Teach your kids about spending, saving and debt

By Andrew Housser

The end of summer is fast approaching. For most families, the only time they've thought about marshmallows this summer was when they were roasting them on a campfire. But in fact, marshmallows can help kids learn how stay out of debt and other financial problems.

The classic "marshmallow test" has discovered how kids who build up self-control can be more successful in life. The test works this way: 4-year-olds are left alone in a room with a marshmallow. They are told they can eat the marshmallow immediately, if they want. But if they resist eating the marshmallow until the researcher returns, they will get two marshmallows instead of one.

The point of the test, of course, isn't whether a child eats the marshmallow or not, but rather the benefits of delayed gratification. The original marshmallow experiment, which took place on the campus of Stanford University in the 1960s, demonstrated what many people already intuitively know: that those who can delay gratification and hold out for a greater return in the future are more likely to be successful later in life. In other words, self-control pays off.

The same lesson applies when it comes to managing personal finances. Delayed gratification, when it comes to money and debt, can help you save for a goal rather than charging something today. It can help adults make wise choices later in life, when it really matters.

If you're interested in helping your children learn how to better manage their money and debt, try these suggestions:

1) Demonstrate responsible choices.

Children are most likely to behave as you do, no matter what you say. Show your family that you are living within your means. Talk with them about your choices, pointing out that, for instance, the reason you are visiting relatives instead of going to Disneyland is not because you don't like to have fun, but because you would rather spend the money replacing the family car or paying off the last of your student loans. Especially with teens, discuss how you make financial decisions. Don't worry them about whether you can pay the bills, but let them know money does not just flow freely. Talking through choices gives kids a clearer way to make future decisions.2) Teach financial responsibility.

Do not give children cash whenever they ask. Instead, provide a way for kids to earn money. Some families require kids to get a job when they turn a certain age, others pay for chores, and some provide a certain amount as allowance. On vacation, instead of charging souvenirs for kids on your credit card, give the kids a set budget for spending. Help children allocate their money to spending, long- and short-term savings, and charitable contributions. Allowing children to make spending decisions while they are young means they can learn from their mistakes while the effects are harmless.3) Encourage long-term goals.

Help children learn by experience how to save and plan for something they want in the future. This is the very skill highlighted in the marshmallow test. Talk with children about how the candy bar they buy today slows down their progress toward a new video game. When they get tired of the game they had to buy, point out that in the long run, they might get more satisfaction from saving money longer for something they really want, such as their own car (even younger children can relate to some "grown-up" goals). 4) Teach the benefits (and risks) of interest.

Help children open a savings account. Explain how compound interest works, and show them how their saved money grows. On the other hand, do not advance them money without charging interest. Explain how interest works. For example, borrowing $200 to purchase a video game system at 10 percent interest, and paying it back over 12 months, results in paying an extra $11 for the gadget -- not to mention the burden kids will feel when they continue paying for something that has long lost its luster.5) Have teens participate in the household.

Consider delegating a household task -- whether maintaining the lawn mower or preparing meals -- to teens. Assign them a budget for their job. Let them use the budget to pay for necessary items or repairs. The added responsibility will teach money management and prepare them for independent life in a few years.

Teaching kids about money and debt can have a profound effect on their futures. Use the lessons taught by the "marshmallow experiment" to help your own children learn to delay gratification and create a more stable future, with a healthier relationship with money and debt.