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How to teach your kids that money doesn't grow on trees

Erica Sandberg

July 1, 2014

QHi Erica,

My boys are 6 and 8, and they think money grows on trees! If I tell them that I don't have the money to buy them a toy or something, they tell me to use my credit card! I've told them that you still have to pay the money back, but they don't seem to get it. Any ideas? –Jeannie

ADear Jeannie,

I understand your predicament. As my own daughter gleefully pointed out, money does grow on trees! It is made of paper, after all, which comes from, you know… trees. Smart aleck kids.

Time to give some real lessons in what money and credit are all about, since it seems your wee ones are a wee bit confused about the basics. Here's how you, Professor Mom, can clear up the murkiness.

How you get money

A logical place to begin is with the fine art of earning. Keep it simple and positive. Explain that an employer gives money in exchange for effort and time. The longer and harder you work, the more you'll make. Demonstrate this by allowing your children to earn a bit of cash from an array of job opportunities. Make sure the tasks are doable but challenging, and outside of what they're normally expected to do. You can even negotiate over the wage.Ask Erica

It's important to give them the sense that work may be tough, but worth the reward. About your own occupation, convey a sense of pride. A great way to put it: “Not all aspects of my job are fantastic, but I always love providing for you guys!”

What you do with money

Tell them that because you are the parent, you get to decide where and how to spend the money you earn. Your first priority is to ensure their security. That means paying for essentials such as housing costs, fuel for the car and groceries. Draw a pie chart, with all the categories as slices. Include pieces for savings and fun.

Point out that if you spend too much in one slice of pie, there won't be enough for others. Again, you want to convey control and enjoyment.

Why you might want to borrow money

Explain that there are some things that you would like to have, but you don't have all the money needed right now, so sometimes it makes sense to borrow. Tell them the cost of an average house in your area, and say, “Most people don't have enough cash to buy a home like this with savings, so they ask a bank for a loan and make monthly payments. The bank adds fees to the loan, but the buyer gets to live in it right away, which is really cool.”

As for credit cards, it looks as though the kids have seen you use them, so now explain the more complete process:

  1. Say: “The bank lets me borrow up to $1,000. That's my credit line and I can charge up to that amount.”
  2. Tell them: “At the end of the month, they tally up all my charges and send me a bill. If I pay everything, I don't have to pay any extra (called interest). But if I only pay some, what I bought will be more expensive, leaving me with less money to spend on other things we want or need.”

What happens when you don't repay the money you borrow

Now, get really dramatic. Ask them if they'd be upset if they lent someone money, but that person didn't pay it back. When they nod, explain that banks do too, and can react in a few ways:

  1. Give you a terrible report card. Just as their school will list poor marks for bad performance, banks will add negative information about you to credit reports. Other banks will see that you didn't pay as you promised, and the next time you want a loan, it will be harder and more expensive.
  2. Add a lot of money to what you already owe. The amount of interest the banks add will be higher, making it even harder to repay.
  3. Sue you if you still don't pay. They have that right, but you never want them to take that action. It would be very stressful, and you'd probably lose and owe even more.

So that's a start. Don't try to cover all these points at once, but discuss it over time. Instead of lecturing, try to have fun with it! Though this knowledge won't always take the sting out of not getting what they want when they want it, it should temper the tantrums.

Got a question for Erica? Send her an email.