How can you possibly talk about long-term savings with a kid who can’t see past next year or even next week? Should you even bring up the subject? Your kids will hear conversations about “saving for college” and “saving for retirement.” Kids, however, have no perspective of what college or retirement is in terms of money, or even where such things fit into the span of their own lives.

Even though college, working and retirement is far, far outside a child’s perspective, there are some things that parents can mention now and then to help their kids understand what lies ahead. Here are some ideas about how to frame those conversations you might have with your kids over the years.

Let’s start by defining one’s money in three stages. When we think about a person’s life we can see differences in how money is received and spent during three phases: childhood, adult working years; and retirement, or non-working years.

This framework can give you a guideline for talking your child about what is going on money wise in these three stages. Obviously a child can’t comprehend all this at one time, but there will be times when you can ask a question to see what your child thinks.

Money in childhood. Ask your child, “Where does your money come from?” Have your child make a list. This may include allowance, gifts, money for chores, and maybe, part-time work for older kids. Then ask them to list what they spend their money on.

Money in adulthood. Ask your child, “Where do adults get their money?” Have them make another list of people they know and how they earn their living.

As a parent, you can write out your long list of expenses, such as, housing, food, clothing, transportation, medical expenses, utilities, and taxes. These are necessary expenses that parents pay along with managing money for family activities, entertainment and savings. Make a point of comparing adult spending with kid spending.

Money in retirement. Ask your child to make a list of people they know who are retired. This may include grandparents, other relatives or neighbors.

Explain that when someone is retired they no longer receive a paycheck, yet they still have expenses and bills to pay. Retired people get their money from pensions, Social Security, and their own savings and investments.

During retirement people may say they are living on a fixed income. You can explain that much of this money is received in fixed amounts that don’t change very much. That can be why decisions to spend or not spend become very important.

You can tell your children that you too will someday retire. You might share what you are doing to save for your retirement. Point out that employed parents have to use their money for both present and future needs.

Like many stories this one has a beginning, middle and an end. You are helping your child see that people are in different money stages during their life. During each stage there are different reasons for spending and not spending.

Your child is just beginning his financial journey. In a kid’s mind, the very act of not spending is saving, a big lesson in itself. You offer your child a good learning experience by letting them set short-term savings goals.

Encourage them when they decide to not spend. Praise them when they reach their goal. Let them experience the good feeling that comes from spending their own money which they saved (not spend) to reach their goal.

During childhood a kid will have many opportunities to say, “I want to save my money for that.” As they grow and manage more money and responsibility, they will have confidence in their ability to not spend with a definite purpose in mind. This decision-making is a habit they can carry into adulthood.

One of the best pieces of advice you can give your adult children is to start putting money aside for retirement with the first paycheck. A good motto is, “Some is better than none. Earlier is better than later.” Even a small amount of money not spent can make a difference, whether it is for the short term or for a goal in the far distant future.

Financial institutions tell us that money will grow in a savings account. However, at current rates if your child keeps $100 in a bank for one year, she will earn a few pennies. Not much incentive.

A better way to encourage saving involves helping your kids make money decisions at home with their allowance. When your child is deciding how to spend her allowance, you can start a conversation about the value of not spending all of it. A child can understand the idea that to not spend means there will be more money to spend in the future. So in a child’s mind, saving is the act of not spending.

When we talk about kids and money management skills, saving is a decision, a part of the process. Kids can decide to not spend when they understand the reason for not spending. A kid can say, “I didn’t spend this money on this now so I can have more money later to buy that.”

Parents can do several things to encourage this spend or save decision-making. Here are some suggestions.

Keep the time frame short

For kids the time from now to later has to be relatively short. Saving today for a movie next week makes sense to a kid. However, saving today for college years 10 in the future is not rewarding for several reasons: 1) a kid doesn’t know what college is, 2) doesn’t know how much college costs and realistically will never be able to save enough to matter, 3) to a kid 10 years might as well be an eternity.

Retrain spenders and hoarders

Kids generally have the freedom to decide how to spend, or not spend, their money. Because of this kids can become either spenders or hoarders.

