Monday, February 7, 2011

Lessons to Teach Kids About Money

As I'm weeks away from welcoming our little baby girl into our home, I am thinking about all the things my husband and I will have to teach her: sharing is caring, if you don't have anything nice to say, don't say anything at all, treat others the way you'd like to be treated, subject-verb agreement...the list goes on and on. But one thing I don't think enough parents tend to tackle is the subject of money. Studies show that parents have a hard time talking with their kids about the big three: sex, drugs and rock and, money. But it's hurting our kids - by the time children start to manage their own finances, they have an average of $2100 of debt on 4 different credit cards! Schools can't be guaranteed to teach financial literacy - most states do not have mandatory financial literacy units. I know we're still a few years out from talking to Baby Claire about money, but this is where my husband and I are thinking about starting.

Allowance does not equal an entitlement. I do believe that kids have to have their own money in order to understand how to manage it. That said, I don't think kids should get $10 a week just for being them or doing their basic household responsibilities, like keeping their room clean or making their bed. No one pays me to clean the house! It's just what I have to do as a member of the family. When kids want to take on projects that fall outside their realm of responsibility, then they should be paid according to their age and the level of difficulty of the chore. It shows they have to earn money, they can't just sit and wait for it to fall into their lap.

The importance of being earnest. Money is very complex, and should be taken very seriously. Yes, you can have fun with your money and you should! But money is for more than just having fun. It's survival, both short and long term. It's saving for a goal. It's giving to something or someone who needs it more than you. I love the piggy bank below because it accounts for all the various ways kids should view money (in my opinion anyway). Of course, kids should be able to spend money just like adults. They can get that toy they've always wanted, or they can buy something impulsively, never play with it again, and it becomes a teachable moment. But kids should also understand the importance of philanthropy and giving back to others. I want my kids to feel like they can make a difference - whether that's at their school, in their community or in the world. Philanthropy and charitable giving is a great way to make kids feel like they did something good for someone else. Obviously saving is a great value to instill in children - they might be saving for a big purchase or event, but teaching them to save when they're young will help them be better savers when they're older. And I love that there's an "invest" slot in the piggy bank. When you're ready to talk to your kids about how to invest and what the stock market is, that is a great tool to help facilitate that lesson. For allowance and cash gifts kids receive, I like the 40-30-20-10 rule: 40% long term savings, 30% big ticket purchases savings, 20% immediate spending and 10% charitable giving.

Everything costs money. Or as my husband likes to say "There's no such thing as a free lunch." I don't think kids should be sheltered from the costs of things. Obviously, there are more appropriate ages to bring up the costs of a mortgage versus the cost of a pack of gum, but kids should know that everything has a price. I think showing monthly bills
or grocery store receipts can go a long way in kids understanding how money works to keep a house going. In order to get things that we need and want, we have to work and pitch in to earn money. At least until the money tree we planted last year starts to grow...

Practice what you preach. While we all want to raise financially savvy children, it's hard to do that when you have mass amounts of credit card debt, live in a house you can't afford, and spend money like it's going out of style. You are your kids' best teachers, but actions speak louder than words. Getting conflicting messages about money will no doubt confuse kids, so make sure to be a good role model yourself.

Are you a parent already teaching your children about money? What do you do that has worked? Did your parents give you any words of wisdom you take with you to this day? What are you planning on doing with your children?


  1. I'm planning to pay my kids a very high rate of interest on their savings, so that they learn about the power of compound interest and so they're biased towards savings. When they get older I may even let them choose bonds, stocks and hedge funds (teaching risk vs. return tradeoff and patience in investing) :).

    Re: chores, my parents had some chores that you did for free and others that you got paid for (the harder/more annoying ones). This generally worked well but you have to use the same pay scale for all the kids, otherwise you're teaching bad lessons about fairness. I like the idea of putting a price on the whole chore list up front, including ones the kids don't know how to do yet, so you can teach them the value of training/self-improvement.

    One thing to avoid: if your kid manages to amass a large amount of savings, do not force them to invest it any particular way, start charging them rent, or even force them to use it to pay for college in place of loans (they will almost certainly come to that conclusion themselves). This teaches a devastatingly bad lesson.

  2. Embrace the power of "No!" It's OK for your kids not to have everything they want, when they want it. Too many parents, often because they're feeling guilty about something (the divorce, not spending enough time with them, etc) try and make up for it by buying the kids what they want. Or give in to the incessant requests because it makes life easier.

    By buying kids whatever they are lobbying for, kids learn lessons like "Money is limitless and I can get whatever I want" or "I feel loved because I have lots of material things" or "I don't have to wait for what I want. I always get it when I want it." You can easily see where those attitudes are going to lead later in life.

    By the way, one benefit of an allowance: you can tell a child "If you want that, you can buy it with your money." It's amazing how often that particular "want" suddenly disappears when it's their money on the table!

  3. BrewerDave - I love the idea of having a chore list with a corresponding value. That's great!

    Growing - thanks so much for that input! I totally agree with saying "No!" Not enough parents do that with money (or with other things for that matter), and I believe it sets kids up to be entitled.

  4. I am a mother of four kids, ages 7 - 17. Our kids get a very small weekly allowance, chores that are expected and optional bigger jobs for more money. The kids keep track of their money and use it to buy the cool "toy of the moment" or pay their way to a movie with friends. They have often made mistakes by making an impulse purchase and then regretting it a day or two later. It was so hard to watch them go through that, but it taught them some excellent lessons. Kids need to practice with their own money while they are young and the consequences are minor, as opposed to when they are in college and have their first credit card. And...even though they are perfectly willing to spend a lot of my money, they are much more thoughtful and careful about spending their own money.

  5. One skill not mentioned yet is budgeting - I think that's a really important skill for kids to practice before they're turned loose in the real world. Our favorite scenario for this is managing a clothing budget during the tween/teen years - it's something very well-defined that they tend to really care about. Our process has been:

    * have the kid propose the budget
    * revise it with us and reach agreement
    * give the child a clothing allowance that matches the budget
    * have the child make all the purchase decisions (with some minimal guidelines)
    * enforce the budget - when it's gone, it's gone

    It's been a valuable experience with our kids so far (we have 5 ranging from 9 to 20).

    Congrats on the baby girl and kudos to you and your husband for planning ahead wrt her life skills!

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