My nephew is 12-yrs old and he is already asking for cash as gifts – Christmas, birthdays – all the time. I’m concerned he is learning the wrong things about money, already.
Not sure how to deal with this … basically, when he asks, I just say NO.

I thought that was such a wonderful comment. What do you do when a child asks you for money as a present?

Do you think it’s a reflection of greed? As in “Nothing you could buy me would be what I want, and at least if you give me money I can buy what I really want?”

It takes all the thought that went into your gift and throws it right out the window. At least from my point of view. Still, I know some people do not mind and are happy to give cash to adults and children.

Personally, I don’t because I always end up spending far more than I normally would if I give a person cash. When I shop for normal items I take my time, and usually try to get them on clearance, or at least with a discount. With cash, the person suddenly knows how much the gift cost, and that can be judged very quickly.

I don’t give gift cards for that reason either. I would rather put my time and caring into picking out a gift that I hope the person will love! Still though. Ever Christmas my grandmother gives me an envelope with cash, and I always look forward to it! So it’s a double edged issue for me.

What do you think? Would you rather receive cash as a gift for Christmas? Do you give cash presents to others? Tell me about it below? I would love to know what you think!

There were some excellent articles this week around the blog-o-sphere, and I wanted to share the best ones with you. I hope you find a few here that you enjoy!

‘Tis The Season:

• Being Frugal came up with 50 Frugal Christmas Ideas! This gets my pick of the day – don’t miss it!
• Prime Time Money has 5 Gifts That Will Bring Your Family Together This Christmas. I loved these ideas!
• Money Ning has Frugal Activities for the Christmas Holiday Month of December
• The Simple Dollar talks about The Expensive Ups and Downs of Christmas.
• Get Rich Slowly has their Personal-Finance Gift Guide for 2008 up. Lost of great pf books on this list!

Economic Musings:

• Four Pillars has some musings on The Great American Car Company Bailout
• Five Cent Nickel has a wonderful article on the Income Tax Breaks in the Bailout Bill
• Money Smart Life has an article on how to Save Money at Restaurants – Tips for Spending Less When Eating Out.
• The Financial Philosopher has an article on the state of investments next year called “Nary Quite Contrary… 2009” I’ve you’ve never given Kent’s blog a visit, be sure to check it out!
• The Smart Spending Blog says yes, Wal-Mart really is that huge

Assorted Sundries and Deals:

• Money Saving Methods has several can’t miss deals like the NEW $50 Sharebuilder Bonus and how to get a free Entertainment book.
• Gather Little by Little wonders, “What’s the Dillyeo?” Dillyeo is a new deal linker where you can find some great bargains!
• Taking Charge gives us the lowdown on a new service in “Give Real unveils drinking 2.0“. This isn’t a freebie so much as a neat way to buy your long-distance friends and family a drink!

Carnivals, Festivals, and Celebrations:

• Carnival of Personal Finance #182 – Don’t Go Broke Over The Holidays Edition @ Free From Broke
• 42nd money hacks carnival: laid-off and freelancing edition @ The Financial Wellness Project
• Festival of Frugality #155: The Chic-Tacky Christmas Edition @ Greener Pastures
• Carnival of Money Stories Edition No. 88 @ The Dough Roller
• Carnival of Debt Reduction #169 @ Four Pillars

That’s it for this weekend’s link roundup! If you’re new here we’d like to invite you to pick up our RSS feed. Thanks for stopping by!

Here’s my take:

Teach your child to save first:

This is especially easy with younger children who have no access to credit. Don’t even make borrowing money an option. If there is something that your child wants, but cannot afford, don’t just buy it for them. Sit them down and talk about the cost of the item.

Make a simple chart or budgeting worksheet.

If your child has an allowance, then help them put together a budget. Help them figure out how long it will take them to save for the item. I would recommend getting them their own calendar, and marking their budget on it. You can put stickers on the calendar, or the budgeting worksheet to make things more fun. Give your child a sticker each time they save like they planned to, etc.

If your child believes that it will take them too long to save for the item, you can always encourage them to find more ways to earn money (which is an excellent real-world lesson!). Offer them more chores, or see what type of an odd job they can do to earn extra money. Keep stickering their calendar and charts so that they stay excited about their goal.

