Clients sometimes ask how they can help their kids learn to be smart with money. The truth is it’s never too early to start teaching in this area. Money is a way to teach values that are important to you and instill those values in your children, as well as set kids up for future success.
Children will fail when it comes to money-related decisions, and that is part of the process. Failing is success if they learn from mistakes. Lessons are easier when kids are younger, and it is a $5 or $10 decision than when they are a college student saddled with years of loans and credit card debt. Hopefully, they feel the pain of small mistakes early so that they know to take better care of their money.
Another question I am often asked is about allowance. The best book I’ve read on children and allowance is Money Doesn’t Grow On Trees by Neale S. Godfrey. In that book, Godfrey spends a lot of time talking about how having money helps children prepare for being adults. In my house, my kids hear all the time that “our job is to help make you the best grown-ups you can be.” Along the lines of the book, our kids have specific responsibilities at home that they don’t get paid for such as contributing to dinner. Our little guy (age 2) puts napkins and silverware out, while my daughter (age 11) gets drinks and helps clear the table. I do believe kids need to have an opportunity to earn money and be able to spend that money.
An allowance is a way to help children understand the concept of being paid for work so as they get older they can be a contributing member of the community.
At our house, my daughter can apply for a new job every few months. A job has specific tasks assigned, and those tasks are real work we need to be done around the house. In this way, she feels the benefit of the job she is doing. She could, for example, dust and clean her bathroom (the one she shares with her little brother) as part of her job description but in a couple of months, she might be unloading the dishwasher daily and vacuuming once a week. To earn her allowance, she needs to complete all of the job’s tasks during the week.
There are times my daughter wants to earn extra money. Those opportunities are only available when she has done her regular chores and only then can she help clean the garage, wash cars, or help me organize.
The money she earns is divided between a short-term goal to buy what she wants, a medium-term goal of her saving for something bigger, and our goal of long-term saving for her college education. Working together, we talk about each of these goals, including how to set and achieve them.
The medium-term money is interesting because it’s an excellent opportunity to teach kids different concepts. To help a child be successful when they’re first starting, having a very short-term goal may be their medium-term bucket. If it’s going to be a dollar a week, have them pick something inexpensive that they can buy for a couple of dollars. As they’re successful with that, have them set a new goal that will take them a month to save for in that medium-term bucket and then two months.
Eventually, as the child gets older and shows more success, you’re able to hand over more of the money for the child to manage that you usually have held onto. For example, my daughter may ultimately be responsible for helping buy the birthday presents for the birthday parties she attends. Initially, it’s probably not fair to expect her to pay for all of that, so maybe I will match similar to a 401(k) match on money she has saved. I can do the same thing for Christmas presents when she wants to buy her little brother a stuffed animal that is more than she has saved. I can match her spending knowing that I typically intend to help her with those presents anyway.
People have asked me if I think it is a good idea to reward kids for good grades and I don’t have a strong opinion. I guess it depends on what’s important to you and your family. What I do have strong feelings about is thinking through the long-term expectation that you want to set. If getting good grades is just something you want to happen in your house, then I’m not sure paying for grades makes sense. If you think that getting A’s is more of a bonus and you want to reward that, then I can understand that also. It depends on perspective.
There’s no doubt that our kids watch what we do, especially when it comes to money. Unfortunately, in an age of online banking, many folks don’t need to sit and balance the checkbook as our parents did. The result is that parental money management is hidden, and it takes a conscious effort to bring it into the open so that kids can learn. Talk about wants versus needs, make it clear that you aren’t always able to get what you want at the moment but if you save, you can make a purchase in the future.
It is essential that when kids start getting an allowance that they can see progress with their saving. One way to do this is to make the savings visual using a jar or baggie so they can watch their money grow as they save. Of course, over time the jars will be filled, and it is at that point you might consider moving the money to a bank account. Keep in mind that the bank experience is really about teaching your child to deposit and track their balance and not about you going to the bank on their behalf.
Allowances, bonuses, and spending provide an opportunity to teach children about debt. It seems that when my family travels, we can count on two things being forgotten. The first is me forgetting my toothbrush, and the second is my daughter leaving her spending money at home. When she finds something she wants, usually a stuffed animal, she will ask us to buy it for her. Our agreement with her is often to loan her the money until we get home, at which point she is to pay us back; or, if she has some but not all of the money, we will loan her half until we get home. Then, much like interest, we leverage the debt she owes if she doesn’t pay right away. Sometimes that doesn’t feel very good to the child, or frankly to us as parents when she doesn’t like the consequence, but it is a lesson she remembers. Now, it’s rare not to get paid back as soon as we get home.
Raising financially smart kids won’t happen in an instant but rather over time in small lessons about saving an allowance, earning money for purchases, learning to save for goals of different lengths, and experiencing the pain of debt. Children learn from experience so if they fail successfully when the cost is a few dollars, hopefully, they will make smarter money-related decisions in the future.
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