Spenders want instant gratification. Hoarders treasure their money and don’t want to let go. Unfortunately, adults don’t have the option to spend or hoard; adults have to pay the bills and figure out how to save money for future purposes

As parents you help your kids learn to make decisions by requiring them to have certain spending responsibilities. This teaches spenders that they can’t use all their money for fun stuff. Hoarders learn that they have to spend some of their money for responsibilities whether they want to or not.

Leave the final decision to the kid

When your child doesn’t have enough money for something encourage him to not spend this week and wait until there is enough money. Praise his decision-making, as he not spends to attain his goal.

Whatever the goal let him make the purchase. Remind yourself that your kid owns the decision. This may go one of two ways.

Your kid says, “Now that I have the money I don’t want to buy that,” or “Now that I have the money I want to buy X instead.” These are both reasonable kid decisions.

Caution: Parents may want to reward their kids efforts by saying, “Now that you’ve saved all that money, I’ll pay for it so you can use your money for something else.”  This shows your child that by not spending he can get you to buy it instead. This is a common unintended consequence of what parents think of as a reward for saving.

Require contributions to shared expenses

Negotiate with your kids on some shared expenses, such as camp or lessons. Tell your child that you will match his contribution. He may have to not spend to reach that goal.

Caution: Only do this if you are prepared for him to decide to not participate. If he doesn’t want to contribute his share, he wasn’t really interested. You both save money!

Having a savings account at a bank is a good experience in itself for a child. However, by encouraging your kids to learn how to not spend their money, they are learning how to make the type of day-to-day decisions that will face them in the future when they are on their own.

Next week we’ll look at some ideas for talking about long-term savings and investments with your kids.

According to Bankrate’s Checking Account Pricing Study the average interest on a checking account now sits at 0.97 percent. That means that after an entire year each hundred dollars of our money has finally, but not quite, earned one penny.

Suppose you try to explain this to your child, saying something like, “If you keep $100 in your checking account for one year, you’ll earn one penny.” Your child stares up at you and asks,

“How long would it take for one penny to earn a penny?” Leave it to a kid to ask the hard question.

Ben Franklin did say that “a penny saved is a penny earned”, but did he realize it would take 74 years! This is based on the Rule of 72, that wonderful formula that explains how long it takes for an amount of money to double. By the time that penny doubles in value your child be answering silly questions from his great-grandchildren.

Just for fun I translated these numbers to punch into my calculator so I could see what’s really happening with my money.

Starting with the .97 percent, we see that this number is a percentage. That means it is only one part of a hundred. To get to a real number you have to divide by 100. Caution: division makes numbers smaller!

When we divide .97 by 100 we end up with a very small number that looks like this .0097. Now we’re ready to calculate some interest.

If you multiply $2,000 by .0097 you get 19.4 cents. But wait. You now have to divide that by 12 because .97 percent is an Annual Percentage Rate (APR), a number that is based on keeping the money in the bank for the entire year.

So we divide 19.4 by 12 and end up with a whopping 1.6 cents. It’s that pesky division again, making the number even smaller. The bottom line is that by leaving your $2,000 in the bank for the entire year you will get a return of about 20 cents

Not only is the yield small, but consumers must also keep more money in their accounts just to qualify to earn any interest at all. According to the same study the average minimum balance required to earn interest has increased 5 percent from one year ago. So one needs to keep 5 percent more in a checking account to earn less than 1 percent. Even a regular passbook savings account will earn only an average of .14 percent APR.

Even a kid can see that trying to grow money in a savings account is a very slow process indeed. Yet we continue to encourage our kids to save. In my opinion the concept of interest bearing checking accounts at a bank does not provide a valuable example of saving for our kids; the rate of return is too small.

We can provide a better lesson when we put saving in terms that kids can relate to. Change the conversation slightly to say to your child, “If you don’t spend that money today you’ll have more next month to buy that thing you’ve been talking about.”

In doing so you encourage saving money by not spending money. Your child learns that deferring spending can lead to making a better purchase in the future. When we help our kids understand the importance of knowing when to spend and when not to spend we guide them to make better choices with their money. I write more about this in my blog, To spend or not spend, that is the savings lesson for kids. 