I know this sounds like a plan for younger children, but it works just as well with teenagers – as long as you don’t talk down to them. The message is basically the same: No, I’m not going to give you what you want, or lend you money. Earn it, and Save for it. Obviously you will say that as gently as possible – but the meaning shouldn’t change.

I truly do believe that it’s best to start with that lesson before you ever introduce credit, or allow your child to borrow money.

Make sure your child knows there is a direct connection between time and money:

This is one reason a calendar and a budget are so important. Help your child understand exactly how many hours of his / her life they are going to have to work to have the item they want.

You know, as an adult I sometimes buy things that I do not need, and regret it later. One of the best ways that I found to stop that behavior was to think (even for a second) of how many hours I had to work in order to purchase that item. Nearly every single time I ask myself that question, I end up putting the item back.

It’s especially important when you are talking about credit and borrowing money. Not only do you have to work hours of your life to afford the item, but unless you pay your full balance each month, you have to work additional hours to pay the interest on the loan.

So that calendar, and budgeting worksheet go a long way towards teaching your child to question his/ her purchases and judge them by the mount of time it will take to earn them. Especially if you are consistent about using them.

Talking to your child about credit:

Having basic “Save before you buy” mentality will work wonders when you start introducing credit to your child. When my daughter is olden enough, I am going to teach her about credit card rewards first.

I will explain to her what the rewards of good credit are (That it costs you less to borrow money because people know that you will pay them back) and also that it’s possible to get some nice financial benefits and rewards if you use credit correctly. She will never be allowed to borrow money that she does not already have in savings. If she uses credit it will be because she has the money at home already, and wants to take advantage of the rewards from using credit.

I believe this will set her up with a better mentality about credit cards. Credit cards are financial tools. In some cases they are excellent financial tools. Being able to get rewards because you use your credit cards is a nice benefit of having good credit. In some cases it’s like getting a constant discount of a few percent – whether that’s in rebates, airline miles or cash back.

Obviously, my daughter will be much older before we have these types of conversations. If you child is the right age for this type of discussion, make sure you mark a calendar with their due dates as well as your own. Take the time to sit down with them and make sure they are budgeting and making payments on time. Adding your child as an authorized user and sharing a basic rewards credit card account might be an excellent way to teach your child how the rewards of good credit work. It’s also an excellent way for you to supervise their use of credit, and to oversee their payments.

I don’t believe I even want to teach my daughter that she can borrow money that she does not have. That’s my whole goal with talking to her about good credit and rewards. I Want her to know right from the start that you don’t borrow money because you don’t have any money.

If you are broke and have no money you work to earn more. If you have money and borrowing gives you a clear financial benefit, then it’s an acceptable situation.

What do you think about this plan? Do you have any suggestions? Leave me a comment below!

Keep Reading:

• Teaching Your Child The Difference Between Wants and Needs
• Saving for Your Child’s Education with UPromise
• Should Teenagers Have Credit Cards?

So, what are the pros and cons of this? Why would anyone give their teenager a credit card?

Cons of Giving Teenagers Credit Cards:

1. They may begin to see credit card debt as an acceptable thing - If you outright hand your teenager a credit card, that is the same as telling them that’s it’s OK to go into debt.
2. They will almost certainly use the card improperly at first - Most teens will run right out, and charge up the credit card to the limit. (That’s a generalization, I’m sure some teens would be responsible with a credit card.) It really depends on the kind of debt instruction they have had previously.
3. It may be difficult for them to handle the responsibility - the teen years are tough, kids are learning to manage a lot of things at that time, and throwing credit into the mix may be difficult.
4. It teaches them to borrow on credit rather than save for what they want - If they can go right out and by that new game, or outfit, or CD, why would they want to wait?

