Children and teenagers who received monetary gifts for the holidays are often excited to choose what to buy. While they should be allowed to spend some of the money or gift card, as a parent you could also use the reception of this new windfall as an opportunity to teach and practice important personal finance lessons.
Here are a few ideas to start, including how to set and meet goals, the value of comparison shopping and the importance of saving and giving back. The lessons remain essentially the same no matter the child's age, but you may want to alter the message or subject matter to match your child's experience and ability to understand the topic.
Create money goals together. Planning how your child will save or spend monetary gifts is a valuable skill and practice no matter their age. (If you don't have a personal plan, this is a great opportunity to set an example by developing your own financial path as well.)
You can start by drawing three columns -- spending, saving and giving -- and having them write a few goals for each. This is a great opportunity to explain the differences between, and the importance of, both long- and short-term goals. Under spending, there could be something they want to buy right away and something they'll want in the future. Saving could be for both a short-term emergency fund (a car repair or bike tire) and longer goals like college or even retirement. The giving column offers a great opportunity for them to discern and include a few causes they want to support.
Set priorities and discuss the big picture. If they received monetary gifts, have them add up all they received and divide it into each column. Offer guidance to help them determine how much to put into saving and charity, taking the time to explain your reasoning and the larger picture.
It could be difficult, especially for a first timer, to distribute the money and they will likely find that there isn't enough to make a significant impact on all their goals. Have your children prioritize their goals based on importance and how much they received. Share how sometimes it makes sense to put off an immediate want to buy something bigger and better later, and have them calculate how expected earnings from allowance, working or upcoming holidays or birthdays could help them achieve their unrealized goals.
Help children see the big picture by sharing your experiences. A teenager might have a worthy goal of buying a car in a few years, but overlook the value of having an emergency fund to pay for repairs. Or, younger children might not consider saving for an upcoming family vacation until you remind them of how nice it'll be to have extra spending money.
Decide where to store the savings. If they don't already have one, it might be a good time to open a checking and savings account with your children. They can use the accounts to store the gifted monies, and the funds they expect to receive in the future.
Go over the differences between a checking and savings account, including how a debit card works, earnings from interest and how many withdrawals you can make each month before paying a fee. Your kids can then decide how to split their money between checking and savings based on their goals, and whether or not it makes sense to start building an emergency fund.
Gift cards can pose a challenge, particularly if they're store-specific cards. Children who receive them can't deposit them at the bank, and they should take this into account as they determine which priorities they can meet and which may need to wait.
However, there are online marketplaces where they can buy and sell gift cards. How much they'll receive depends on the marketplace and the store -- an example of supply and demand in action. They can also optimize their buying power by using gifted money to acquire discounted gift cards before making a purchase.
Comparison shop before making a purchase. No doubt children are going to want to spend some of the money right away. It offers a great opportunity to discuss the importance of comparison shopping.
Not only should they compare prices at various retailers, an important step in getting a good deal, but they should also consider several alternative but similar purchases. No matter if they want clothing, toys, electronics or something else, being able to figure out what best fits one's needs, wants and budget is an important skill at any age.
Discuss the time value of money and importance of saving wisely. Older children might be ready to learn about the time value of money (TVM), the idea that a dollar today is worth more than a dollar in the future.
You could discuss how inflation can decrease the purchasing power of money over time. Older children might be able to think of examples, and you can reinforce the point with images of old advertisements for 5 cent soda or gum.
The next step might be to discuss the importance of saving and investing and how compound interest could potentially offset or supersede the effects of inflation. Perhaps conclude by touching on opportunity costs, the trade-offs that come from every decision.
Review the gift cards' terms and conditions together. Gift cards offer another teaching moment where you can demonstrate the importance of researching and understanding how different financial products work and the laws that govern them.
One law you could review is the federal Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, which places the following limits on gift cards' fees and expiration dates.
• The expiration date for the amount on the card must be at least five years from the time of purchase or funding. The gift card itself could expire before then, in which case you can transfer the funds to a new card for free.
• There could be a fee to have a lost or stolen card replaced.
• Issuers can only charge an inactivity fee, dormancy or service fee if the card wasn't used during the previous 12 months.
• All the fees and expiration-related information must be on the card or the packaging.
State-specific laws could also impact gift cards. For example, in California gift cards that have less than $10 on them can be redeemed for cash or a check.
Bottom line: You can't force behaviors, but you can use teaching moments to explain and practice valuable money management skills. The holidays are a great opportunity as many children receive gift cards or money, and these lessons can continue throughout the year. Try to reflect the skills and practices you're teaching in your day to day life as well. Children can pick up on the non-verbal lessons you demonstrate as much as the explicit lessons you sit down and teach.
Nathaniel Sillin directs Visa's financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.