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David Bakke, Editor of Money Crashers Personal Finance
Five-year-old Nicholas Bakke has learned the satisfaction of saving money. "I just needed to show my son what a bank was and how it worked, then explain the concept of interest," David Bakke told the Deseret News. "Once kids start understanding the advantages of saving, it really becomes infectious."
Children need to know the satisfaction of good honest work. Children need to know what money can and can't do, so they don't confuse net worth with self worth. —Neale Godfrey, author of

Four-year-old Nicholas Bakke gallops down the toy aisle of Target in Atlanta with a crisp $10 bill between his small fingers.

"I want the Four Arms action figure, Dad," he says, standing on the tiptoes of his light-up sneakers to reach the gadget.

David Bakke points to a bright red fire engine truck. "You could get this if you save your allowance for two or three more weeks," he says.

"No, I want this today," the boy insists.

Parents give their children allowance with the hope that handing them cash will teach them money management, but most are only learning how to spend it, rather than how to save it. The average child with an allowance pulls in $65 per month, totaling $780 per year — a sum that provides a child enough money in a year to afford an Apple iPad or three Kindles and still have money left over.

It's money that 1 percent of parents say their kids save any portion of, according to new research conducted by the American Institute of CPAs (AICPA). That's why experts say that as parents work to teach their children money management, shifting the focus away from entitlement and towards charity can be crucial.

"The real world isn't run by an entitlement program in which money is handed to you just by the nature of your existence," said Neale Godfrey, author of the New York Times best-seller "Money Doesn't Grow On Trees: A Parent's Guide To Raising Financially Responsible Children." "Children need to know the satisfaction of good honest work. Children need to know what money can and can't do, so they don't confuse net worth with self worth."

A nation of spenders

Experts found that the most common ways kids spend their allowance money is by hanging out with friends and purchasing toys — something their parents are doing on a larger scale, coming out of a national savings rate that has been in the negative until recently.

The U.S. is a nation of spenders, Godfrey said. It's part of our DNA as consumers to spend. "We're even being encouraged in these tough economic times to spend our way out of the recession."

And our children? Failing to teach them the values and skills of responsible money management at a young age is like handing car keys to a teenager who has no experience behind the wheel, Godfrey said. "We can't expect kids to intuitively understand what to do with money."

The 61 percent of parents who hand out allowances are "significantly more likely" than their non-paying peers to be covering the costs of their kids' digital downloads, movie rentals, mobile phones and expenses related to hobbies and sports, the study found. Allowance, then, becomes an outlet for frivolous expenditures.

The long-term effects of such spending habits are jolting: There is a higher stress level surrounding financial issues than there is around combat.

Empowered by allocation

In nearly nine out of 10 families with kids getting allowances, children are chipping in at least one hour of chores weekly, the study found. However, while children are working for their allowances, they're also burning holes in their pockets. Remember that 1 percent of parents who say their kids save a portion of their earnings.

Budgeting habits teach children values that go beyond monetary value, said Denise Winston, author of the upcoming "Money Starts Here! Your Shortcut Guide to Financial Freedom." Children learn to set and accomplish goals, put math into day-to-day practice and make decisions about where and how to spend money.

Parents can start early, using raffle tickets with children between the ages of 3 and 5, as a form of allowance for things like TV and video-game time, Winston said. As the child gets older, parents can pay them in small bills and change.

Have children allocate their allowance into four glass jars — one for long-term goals, one for short-term goals, one for charity and one for spending. This works as a great visual for the concept, Winston said. As the child gets older, they can transition to envelopes then later to the bank.

Delayed gratification

Parents can co-sign for bank accounts with their children, Elle Kaplan, CEO of Lexion Capital Management — an asset management firm for financial advisement to families — told the Deseret News. This is a fun way for children to learn that through delayed gratification, money can make money.

Back in Atlanta, Bakke, the father of Nicholas and Editor of Money Crashers Personal Finance, said he remembers taking his son out one day after giving him his allowance. "He thought we were going to the toy store."

Bakke pulled into the local bank. "I had him hold onto his $10, but I pulled out $10 of my own and we opened a bank account, essentially in his name."

Bakke showed him how to keep track of his money and explained the concept of interest to the young boy. "He then stunned me by asking if he could put his $10 in the bank as well. I knew then that what I was trying to convey had finally sunk in."

Have multiple conversations with children about finance, Kaplan said. But resist interceding in their spending decisions. You would be disempowering them as adults in keeping them from making mistakes they can learn from.

Learning to give

Learning how to give money can be a means of teaching kids invaluable life lessons, said Lisa Reynolds, saver-in-chief at the coupon company, RedPlum. When children are earning their own income, giving away money becomes more meaningful.

Allotting funds toward charity can also teach children that money isn't only about earning and spending, said Reynolds, who advises parents to work together as a family to raise money for a good cause.

In Hoshcton, Ga., 8-year-old Ava Kofke's parents taught her to distribute 10 percent of her money into a charity fund, which she has used in numerous ways, her father, Danny Kofke, author of "A Simple Book of Financial Wisdom," told the Deseret News.

"One year there was a little girl at my school who lost her father shortly before Christmas. Ava used her 'giveaway' money to buy this little girl a stuffed animal," Kofke said. "Ava actually came to my school and delivered this to her personally."

If Ava continues to apply these lessons in life, "she will be wealthy in more ways than a fat bank account can show," Kofke said.

For children who are hesitant to give funds away, have a conversation with them about the significance of charity, said Reynolds, who is a mother of two boys, ages 8 and 11. "Make it a teachable moment."

Bakke's son has been putting money away for close to a year now and has close to $200. He wants to open a lemonade stand or sell his old toys on the Internet to make some extra cash, Bakke said. "Once kids start understanding the advantages of saving, it becomes infectious."

People who work for money have a different sense of self-worth and a different sense of value with money, leading to a much healthier, better balanced child, Kaplan said. "This is the best gift you can give to your child."

Denise Winston teaches children money management

Rachel Lowry is a reporter intern for the Deseret News. She has lived in London and is an English graduate from Brigham Young University. Contact her at [email protected] or visit www.rachellowry.blogspot.com.