Pros of Giving Credit Cards to A Teenager:

1. You are there to guide them, and help them understand how credit works, before they leave your house - This could prevent a lot of pain and heartache for them later – especially since credit card companies regularly stake out college campuses and offer free T-shirts to anyone who applies.
2. You can be there to teach them about compound interest, why they should pay their bill off every month, and how they can benefit from rewards if they do things correctly - Credit cards are excellent financial tools when used correctly – and by laying down the ground rules while your child is still young it gives them the best chance for success.
3. There probably is no replacement for actually handing a child a credit card, letting them get into trouble with it, and then making them work to pay back what they borrowed - If you can enforce that rule in your house as early as possible, it would be a valuable, lifelong lesson for your kid. It would also, hopefully, keep them from making the same mistake once they leave your house.
4. Skills to pay the bills - If your child actually has a credit card that they are managing, you can teach them to mark the due dates on a calendar, to budget so that they can pay the balance in full. You can also show them how much interest they were charged if they do not pay the card off in full each month.
5. You can help your child build a positive credit history early on - The benefit to this is twofold. As long as your child has a credit card, you can actually monitor your child’s credit report along with them. This opens up a wonderful opportunity to teach them about why credit scores are important, and how they are computed.

   The second benefit is that by making sure they use their cards correctly, you are raising their score a little while they are still at home. This will help them when they go to apply for student loans, a car, or an apartment. It will give them leg up when they are starting out.

The decision about whether or not to give your child a credit card is personal, between you and your child. What do you think? There are some hefty pros and cons to the issue, what do you believe is right?

How can you judge whether or not your child is ready to be responsible with a credit card?

There’s actually a pretty simple way to tell. You can purchase a pre-paid credit card and give it to your child. Tell them it’s for emergencies, and then sit back, and wait for a few months.

If your child does not charge anything, or very little on the pre-paid credit card, they are probably ready to handle the responsibility of having a real credit card.

However, if they come back to you a couple of weeks later and all of the money on the card is gone, then you will know it’s time to sit down and talk to them about credit, and what constitutes an emergency.

How do pre-paid credit cards work?

Prepaid credit cards are a bit like debit cards. You put money onto the card, and the money that you spend comes off of your total balance – just like putting money into the bank.

Some prepaid credit cards offer a “credit builder” program, which means that you pay a small monthly fee on the credit card. That fee is then reported to the credit bureaus as an interest payment, and it will raise your child’s credit score. In that respect, pre-paid credit cards are better than debit cards since debit cards will never help to build your credit score.

If your child manages the pre-paid credit card well enough, you can consider adding them as an authorized user to one of your credit card accounts. If you do this, make sure that your card has a low, or zero revolving balance (meaning that you pay it off every month in full). Also make sure that you never make your payments late because then it would hurt your child’s credit score as well as your own.

Neither of those two options actually involve giving a child a self-directed credit card, which personally, I think is important. That last and final step should really only come when you are certain that your child understands how credit works. When your child has a regular income, and has passed the two tests above, then it is probably safe to let them apply for a student credit card. Or a secured credit card.

Secured credit cards in particular give your child a failsafe if they leave home and get into trouble with their credit card balance, or lose their job. Since the balance on the card is guaranteed with a savings account, you will never have to worry about them defaulting during college and wrecking their credit. The balance on the card would simply be paid out of the savings account, and it would prevent further damage being done to their credit score. Essentially, it would help them get back on their feet that much quicker if they had problems.

There really is no “one right path” for everyone when it comes to children and credit. The most important thing to do is just make sure that we do all teach our children about credit - by any method we feel is right so that they have the tools they need to succeed when they leave home.

What do you think about teens and credit cards? Leave us a comment below!

Keep Reading:

• Should You Charge Your Children Interest?
• Teaching Your Child The Difference Between Wants and Needs
• Saving for Your Child’s Education with UPromise

Most adults become aware of identity theft pretty quickly – we check out bank balances, our credit card statements, and our credit reports. When we do find that someone has been using our personal information (as I recently did), we take the necessary steps to cancel our accounts, and stop the theft.

The problem with children and identity theft is that it may never be detected until the child goes to apply for his / her first loan – which could be years after their identity was first stolen.

There are three types of identity theft to watch out for:

So, how can you tell if your child’s identity has been stolen?

In a worst case scenario, your child will find out that their identity has been stolen by having bills sent to them, having an arrest warrant, being turned down for a loan, fired from a job, or denied employment because of a “criminal record”. The best thing though, is not to let it get to that point.

The easiest way to keep tabs on your child’s identity is to check their credit reports just like you check your own. Since the credit bureaus do not “knowingly keep records on children under 13″ the best thing that you can have happen is to be told that there is no report on file. You can find a sample letter here that you can print out and send to the three main credit bureaus to check on the state of your child’s credit report.

