 or 22 they already have four years or more of a solid credit history. And that will make their transition into the real world so much easier. If they emerge from college with a solid credit score, it is more likely they will be able to qualify for a credit card that doesn’t charge outrageous fees, get their own cell phon
e plan—yes, it will be time to cut them off of your plan—rent an apartment, and set up their utility service without having to pay any up-front deposits. It can also mean they will qualify for a less expensive car loan and car insurance.

  HOW TO HANDLE MONEY GIFTS AND SAVINGS

  Teaching your children the pleasure of saving is going to be one of your hardest tasks. If you force them to save they might grow to resent it. Rather than see the value of saving, they get stuck on how they can’t spend the money that is supposedly theirs. It sends all the wrong messages. There are a few approaches to consider to try to illustrate for them that, while it is indeed fun to spend money, there is satisfaction to be had, too, in putting money aside for later use:

  I would first encourage parents—and grandparents—to consider noncash financial gifts as a way to start this education process. I recently had a 13-year-old girl on my show who wanted to spend $8,000 she had received in cash gifts on a Rolex watch. Her family was aghast; they just assumed she would save that money for her future. You can’t assume anything. And if you give cash with no strings attached, or you have not actively helped your child learn how to spend, and learn the value of saving, well, what do you expect?

  I think money gifts such as U.S. savings bonds or a stock purchase of a company they are familiar with is a good way to introduce the concept of investing. At TreasuryDirect.gov you can learn all about Series EE savings bonds, which make a great gift for young children. For stock purchases, open up an account at a discount brokerage and purchase a few shares of stock; each month sit down and review the statement together. That’s a great way to start an ongoing conversation about saving and investing.

  That said, at the same time you must also help them learn how to handle money. By the time your child is 10 or so I want you to put your child in charge of how to handle any financial gifts. That’s right, I said your child is in charge. As I will explain in a moment, you are going to give them a three-option framework to work from, but you must leave the choices to them. This is an opportunity for you to learn too: How good is your child at making the “right” money choices? You need to give them the room to make those choices, and then if you are not comfortable with how they are handling things, that’s when your teaching begins. But first you must give them power over their money. I imagine that sounds very odd to you. But think about it. If you don’t give them a true stake in the decisions, you likely won’t get their full attention; they won’t engage in this very important learning process.