I recently read a provocative article from Money magazine, titled "Everything You Know About Kids and Money is Wrong." The title alone had me thinking, "Oh yeah? We'll see about that."
The article offered four findings. The first two were that money classes don't make kids smarter or change their behavior. That's discouraging, but the explanations offered were that the findings are based on studies of high school students, and that offering financial lessons in high school may be too late.
I don't quite agree. I think that the earlier we learn about how to best manage money the better, of course, but I myself didn't give the topic much thought until I was in my late 20s. I've seen the financial light go on for people of many ages.
The solution offered in the article is to start talking about money with kids earlier. That makes sense. It also makes sense to do so not only in schools, but also at home. Parents may be able to get financial lessons across more effectively because they can use actual real-life examples, such as going over the family's phone bill and explaining all the charges and taxes, and even going over the family's tax returns and property tax bills. Younger children can benefit from lessons on saving and careful spending at the mall and in grocery stores.
Are allowances bad?
The third finding was that an allowance can make things worse. The arguments made sense. If kids know they can expect a cash inflow no matter what they do, they can just sit back and let money come to them without trying to earn it. It can be more effective to link payments to responsibilities, though some studies suggest that tying allowances to chores doesn't make a big difference, either.
The suggested solution is to get more involved in your children's finances. This makes sense to me. Discuss their wishes and goals. Talk about things they'd like to buy and how they'll do so. Discuss savings plans. Encourage them to systematically save some of their income for future wants, to spend some of it on immediate desires, and to give some of it away. (They -- and you -- might find a whole lot of inspiration in our annual Foolanthropy charity drive, which is raising money for some remarkable organizations. One of them is focused on teaching financial literacy to young people, while another is spreading education throughout the developing world. Stop by and join us in contributing at least a few dollars, if you're so inspired.)
Pooh-poohing stock market games
The last finding was one I've long agreed with: Stock market games are for losers.
Ironically enough, I used to be a high school teacher myself, and I conducted a form of the classic stock market game in my class -- back in 1987. I was young and naive then, and not yet a stock market investor. But the stock market had just plunged 23% and I was teaching history, so I thought we might all learn something by pretending to invest in the market.
I found that the game is good for something. It can teach you the essential mechanics of investing. If a stock costs $40 per share, it will cost you $4,000 to buy 100 shares (plus the commission cost). If it rises to $50 per share, your shares are now worth $5,000 and you've made $1,000 -- perhaps just in a few months!
Another thing the game was good at was sparking interest in the stock market. But there are lots of drawbacks:
- Kids' interest should be pointed toward more of the business world than just the stock market. They need to see stocks as chunks of real businesses, not just pieces of paper that rise and fall in value almost randomly.
- I used the word "randomly" above intentionally. That's because over the short term, such as a few months, a stock market game won't impart many meaningful impressions of stock performance. Good stocks can stall or fall, and bad ones can rise. Careful and effective stock-picking isn't likely to be rewarded over just a few months.
- Kids might also learn incorrect lessons. They may think they're great investors when they've simply been lucky, and vice versa. Since they're using imaginary money, they may not take the exercise seriously, either.
A better approach might be to help your children actually invest. Let them manage a small part of your portfolio, for example, or help them buy shares of stock when they accumulate some money. Discuss the rising and falling fortunes of companies around them. When McDonald's (NYSE:MCD) starts trying out gourmet coffees in its stores, discuss how that might affect the business. When PepsiCo (NYSE:PEP) partners with Cold Stone Creamery, talk about how the deals can benefit each company and how they might affect various competitors. When Nike (NYSE:NKE) introduces the Air Force 25 basketball shoe, discuss how it might help the company. When Microsoft (NASDAQ:MSFT) launches its long-awaited operating system, Vista, follow its progress with your kids and see how successful it is and how it affects the stock price.
Let your kids learn from you, too, as you invest. Share your successes and more importantly, your blunders.
Learn more
Your kids can learn much more in our well-regarded book, The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of. You might also point them to our nook for teens and clever pre-teens, Teens and Their Money.
And please do check out our annual Foolanthropy charity drive -- I think you'll be impressed by what you see.
Here's to smarter, wealthier children! (And hey -- consider forwarding this article to anyone whose financial future you care about. Just click on the "Email this Page" link on the page.)
Longtime Fool contributor Selena Maranjian owns shares of McDonald's, Microsoft and PepsiCo. Microsoft is an Inside Value recommendation. For more about Selena, viewher bioandher profile. The Motley Fool isFools writing for Fools.