If your child does have an active credit report, then that is a sure sign of identity theft. If that is the case, you will want to treat it just as if your own identity had been stolen:

Identity theft is a scary situation, it’s a real violation, especially when it happens to a child. Thankfully, we have enough laws in place, and enough ways to combat identity theft that if it does happen to you or your child, you just have to take the necessary steps to stop it.

Have a question for us? Leave a comment below!

Keep Reading:

• What To Do If Your Purse Or Wallet is Stolen
• Should You Sign The Back of Your Credit Card?
• New Protection From Identity Theft?

I have a question – My credit score is 662. I have 5 Credit cards (revolving) and some installment accounts mainly student loans with 1 auto loan payment. I am trying to apply for another private student loan and was recently denied (even with a cosigner). My credit to debt ratio is rather high 96%, but I do not have any negative accounts, no late payments, and no defaults. If I was to pay off one or two of my credit cards, how long would it take for my credit score to increase?

Thanks for your question Danielle!

Paying down your credit card balance is exactly what you want to do in this situation. Your debt – to – credit ratio (how much you owe) is 30% of your FICO score. If you start paying down your current balances you should see your credit score start to rise within a month. (It takes at least a month for your credit card companies to report your new lowered balances to the credit bureaus. As your balances continue to go down, your score will continue to go up.

The standard financial advice for paying down your debt would be to pay down the credit cards with the highest interest rates first. However, if you want to maximize your credit score as quickly as possible, make sure you pay down your credit cards that are closest to the limit first, and do not focus as much on what the interest rate is.

Paying the cards down in order of “closest to the limit gets paid first” is the best way to boost your FICO score because it will have an immediate effect on your debt – to – credit ratio.

Ideally, for your score to go up as fast as possible, you will need to get all of your credit card balances down to under 30% of your available credit. If you can keep them that way, then over time, your credit score will be up over 700. All you have to do is just keep making your payments on time, and keep your balances low.

It may help for you to call your credit card companies – see if they can lower your interest rates, or even increase your limit. A limit increase would positively affect your debt to credit ratio too because that’s an instant way to make it look like you haven’t borrowed the full amount you have available.

Do be careful asking for too many limit increases in a row though. Each time you request a limit increase, the credit card company will pull your credit score, which counts an an inquiry. Too many inquiries will actually lower your credit score, and that’s what you’re trying to avoid.

In your position right now (with trying to get a student loan) I don’t think I would apply for any new credit cards for a while. Having new cards with no balances would certainly help to lower your debt to credit ratio, so it would seem to be a fix. But, new credit cards will also lower the average age of your accounts, and ding your credit score from the inquiries. So it’s probably best right now just to knock some of your total debt down, keep making your payments on time, and periodically check your credit score.

Before you apply for your student loan again, make sure that you give them a call. Ask them what credit score you need to have to be approved. That way you can monitor your own score and approach them again when you’ve reached that point.

It does surprise me that they wouldn’t give you a loan, even with a co-signer when you have no late payments or charge offs. That sort of suggests that they may think that your debt vs. your income is too high as well. Either way, paying down those balances is the first thing you want to tackle because it will raise your credit score fastest.

Thanks for your question!

We also had another reader, Nancy, who left us this question:

My husband and I are planning to file bankruptcy. My question is, we opened up a new account with Discover in hopes to transfer a higher balance over,however Discover only transfered half because of our credit. This account is so new we haven’t received a bill yet,should we transfer the Discover amount back to the original account, before we file?

Thanks for your question Nancy!

If I am understanding you correctly, you are about to declare bankruptcy and you are wondering what you should do with your new Discover account. The only reason you would want to transfer the Discover card amount back to the original card is if you are trying to keep the Discover account through your bankruptcy.

Credit card accounts with zero balances can sometimes slip by through a bankruptcy without being closed. If you are to have any chance of doing that, then yes, you need to transfer the balance back quickly, before Discover bills you. Once they bill you the account will show up as having a balance on your credit reports, and would probably be included in your bankruptcy.

If it’s too late, and they have already billed you, then you can go ahead and transfer the balance back, wait a month for the new billing cycle so that the card reports as zero balance, and then declare bankruptcy.

