4 Money Tips to Raise Financially Responsible Kids

Barbara Friedberg

Investing is an ideal way to build wealth for adults. Normally, that topic is reserved for those with a job. But imagine if smart money training and investing education could prevent us from raising spoiled brats.

How many times have you been in the mall or supermarket watching a kid say to mom or dad, "I want this" and beg for a new toy repeatedly? With most parents working from dawn until dusk, with their children in school, extracurricular activities and child care, parents tend to feel a bit guilty, leading them to say "yes" too often to their kids. Yet, holding children accountable and making them responsible, teaching them to earn what they want and making them realize there is no "free lunch" goes a long way toward raising respectful children.

1. Give your child an allowance (with constraints). Require that your child divide their allowance into four buckets: one for charity, saving, investing and spending. The child may choose the charity and cause, thereby getting a head start in learning to have empathy for others. Saving is the second bucket. That way, the next time junior whines for a new toy, suggest he or she dip into their savings. You may be surprised to find that the toy isn't that important to them after all. The third bucket is for investing. It's never too early to teach a child the principles of compounding.

Start a 7-year-old child investing $250 per year in a diversified stock index fund. Assume the fund earns an average 8 percent per year annually. At age 67, that $250 per year is worth $338,367. That's right, the total $250 per year investment ($15,000 total) grows to almost $340,000. The spending bucket is quite clear. If Amanda wants a toy out of the machine in front of the supermarket, she has the money to pay for it.

2. Around age 11, start your child's money education. There is a great book for kids (and adults) to get a sound money education, called "What All Kids (and adults too) Should Know About Savings and Investing," by Robert Pivnick. Schedule a few minutes a month to go over these money and investing concepts and ideas. You'll help your children feel accountable for their own success and you may learn something too. If you want another excellent investing book, check out the classic, "The Elements of Investing," by Burton Malkiel and Charles Ellis.

3. Require your child to get a job. At age 12 to 14 or so, kids can start volunteer work. At age 15 or 16, the child gets a paid job. Pay is divided up just like an allowance, with buckets for charity, saving, investing and spending. There's nothing like work at a minimum wage job to teach responsibility and encourage a child to get a college degree and a better job. Now that Dylan is earning a paycheck, he can open a Roth individual retirement account.

This investment will grow tax-free until retirement. Assume Dylan earns $3,000 over the summer and invests $1,000 each year he's working in the summer job, from age 16 through 22 when he graduates college. That's a total of $6,000 into his Roth IRA. If he leaves that $6,000 to grow and compound until he retires at age 67, the $6,000 investing from his summer work will be worth almost $200,000. A child required to work, save, invest and give to others will have a difficult time becoming spoiled.

4. Don't be afraid to say "no" and set limits. What if Rebecca says she doesn't want to invest her allowance? Your response is easy: "I guess you don't want an allowance." Done. What if older Juan says he doesn't want you to telling him what to do with his paycheck? Another easy answer is, "When you are on your own and supporting yourself, you can do whatever you want with your money."

Money rules and investing guidelines can't guarantee your kids won't become spoiled, but they will help them understand that everything in life comes with a price tag. Don't let your kids rope you into believing you "owe" them more than you do. Your responsibility as a parent is to raise a child who will be an asset to society.

Understanding how to manage and invest money is a wonderful gift to give your child. The simple examples we shared about the power of compounding returns didn't even begin to touch on the responsible adult son or daughter's investing habits. If your child continues investing as they enter the workforce, it's likely he or she will amass a million dollars or more in a retirement investment account. Now that's parenting that really pays off. Holding children accountable, setting limits and teaching them good investing and saving habits will lessen the chances they take money for granted and help create financially self-sufficient adults.

Barbara Friedberg, MBA, MS , is a former portfolio manager, university investment instructor, website CEO and author of "How to Get Rich; Without Winning the Lottery." Her newest book, "Invest and Beat the Pros-Create and manage a Successful Investment Portfolio" launches this month. Learn more about money and pick up her free investing ebook at Barbara Friedberg Personal Finance.com .