In looking at our $3.74 earned interest, I don’t feel encouraged or rewarded for having an interest bearing checking account. In the end, whether we share an ice cream cone or save it for the future, we are required to declare it as income on our tax return. Our money didn’t work very hard, but it did earn a few dollars. I’ll really be bummed if those few bucks bump us into the next tax bracket!

Identify your financial goals for the year. What is a financial goal? Buy a new car, pay off your mortgage, increase your savings, reduce your credit card debt. The possibilities are endless. Just like other resolutions, we often make a list rather than a plan.

Just like starting a new diet, you need to know where you are now. Start by figuring out your total income and your total expenses. This can be a painful, but informative, exercise. Doing some analysis will help you gauge your progress with any financial goals

Pay off your highest interest rate debt first. Most likely this is credit card debt. So the real conversation you need to have with yourself is how to control credit card spending so you don’t have credit card debt.

Set a goal of paying your credit card in full each month. Do whatever it takes to keep track of your credit card spending. Train yourself to only spend what you can pay when the statement arrives.

Create a financial emergency fund with 3-6 months of take home income. Let’s look at some numbers. If your take-home monthly income is $2,000, you’d have to save $6,000 to $12,000 dollars in one year!

While this is a standard item on financial checklists, I personally find it to be a daunting task that would discourage anyone who’s juggling bills and income. Who can save that amount, put it aside and not touch it?

If you have a fund of $3,000 to $6,000 available to you wouldn’t it be better to pay off that high interest debt? Then you’d have more money available each month, some of which could set aside for an emergency fund. I think that is a better plan.

Start or contribute more to employer sponsored retirement plans. This is an excellent goal that helps you prepare for the future. The challenge here is in finding the money each month to make the contributions. Where is this money going to come from?

Look carefully at your income and expenses. Where can you start making some changes so you can increase these contributions? It make take some time to reduce some discretionary spending so you can reassign some money to retirement saving.

Create a monthly budget plan. A budget is like a diet, easier to set up but more challenging to follow. Managing money is somewhat like herding cats; everything keeps moving.  Each spending choice changes how much money we have for the future. Unexpected expenses throw a wrench in the money works, leaving us scrambling to make ends meet.

The word “budget” itself creates a mental picture of a strait jacket, something that is so constraining you can’t be at all comfortable. However, a spending plan based on your available funds gives you more flexibility and is a good idea.

Make a commitment to know more about your spending and your available resources. List your required expenses. Some of these are the same amount each month; others are somewhat flexible. Review these each month so you can get a clear picture of how much you need to allocate out of your monthly income for your basic needs.

Subtract these expenses from your total monthly income. Look at the amount that remains. List everything else that is not essential, but you want to spend money on. Now subtract that amount from the total. What does that number tell you?

In the end, managing money is all about the numbers. Keep reviewing yours and tracking your progress so you can get the most out of your money over the long term.

Taxpayer goes to Uncle Sam and asks, “I’m concerned about the national debt. Can you explain our budget and what you’re going to do about the overspending?”

Uncle Sam peers down at Taxpayer and says, “Okay, here’s the real story. Thanks to all you wonderful taxpayers the U.S. has an income of $2,170,000,000,000.  All the things we want to do for our citizens add up to $3,820,000,000,000.”

Taxpayer stares at all the zero unable to comprehend just how much money the government is spending.

Uncle Sam continues, “Because Uncle Sam doesn’t have enough money on hand we use credit, like when you go shopping with your credit card. This year  our credit spending was only $ 1,650,000,000,000. Haven’t  paid if off for years so the debt has grown a bit to $14,271,000,000,000.”

Taxpayer’s eyes glaze over, “Give it to me straight. Cut the zeros and explain it to me in numbers I can understand.”

Uncle Sam squirms takes out a piece of paper. “Okay. If I take off the zeros the numbers will look more like a family budget.”

Taxpayer looks at the new numbers.

• Annual family income: $21,700

• Money the family spent: $38,200

• New debt on the credit card: $16,500

• Outstanding balance on the credit card: $142,710

“Hey Uncle Sam,” says Taxpayer, “Now I understand.”

“But if I spend like you do I’d be spending nearly twice my annual income. I’d be adding  to a total debt that is already almost seven times more than my annual income. If I saw those numbers in my household I’d have to make some changes.”