You can also consider doing what is known as reaffirming your debt, which basically means that you make an agreement with your credit card company to pay your balance with them – even though you are declaring bankruptcy. Not all lenders will accept debt reaffirmation, but if you want to keep the account, then it would be worth looking into.

Thanks for your question!

Do you have a question for us? Leave a comment below!

Keep Reading:

• Repairing Your Credit After Bankruptcy Part 1
• What To Do When Your Credit Card Company Won’t Cooperate
• Negotiating With Your Creditors When You’re Past Due

We’ve already started a Coverdell account for her, to take care of her early school years because we want to put her in a private school. I hadn’t actually started her an official college account though. So when I ran across UPromise, I thought I would check it out, and see what it was all about.

I thought it might be fun to do a review-in-pictures, so I included some screen shots below!

This is the UPromise main page – where you’ll end up if you want to check the program out a bit. I started my account with them in September, because I got a five dollar sign on bonus. I haven’t really been actively trying to accumulate money in the account, I just set it up, and gave it a couple of months to do it’s thing.

So far, I have $8.64 in the account. Not counting the $5.00 sign on bonus, it means that I’ve earned $3.64 towards my daughter’s college fund. Certainly not earth shattering! But, considering all that I did was to list my Kroger card number with UPromise, and make my regular purchases, I don’t think that’s too shabby.

If I earn a dollar a month, for the next 16 years (assuming I do nothing differently than I am now) that’s $192.00. I am assuming that *might* buy a textbook in 2024. Maybe. An undergrad textbook.

So, clearly, this is nice, but if that were all the program offered, I probably wouldn’t waste my time.

One thing that does help though, is that you have the ability to invite friends and family members to join you on UPromise. And they don’t spam them to death either – as far as I can tell. At least, no one has complained to me about it yet.

So, you get your family in on the deal, and they allocate their rewards to your child. This is great for me, since my dad is big into EBay (We will get 1% of all his purchases) and my mom shops online (1-10% back depending on where she shops). If we all throw our Kroger cards in there, I can see how the savings could build up a bit over time. And hey, it’s free money. The only work I had to do was sign up and list my Kroger card.

As I said though, this isn’t the biggest benefit of UPromise in my opinion. Free money is good, but this is better:

What sold me, lock, stock, and barrel was that little logo at the bottom – UPromise has partnered with Vanguard to offer low cost 529 plans.

Here’s a few more details:

So. That’s a pretty sweet deal considering the last time I browsed around Vanguard’s website, their 529 requirements looked like this:

So, frankly, I don’t have $3,000 to cough up all at once to start my daughter’s college account. I wish I did, but I don’t. But if I go through UPromise, I start the account with $200, and contribute a regular $50 a month. Then, anytime my UPromise account hits $25 or more, they will roll it on over into the 529 account for me. Easy Peasy.

UPromise has also partnered with Citi to offer a rewards credit card. It has decent terms, and the rewards go into your UPromise account:

Basically you can earn 10% back when you shop through their approved retailers, and 1% back everywhere else.

As far as their “approved retailers” go, it really is a large list. There are more than 600 stores and travel sites to choose from. Here’s a few to give you an idea:

• Target
• Priceline.com
• Walmart
• Williams-Sonoma
• Amazon.com
• Bluefly
• FTD.com

Honestly though, this is not the type of credit card you want to carry a balance on. Just like any cash back credit card, if you carry a balance from month to month the interest that you pay will completely negate any benefits you get from using the card.

If you normally carry a balance on your cards, you’d probably be better off just chucking an additional $10 or $20 into the college account itself, rather than paying interest to Citi just to get a few dollars in rewards.

All in all though, I’m thrilled. I have to admit, I think this is going to be a valuable program. I do have one BIG gripe though, and thankfully, it is an optional feature.

UPromise has a tool bar that you can download. When you jump online, you log in, and it will show your current savings. What it also does though, is to automatically use the UPromise affiliate link when you visit one of the 600 partner sites. That way you can be sure that you will get your rewards back when you shop there.

The only problem is, I’m one of those people who likes to browse. So, if I get an email from Amazon, and I click on the link, I get redirected through UPromise temporarily. My gripe here is, when the toolbar is active it sends me through UPromise, and then redirects me to the front page of the partner site – not to the page I was trying to visit. In other words, I’ll click a link for a sweater, and end up on Amazon’s front page instead.

