Suze Orman Answers Kids' Tough Money Questions

“As soon as kids realize money is needed to buy candy or a toy, you better start talking to them about money,” says America's favorite financial expert, Suze Orman.

Stumped about what to say? Follow Orman's smart, no-nonsense advice.

“The answer should always be ‘no,’” Orman says. “We are rich in love. We are rich in that we have each other. We are rich in every way in life that matters.”

“If you or the child’s parents are being asked that question, then your grandchild is probably already confused by what’s been said to them. If they are watching their parents spend money and then hearing them say that they can’t buy this or that, it’s confusing."

This answer has two forms, depending on where the family is financially. If they are having financial problems and continuing to buy things, says Orman, then “they have been a horrific financial example. They are raising dumb money kids…if they are buying things that are 'wants' versus 'needs,' then kids are asking a very legitimate question.”

If, however, the parents have a job, and are financially in good shape, “The answer is simple—Your mom and dad went out and worked for this money and they can go out and make a decision about what they spend it on.” Stress to the kids that if they work for their money or save their birthday and holiday money, then they can make decisions about what to buy, says Orman. And don’t reneg on the deal. “If you stop them, then they won’t want to save anymore.

Orman suggests the questioner will get a much better understanding if the parents make a demonstration out of the answer.

They can gather together their monthly bills and statements, then sit your grandchild down and say, “Let me first show you how much money we need to make to pay for our every day expenses.” They can use monopoly money or even real-looking fake cash. “If it’s $200 for the cell phone bill, put $200 in the middle of the table. $150 for electricity? Put it in the center of the table. Go through the rent or mortgage, the insurance, the taxes. Then you can say, 'So that’s $5,000 a month.' Then we have to set aside money for vacation, for holiday gifts, and for food. This is how much money it takes for us to live. When we pay all of those things, we only make this much (the amount that’s left over.)”

Orman says this lesson can be just as effective with a six-year-old as it is with a 12-year-old.

Say to kids, “You may want a bigger house, but you don’t need it,” Orman says. “We are a family that respects the things that money can buy and we don’t buy things we don’t need. A bigger house means more electric bills, bigger water bills, etc., and that’s not how your family chooses to use money. We all want to make sure we have money for you to go to college. Would you rather have a happy mommy or a worried mommy? If you always buy what you need versus what you want, you’ll never be in financial trouble.”

It’s hard to explain to children why you would choose NOT to help someone. But like all money questions, according to Orman, this one is simple. You must teach children to honor money.

“You must never give out of guilt. Or just because someone is asking. You have to honor your money, and give it only when it rings true in your heart and when it seems like a wise thing to do,” she explains.

So tell the asking child that you didn’t feel like it was the right thing to do at that moment. But also explain how you do help others with your money—explain what causes you do support and why.

“Yes, but not necessarily right away," Orman says. "The harder you work and the more energy you put out, absolutely the more money you will earn."

Even people who work at low-paying jobs see rewards from working harder. Orman points out, “A cleaning woman could clean one house in a day or she could clean four houses. If she cleans four houses, she’ll make four times as much money.”

With so many families out of work, this question may worry a child. But Orman says parents should have a good answer ready for kids who ask.

“Whether you’re of the elite or quite poor, we tend not to talk to our children about money. But parents do need to let kids know what they have done to prepare.

Hopefully, they’ve put away eight months of emergency funds, so if it happens, they’re ready. Then they can explain to the kids, ‘We will cut back, not go out to dinner and the movies. We will save money until we get another job. We’ll make it through and we have each other.’”

Says Orman, “The worst you can do is lose your job and go on spending as if you haven’t. Then you’ll have to explain to your children when you’re living in your car!"

Suze Orman has a special message for grandparents: “Be careful with your grandchildren and money,” she says. “You can ruin the message that mommy and daddy are trying to teach the children. Or you can enhance it.

"Grandparents love to give money to kids. It can really send the wrong message. The kids will love you because of the time you spend with them. You don’t want them to pretend to love you because every time they see you, you give them $25."

“If you are wealthy enough to be able to gift significant sums of money to your grandchildren, don’t give it to them directly. That’s the biggest mistake you could ever make. Gift it into their college fund, and let the child know it’s for the college fund.

“I was driving in Florida and there was a car in front of me—decked out like you would not believe. Crazy lights and wheels and booming boxes that vibrated the whole street along with tinted windows and a painted design. The license plate read, 'Thank you Grandma.' I’m sitting there thinking that if granny saw what her money did, she would have died.”

To read more financial advice from Suze visit her web site Suze Orman.com