“Well,” says Uncle Sam, “That’s just what the government is doing. We are making big spending cuts, really big cuts.”

“How much,” asks Taxpayer. “Tell me just how much you’re going to cut.”

Uncle Sam smiles proudly, “We’re cutting $ 38,500,000,000.”

Taxpayer gets out a calculator and runs the numbers. “But Uncle Sam, you’re cutting less 2%.”

Uncle Sam puts down his pen. “But Taxpayer, can’t you see that we’re cutting billions and billions.”

Taxpayer looks Uncle Sam straight in the eye and says, “You can’t pull that trick on me. You think you can impress me by adding all those zeros and talking about billions and billions of dollars. I can see right through that. If I follow your example I’d be reducing my spending by $385. That’s almost nothing about, so why are you bragging about it?”

The End

This is not a fable; this is exactly what our government is doing with our money. Your children will be the future taxpayers. What can we do today to help Uncle Sam become a better money manager? You can start by sharing this reality and demanding that our elected officials do a better job with our money.

In my opinion, I believe that each time a kid gets money, that money is another building block for learning money management. Kids need money in order to practice making money decisions. For that reason I am a strong proponent of paying kids for some chores, but not all of them.

However or wherever our kids receive money we, as parents, are responsible for making that money a part of our their money management education. Studies continue to show that kids want to learn about money from their parents instead of in the classroom.

Kids get money from several sources with chore earnings only one in the mix. Other sources include allowances, gifts (birthday, holidays), special occasions, working for others, and good old-fashioned handouts. So we can see that kids get money and have money.

However, most kids get their money with no strings attached. This is great fun during childhood. Then reality hits when your child becomes an adult with money obligations and legal responsibilities for her financial actions. How does a parent prepare a child for the time when money comes with strings attached?

While growing up, getting paid for chores gives kids the satisfaction of getting paid to do something. However, they already know that adults work and get paid so this isn’t a new lesson in itself. The important lesson is what happens when money has to be spent for financial obligations.

Kids look at money in terms of the future, as if money begs to be spent right now. Adults get money and have to figure out how to pay for decisions and purchases made in the past. In the adult world of money this sets up a cycle of managing each inflow of funds to continue paying for spending decisions and obligations.

As parents we believe that letting kids have money teaches them how to manage money. However, what teaches money management is learning how to meet obligations and pay for spending decisions. To this end, there are three important elements of money management that parents can provide.

1. Money  Only parents can provide their kids with real money; paying for chores is one method to do this. This is where parents have the advantage over schools, because schools can’t provide real money for kids to practice money management skills. Hands-on practice is required to learn any new skill, so it is with money.

With our continuing trend to cashless transactions today’s kids need to learn how to manage money that they receive and spend in both cash and cashless forms (virtual money). This includes credit spending, electronic transfers, debit cards–and other forms of virtual money that hasn’t been invented yet. Managing money that exists as a number in a financial account requires more planning than spending a handful of cash.

Here’s an explanation of a no-cash allowance system.

2. Responsibility  Parents and children can agree on certain expenses that become the child’s responsibility, setting the stage for managing expenses as adults. Any child can take money to a store and buy something, but it takes thinking and planning to manage money for expenses and fun, as adults have to do.

Remember, in most instances this is money you would have spent on your children anyway. You can funnel it through their allowance at no extra cost to you!

3. Autonomy  As difficult as it may be for parents to accept, it is essential for kids to have full control of their money so they have the opportunity to make both good and bad decisions, learn from them, and go forward. A $10 spending mistake by a kid will be a big learning experience. A $1000 spending mistake by an 18-year-old can be a financial disaster with lingering consequences.

Kids learn from real-world experience, meaning that their money has to be part of a stream of funds that has both a past and a future. Parents have to provide funds in a consistent way, much like they provide resources for a child to learn other skills, such as sports or music.

So it matters not so much as to how the kids get the money, but rather what the expectations are for them in managing their money. If your children continue to spend only for their own fun and pleasure, then it will be difficult for them to learn to manage money for both fun and responsibilities as an adult.