Well, after about a month of that, I uninstalled the little bugger, and put a few expletives in the comments section of the uninstall. Hopefully Upromise will fix that feature as soon as possible.

So, that’s my only warning. If you browse a lot, do NOT install the toolbar. Just visit UPromise any time you actually expect to buy something online. They have so many affiliate sites that chances are, you’ll find what you need at one of them, and be able to get some money back on your purchase for your child’s education.

So, I guess my next question would be, why in the world can’t we do this with our retirement accounts?

Have a question for us? Leave a comment below!

Keep Reading:

• Teaching Your Kids About Credit and Money
• Should You Charge Your Children Interest?
• Teaching Your Child The Difference Between Wants and Needs

• Less likely to be swayed by emotional marketing techniques
• More likely to save money for what they want instead of putting it on credit
• Less likely to throw a screaming fit in the middle of a grocery store
• Less likely to judge their own worth by what they own

The problem is, teaching your children the difference between wants and needs isn’t something that you can do just once. After all, when is the last time you were able to teach your child a valuable lesson in one go? The difference between wants and needs has to be taught throughout your child’s life.

You can start by laying an easy ground rule with your child:

“I will always, always take care of your needs. You will never go without food, clothes, shelter, or school supplies. I am not here to give you everything you’ve ever wanted though. I love you very much and if there is something you want, I will help you save for it and show you how – just like I do. “

This statement pretty much works at any age, any time you are having trouble with your child begging for something that they want, but do not need.

Let’s also take a look at a few specific examples that you can use to help teach your child the difference between what they want, and what they need.

When purchasing school supplies:

Children do need school supplies in order to have a good experience at school and complete their education. And school supplies can be expensive – there’s no way around it!

If your child is old enough, you can hand them the list of supplies they need, and an amount of cash that you are comfortable spending. Carefully help them keep track of the cost of the items in the cart, and have them check the items off of the list as they decide what they want.

Now, the beauty of this plan is that your child will mess up. They will probably pick out the most expensive calculator, pens, or notebooks at first. Take a calculator with you and keep that running total going. Use the experience as a chance to talk about the real value of the items they are buying. Yes, they need a notebook. But can they afford to spend $8 on a single notebook?

Do be careful not to assign the value for your child. The whole point is for them to figure it out on their own while you are there to support them. Yes, obviously a 25 ¢ notebook is better. But your child may attach great value to the $8 one. That is the perfect time for you to help them question why they want it:

• Is it a better notebook? Higher quality?
• Do they have any other notebooks like it at home?
• Does it have a cool picture on the front?
• Is it a “cooler” notebook than their friends will have?

If you can show them that they will have to sacrifice in other areas if they want the more expensive item then that is a valuable lesson too. Just make sure you don’t give your child additional money to purchase what they want – that will defeat the purpose

Letting your child pick their own school supplies can be an excellent experience for both of you – if you can let go and allow them to make the mistakes right there in the store. It also requires a fair amount of patience, as well as taking things in and out of the cart. If they do manage to get everything they need and stay within their budget, make sure that you celebrate a bit. Tell them you are proud of them, and have an ice cream, or some family time together afterwards.

At the Grocery Store:

Taking your child to the grocery store with you give you a wonderful opportunity to teach them about marketing. It can be a very frustrating experience to have a child who wants sugar-filled cereals, and junk because they have seen advertisements on T.V.

I have solved that problem in my own home by disconnecting the cable, and monitoring what my child watches on video. I don’t expect that to last forever though. Sooner or later my daughter will be exposed to the “advertising machine”.

It helps to have some idea of how you can talk to your child about marketed products – since 99.9999% of them fall into the “want” category, and not the “need”.

You can try all of the following quick ideas with your own kids:

• Ask them about the ad they saw for the product – Why did they like it? Why did it make them want the product? Ask your child if they think their life will be like the commercial if they buy the product.
• Show them the price difference between the item they want, and a less expensive quality item.
• Allow them to add the single choice of a “want” item to the grocery list - before you leave the house. Talk to them about buying on impulse. If they see something else that they want, you can have them wait until next week and think about the purchase.
• Make them use their own money to buy the item - Few things drive a point home like having to decide whether or not to spend your own cash on a purchase.

