Janet Bodnar is deputy editor of Kiplinger's Personal Finance magazine, for which she has written articles on a wide range of topics, including investing, money management and the economy. Bodnar, a nationally recognized expert in the field of children's and family finances, is the author of Dollar & Sense for Kids and writes a column called "Money-Smart Kids" for Kiplinger's magazine. Her newest book, Money-Smart Women: Everything You Need to Know to Achiebe a Lifetime of Financial Security, is available via Kiplingers' website.
Janet Bodnar on Kids and Money:
One theory is that allowances should go hand in hand with your age. Do you agree with that and at what age should you start your children with allowances?
I'm a big believer in using an allowance as a hands-on teaching tool for kids, and I think 6 or 7 is a good age to start. That's when children start learning about money in school and develop a sense of what it can buy. Younger children usually aren't sophisticated enough yet to make that connection.
As for equating allowance with age, I think a lot of parents would feel uncomfortable giving a 6- or 7-year-old child $6 or $7 a week-it just seems too high. I'd recommend starting your child with a base allowance that's equal to half his or her age, and allowing it to grow depending on age and increased responsibilities.
Should allowances be linked to household chores? What about school performance?
Allowances shouldn't be linked to either. The base allowance shouldn't be tied directly to chores because it's too easy for parents to lose track of what their children have actually done. Besides, as members of the household, children should be willing to help out without being paid.
Instead of being linked to household chores, an allowance should come with financial responsibilities, or what I call "financial chores." Young children, for example, could be responsible for buying their own collectibles (trading cards, gel pens, or other things they like to buy), or popcorn at the movies. Older kids should pay for their own entertainment and mall excursions with their friends. Teenagers should have a clothing allowance.
To teach kids the value of working for pay, you can offer to pay them for "extra" chores, such as mowing the lawn, cleaning out the garage or whatever you consider beyond ordinary day-to-day tasks. Paying for work on a job-by-job basis is also easier for parents to monitor.
As for grades-reward your kids with a big hug or a spontaneous treat, but not with money.
Speaking of age, when should your child have his ⁄ her first credit card?
Young people don't need credit cards until they are at least juniors or seniors in college. They first need to learn how to manage cash. I think high school is a good time to open a first checking account.
How do you teach credit card responsibility?
The best way for young people to learn how to manage credit is to learn how to manage cash. I'd start with a checking account and a debit card before they go off to college so they get a feel for what it's like to spend real money and learn how to balance their account.
Kids also need to know that a credit card isn't cash. It's by definition credit. When you use it, you are borrowing money from the card issuer, which will charge you interest-sometimes at a very high rate.
For an eye-opening lesson, young people should use an online calculator to see how long it will take them to pay off debt. And my best piece of advice: Pay your bill in full each month.
Why choose a credit card over a debit card for you teenager?
I wouldn't recommend a credit card for a high-school student. Once kids are older, and have had experience managing a checking account with a debit card, they can apply for a credit card.
This brings to mind a conversation I had one day with my son when he was a senior in college. We were in the car heading back to school and I was encouraging him to apply for a credit card-with the understanding, of course, that he would follow my advice and pay his bill in full every month- and he said, "But if I'm going to do that, why not just use my debit card?" Good question.
I explained that he could use a credit card to make a large purchase when he didn't have cash right away but would have money in his checking account by the time the bill arrived. He could also use a credit card to build his credit rating or as a convenience to earn rewards points.
Would you encourage your child to take a loan out to purchase a car, or wait until he ⁄ she can afford it?
I'd recommend that children in high school have use of a family car rather than have a car of their own. That way, parents retain more control-they can take away driving privileges if the kids get traffic tickets or otherwise break the rules. And they can agree on how to share additional expenses, such as insurance and oil changes.
After college, I'd encourage young people to wait until they can afford a car, or to buy a less expensive or used car. If they are truly set on buying a new one, I'd suggest they shop around for a loan and see what's available. A lot of manufacturers offer special deals for recent college grads. As a parent, I'd be leery of co-signing a loan; if my child didn't pay, I'd be on the hook and my credit rating would be in jeopardy. I firmly believe parents and children should keep their credit histories separate.
On College:
At what age should you start planning for college?
Parents should begin thinking about college from the get-go. One goal, for example, would be to save enough money to pay for your child's first year.
Ideally, college should be a shared expense. So it's a good idea to sit down with your child when he or she is 16 and say, "This is what we can afford to pay, and this is what you'll be responsible for." For example, some parents agree to foot the entire bill if their child goes to an in-state school, but only a portion if their child wants to go out of state or to a private institution. Bottom line: You all have to be on the same page and be realistic about what your family can afford.
What is the best way to finance your child's college education-student loans, private loans, etc?
Loans should be your last option. It's much better to have accumulated some savings or be able to pay out of current income.
But if you do need to take out a loan, I recommend starting with the federal programs, which will give you the best deals and lowest rates: Perkins and Stafford loans for students, and PLUS loans for parents (Parent Loans for Undergraduate Students). For parents, a home-equity loan might also be an option.
How should you prioritize saving for retirement vs. saving for your children's education?
Retirement should always be your top priority.
In an ideal world, you would max out your retirement savings and then start saving for college. But we don't live in an ideal world, and few people actually max out their retirement savings. So I'd recommend taking your overall pot of savings and earmarking most of it for retirement, with a smaller portion for college-maybe 80% and 20%, for example (you can use an online calculator to see how much you'd accumulate under different scenarios).
One good way to save is to use a state-sponsored 529 college-savings plan. Anyone can contribute to these plans, so don't hesitate to tap generous family members. Grandparents, aunts and uncles may prefer to help pay for a child's college education rather than buy him or her a new toy.