There are great lessons to be learned when kids are required to pay for some child-size expenses that grow with them. Kids can experience the pain and decision-making that adults feel when they look at their account balance. Kids can also feel the pride and satisfaction that comes from making good decisions. As parents you can give your kids this valuable at-home financial education that they won’t get anywhere else.

About the show: Money and Marriage Advocate and Host, Dr. Taffy Wagner interviews brides, grooms and industry experts about financial topics that impact couples during their engagement and marriage. You will hear REAL people discussing DAY-to-DAY money and marriage issues as well as solutions to removing those issues in an effort to sustain their marriage.

Listen to the conversation about The No-Cash Allowance on BrideGroomMoneyTalk

Anyone with a credit card can easily spend more than they can pay off each month. As the debt increases, paying the balance gets more and more difficult. Consumers cry, “It’s those evil credit card companies.”

However, the problem is not the credit card. The problem is not keeping track of all the different forms of spending available to us today.

What happens when people spend the same dollar using a credit card, a check, a debit card, or through electronic fund transfer? That one dollar purchase spent using four different cashless methods quickly becomes a four-dollar expenditure that must be subtracted from the account balance.

Now imagine that scheme on a national level. We know that political agendas influence much of our government spending, but the core of the problem is spending without accountability.

Spending each dollar only once is a lesson entirely lost on the most determined non-cash spender of all–our government. Not only does Uncle Sam spend money without the left hand knowing what the right hand is doing, Uncle Sam conveniently forgets to balance the checkbook.

This is not new behavior. Our benevolent uncle discovered the power of distributing invisible money to its citizens more than 70 years ago, long before the first Baby Boomer was born!

The first Social Security payment was not cash; it was a check dated January 31, 1940, check number 00-000-001. Given that unemployment insurance started around the same time, it’s a good bet that Uncle Sam pulled out the checkbook again. Medicare and Medicaid started in the mid-1960s, sending even more checks flying out of the U.S. Treasury.

As individuals, we spend less and less cash, yet are deeper and deeper in debt. As a government we spend without any constrains at all. Is there a correlation?

In my opinion, our collective mental money skills haven’t kept pace with the new cashless methods to spend (and receive) money. We continue think of money in terms of cash spending when in fact technology has drastically changed the look and behavior of money.

As individuals, we’re too far down the road with computer and electronic money technology to reverse our increasing trend to more cashless transactions. What we need is a time out where we sit down and start to manage money as a number.

As the author of, The No-Cash Allowance, I’ve spent more than 40 years observing how money has changed over the years. My parents started their marriage cash-only. My household now uses less than 1% cash. Yet for many, the convenience of being able to spend money without using cash is truly a double-edged sword.

As a society, we can learn new money management skills. As parents, we can help our kids learn new money management skills. As citizens, we can pressure our government to do the same. And sincerely hope they do.

While spending, do you always use the same method of transfer? These are the different actions you take to make the transaction, including: hand over cash, write a check, swipe a card, provide information over the phone, fill out an order form, fax an order, mail an order, or enter a transaction using a computer or mobile device.

How much cash you actually use as a percentage of your total outflows each month? Is this reflected in the way you are teaching your kids about cash and other forms of money?

Cash has been around the longest; it is that image of cash that still comes to mind when we think of money. Today, cash maintains its recognizable look although the design of our coins and currency does get a facelift now and then. But today cash plays a lesser role for most people.

At one time, cash ruled, with universal acceptance anywhere. Now, even as we adopt newer forms of money, we still carry cash just because. Even as we spend without using cash, we still give our kids money cash just because. Where did the cash go?

Times are changing and cash is losing its clout. In fact there are some transactions for which you cannot use cash at all. Would you have ever thought that possible?

If you need to shop online, book a flight or rent a car you can safely leave your cash at home. Get out the plastic because you can only use a credit or debit card for these transactions. And, in a personal oddity for me, at the 180-store mall near me I cannot use cash or check to purchase a gift card!

The reality is cash is taking on a supporting role. Cash is still part of the action, but not everywhere. Why is that?

The bottom line is: money is a number. Simple as that. Unless you are paid entirely in cash and pay every bill in cash, you are managing your money as a number in your financial account. People can no longer manage their personal money by monitoring what is in their purse, pocket or wallet.