No matter how you go about teaching your children about wants and needs, they will benefit from it. As a parent, don’t worry if you make a mistake, or give in once in a while. Smart purchasing, and money management skills are taught over a lifetime. You don’t have to be afraid to get in there and lay the groundwork for your child. Perfect or not, it will be a firm foundation.

How do you teach your child about the difference between their wants and their needs? Do you have advice you can share with other parents? Please tell us about it in the comments section below!

You can also subscribe to our RSS feed to keep up with our articles on kids, credit and money.

Keep Reading:

• Should You Charge Your Children Interest?
• Teaching Your Kids About Credit and Money
• Credit Cards for Teenagers?

“Mom, can I borrow five bucks?”

And we all know that “borrow” means “have” because most children won’t remember tomorrow that they borrowed anything at all from you today.

But what if we did things differently?

Do you think it’s right to charge your child interest when they borrow money from you? Do you ever force them to pay it back?

I wanted to talk with you guys about this today, and see what you thought. At what point, as parents do we step in and teach our child what “borrow” really means? ‘Cause I’m very sure that if we let them grow up, and get out of the house before they learn it, that we’ve failed in an important area.

My daughter’s still young, very young, she’s not yet two. But these types of thoughts are going around in my head, and I want to lay down some plans for how I want to teach her as she grows.

I know that I never had to pay my parents back for anything when I grew up. They never charged me interest on anything I borrowed, or even said anything to me at all if I didn’t pay it back. In fact, we never really talked much about credit, loans, or debt, ever.

So I wanted to turn this topic over to some of the more experienced parents among us.

How do you teach your child about borrowing money? About interest rates? About what a loan really means?

Or, if you’re a future parent, or the parent of a young child (like me), how do you plan to teach your kids about borrowing money?

Is it as simple as “Borrow money? Don’t do it!” or do you have a more complex outlook?

I did a bit of surfing around the internet, to see what kinds of ideas were out there, and I thought there were a few good ones worth sharing:

The Family Education site made a good point about saying no to your child when they ask for a loan:

You can say no and refuse to help. Maybe you’re saying no because you don’t want your child to have the money. Or, maybe you just can’t afford to help.

Either way, it’s an important lesson for your child to learn that, as the Rolling Stones have said, “You can’t always get what you want.”

Hmm, sometimes not getting what you want immediately is a valuable lesson in itself! I definitely know that is something that I want to teach my daughter. In a world where instant credit is so common, I think it’s very worthwhile to emphasize saving instead of borrowing.

An article that I found on Financial Web about kids and credit was actually pretty scary:

Do you know whom the credit card companies really want to reach? Are you aware of whom they really desire to bring into their fold? Well, if you read the title of this article, you already know. It’s your kids, starting with your 12-year-old and up through your college student and young adult. But why would credit card companies want to reach kids when they could focus exclusively on wage-earning adults?

It’s actually quite simple. The credit card professionals know that children are vulnerable, that they’re usually short on cash, and that they’re fairly easy to snare into the minimum-payment lifestyle. Young people are outstanding targets for credit card companies because kids, accustomed to seeing their parents pay with plastic money, have been conditioned to believe that credit debt is simply a natural part of life. These companies also target college attendees because the students are assumed to be relatively safe risks; this is because the companies anticipate that the parents will step in and pay the balances off if the kids can’t do it.

I don’t really know if I believe the credit card companies are “out to get” our children. However, I certainly think they are not averse to taking advantage of the lack of education about credit cards and interest. Both from adults and children.

So far, my basic plan for my daughter looks something like this:

1. Teach her to save first - I’m really only open to lending her money if it’s a necessity. And since I will take care of her necessities anyway, there should be no real reason to lend her money.
2. If I do choose to lend her money, I will charge her interest - The longer she takes to pay me back, the more interest will be applied. I mean, that’s the way the world works, and I would rather her know that before she leaves my house.
3. When she wants to buy something, I am going to help her work out a simple budget and savings chart - I want her to figure out how long it will take her to buy something, and decide whether or not it is worth it based off of her time investment.
4. I plan to buy her this super cool piggy bank! - It has four chambers, spend, save, invest, charity. I would like to drive those points home as early as possible.