Perhaps, we’re teaching the wrong lesson to our kids when we continue to give them only cash to manage. Read this blog to find out what might happen if you did not pay your kids with cash. What is a no-cash allowance?

Does that mean that spending is only real if we pay with cash in the form of dollars and cents? With that line of thinking then can one believe that paying the mortgage using electronic funds transfer (EFT) is not real?

The article pointed out the pain of paying is (apparently) only triggered when using cash and seeing it disappear from your hand. Does that mean that watching that mortgage payment subtracted from your bank account in cyberspace is not painful?

Not surprisingly, credit cards played the role of the bad guy in this discussion. After all it’s not our fault that the evil marketplace motivate us to swipe a card on an almost-certain road to debt. So credit cards are bad and we should carry only cash?

Shocking as it may be, we didn’t always have cash. At one time, back in the mist of time, consumers shopped around herding their flock of chickens hoping to barter for a new blanket.

Times have changed. Money has changed and will continue to change. Unfortunately, many consumers are not keeping up with the changes or adapting to them. Starting with bartering we continue to adopt new ways to spend money without completely getting rid of the old methods.

When bartering became unwieldy (e.g. too many chickens) physical tokens of exchange were invented. The advent of cash brought with it a transition stage, with many people not wanting to give up their chickens. But cash became the new medium of exchange for financial transactions and consumers adjusted

Then along came banks with bank drafts checks, written notes to transfer money from one account to another. Not everyone immediately jumped on the check writing bandwagon, but eventually we became comfortable with writing checks instead of forking over cash or chickens.

Enter credit cards, a new way of spending that allows consumers make many purchases and pay the bill when the statement arrives. Credit cards get consumers into trouble because they forget that they are buying with borrowed money. The problem is not the credit card; it is not paying the bill.

To make it easier to get cash, automated teller machines (ATMs) are open all day, every day. The ATM spits out that physical cash whenever we want it. Here too was another transition stage as people came to realize they didn’t have to go inside a bank or talk to a human teller to get their own money.

The next innovation was a card that let us spend like cash without cash. The debit card is the new cash, allowing us to immediately spend money in our account without need in to make a separate withdrawal. Notice how we have transitioned from spending physical cash to spending invisible cash.

The trend to electronic transactions continues with the ability to transfer funds on a computer or your mobile phone. Checks can now be deposited electronically using our mobile phones!

Yet we bemoan our relationship with cash? Given all the electronic capabilities to transfer money in and out of our accounts why are we clinging to a notion that spending cash is better for us psychologically?

Of course, cash today plays a different role in spending than it did when my parents got married before WW II before checkbooks were common. Of course, cash is used differently than when I got married in the 60s when credit cards were just coming on the scene.

Who knows what role cash will play when my grandchildren become adults? They are growing up in a society with an increasing mix of electronic money transfers using computers and mobile phones. Who knows what other forms of technology will be used in our money system in their future?

All of this reinforces the reality that money exists only as a number in an account. This number represents the money that people need to manage.

Credit and debit cards are new tools for taking a slice out of the pie that represents one’s money resource at any given moment. All this means that is more important than ever to monitor one’s cash flow and balances in the bank to make sure bills get paid promptly and on time.

Using cash is only one way to spend money. For most of us cash is mainly used for out-of-pocket expenses. An increasing number of essential transactions are done electronically: loan payments, paycheck deposits, insurance payments, etc.  In fact, many companies require EFT transfers for payment and deposits.

It’s interesting to note that with credit cards, one can still pay a bill with a check, but to pay with cash? I wouldn’t have a clue how to pay my own Discover or MasterCard bill with cash. And my local mall won’t accept cash for purchasing gift cards. Go figure.

The question isn’t about our relationship about cash, it’s about our relationship with money itself, in all its forms: cash, credit cards, debit cards, ATMs, and electronic transfers at our fingertips anytime, anywhere.

Kids (and their parents) will make better money decisions when they really see the “big picture” of their own money resource. With this knowledge people can analyze their spending patterns and make better decisions going forward, whether they use cash or any of the increasing number of cashless money tools. After all, isn’t informed decision making the essence of successful money management?