So, how about you? Do you think charging your child interest on a loan is the right thing to do? Please leave me a comment and let me know what you think!

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At what age do you start teaching them about credit? When do you talk to them about money? The answer, at least for me, is from the time they are born! Even children as young as two or three can understand basic money concepts.

Here are some quick and simple ways to teach young kids about money and credit:

1) Go shopping with them, and talk to them the entire time. If your child is old enough to count, why not tell them you need a can of tomatoes, and have them price compare? Which can is cheaper? Do you like one brand better than another? What about the packaging?

This can prompt an excellent discussion on frugality – Is the more expensive brand always better?

2) Let your child pay - If you are using cash, hand it to them and supervise them while they count it out. If the store isn’t extremely busy, most cashiers do not mind. If you are using a debit, or credit card, hand it to them, and tell them what it is.

“Here sweetie, this is a debit card. When you pay with this card it means that it comes out of my checking account, and it uses the money that I earned at my job.”

Or, if it’s a credit card:

“This is a credit card. It’s a small loan. When you use it you are borrowing money from the bank, and if you don’t pay the bank off within a month they charge you more!”

I tell my toddler which cards I am using all the time. And yes, I get some strange looks when I hold the card up and say “This is a Debit Card! It’s better than a credit card because I’m using my own money!“. But I will keep saying it until my daughter understands. When she’s old enough to say,

“Yes Mom, I know what a debit card is” I *might* stop telling her.

3) Let your child see you pay the bills - Now obviously, if you’re stressed and pulling your hair out, it might not be the best time to set an example – we all have those months! But if you can find a time when you are calm, go ahead and pay the bills in front of your child. I’m not saying that you have to divulge your entire financial picture to your baby! Just let them see paying bills as a normal part of life.

4) If you carry a balance on your credit cards, show your child how much interest you are being charged, and show them where it is on the statement.

“Look, see, I only paid part of my credit card bill last month, so this month the bank charged me $50 in interest!”

Or:

“You know, if I had put that money into a savings account instead, then the bank would have paid me interest. A savings account is like loaning the bank your money for a little bit, and they pay you money each month because they borrowed it.”

5) Open an investment account for your child, and let them help you run it - Very young children can still be taught good investment principles! We bought our daughter a small amount of Disney stock in her account. We did this not because we believed it was the best investment, but because it was an investment in her. She may not understand what an ETF is yet, but she will know all about Disney. We will help her to understand that those few shares give her a tiny bit of ownership in the company, and it will be a launching pad for more discussions when she’s older.

6) Don’t be afraid to talk to your kids about investing, credit and money - They are not going to learn about it in school. If they don’t learn about these things with you, they are very likely to get their education from the school of hard knocks.

I think a lot of parents avoid talking about these topics because they are afraid they will give their child bad information. You really shouldn’t worry about this. If you tell them something that is wrong, just go back and correct it later. When it comes right down to it, it’s probably better for them to have spotty financial knowledge than none at all. They will fill in the gaps with their own experience as they grow.

7) Tell them where their money should go, do not give them an option - From a young age, as young as you feel you can manage it, split any money your child gets into categories: Spend, Save, Invest, Charity. Go back to that formula every single time your child gets any amount of money.

I mean really, consistency is key. Most children never grasp an idea the first time. Especially if it’s not an idea they like! They do have to be gently told, over and over, and over and over. If you stick to your guns on this one you are giving them a lifelong habit of success.

Talk to your child about what a credit report is - You don’t have to go into the whole concept if they’re young. A simple:

“It’s like a report card. Every dollar I spend on credit is recorded there, and every time I pay my bill it’s recorded there too! If I do a bad job, I get a low score, and then no one will want to let me borrow money any more – that’s like being in detention…for a long time…It takes a long time to get an “A” again if I mess it up”

However you choose to talk to your child about their finances and their credit, the important thing is that you do talk to them.

There are tons of simple ways to teach money and credit quickly, and effectively – I’m sure you can think of a ton of them! Just remember that you probably don’t have to push the good advice at them, just make it a normal part of their lives, and they will thank you for it when they are older.

How do you teach your kids about money and credit? Please leave us a comment below!

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