Now that kids have returned to school, we’ve been discussing how to teach them to manage money well. We believe that while schools can help kids learn to add, subtract, multiply, and divide, the best teacher of financial wisdom is experience. As young as possible, children need to experience real lessons with real regret and real money. Unless schools start printing money, these lessons have to start at home. (Click here to see my interview with Fox19 on this very topic).
Last time, we looked at the discomfort that we feel when we let our kids make mistakes with money. For dozens of reasons, we parents want to make the decisions for them. If we can resist that temptation and risk them wasting the money we give them, the rewards are real. Today, let’s look at four skills your kids can learn about money as long as you give them the opportunity.
One mistake I see parents make all the time is running to a local bank to open a savings account for their kids. They deposit birthday money from their grandparents and it sits there and does nothing. Every now and then, they might get a statement that shows them they earned a penny in interest. So exciting, right? That penny every few months is really going to teach them something about saving—that it is boring. That it is a waste of time. Why leave that money in the account to give them no benefit when they could have the new video game instead? See how backwards this gets?
That is why I recommend that parents open a branch of the Bank of Mom and Dad. This experiment has provided some stunning success stories for our clients and our own children. Keep a simple ledger for each child, and give each of them a deposit of their weekly allowance in that ledger. They can make a withdrawal from their account whenever they want to buy something, or just have cash in their wallet. When they do, you make an entry in the ledger for the withdrawal and give them some cash from your own wallet. But, the money that stays in the fictitious account earns 10% annual interest. That is a much more exciting amount for them to see, and it gives them a real reason to keep the money in there. The longer they can keep their money in the bank, the more interest their savings accrue, and the more they come to understand the power of compounding interest.
In our home, we’ve noticed that our son now leaves his wallet at home when we go to the mall. He’d rather watch his savings grow than see it disappear on something silly. One of my clients opened up a branch of the Bank of Mom and Dad. As soon as his fourteen year-old got her first job, she opened a Roth IRA and started saving some of her earnings. Lesson learned.
None of us wants our kids to grow up to be miserly Scrooges. Still, without their own money, children miss the chance to practice giving. In other words, in order for kids to learn open-handedness, it has to cost them something. They have to choose to give away what would otherwise belong to them.
I’ll never forget the family night at my son’s school when I saw my son and his friends toasting each other with root beer floats. “Those look good,” I said.
“Yeah,” said one of Max’s friends with an ice cream mustache. “Max bought us all one.”
I was delighted. My son was glowing because he had his own money and he decided to use it for the benefit of others. The earlier we give kids an opportunity to be generous with their own resources, the sooner they learn how much better it is to give than to receive.
At our house, every birthday means a small raise in allowance. It also means a raise in the number of necessities that child pays for out of that allowance. Our eleven year-old now buys his own shoes. In a few short years, he’ll be paying for gas. Soon enough, he’ll be making small rent payments. Giving them their own money in the Bank of Mom and Dad teaches them that wants cost something, and they should spend wisely and save as much as possible. But, that is only half of the story.
Needs cost money too, and if all of their needs are paid for by their parents, they will have unrealistic expectations about how many of their wants they can buy. As our kids get older, we get them a reloadable debit card so that they have the ability to buy these needs and get comfortable with buying things with a swipe. That satisfying swipe has ruined many a college student who hasn’t learned how to handle it already.
Every family gets to set their own specific course. No matter what the progression looks like in your house, it’s important to give children gradual, manageable steps toward financial maturity. We give them small goals that teach them to prioritize needs over wants. When they reach adulthood, the responsibility won’t overwhelm them. They’ve had years of practice.
After months of saving, one of our sons could finally afford in iPod Touch. Sure, he felt that burning desire to order the metallic green one he loved with next-day shipping, straight from Apple’s website. I challenged him to see if their was a smarter way to go about it. Together, we surfed around and found that he could save close to fifty dollars with regular shipping and a refurbished model. He chose this option, and had to wait a few extra days to get it. That delayed gratification was hard, but in the end, he was proud of his decision. A year after it arrived, it still looks brand new because he used his money to buy it. He treats it like he should because it cost him something significant to buy it. We aren’t born with the ability to maneuver money like this. We do our kids a favor when we let them practice early on.
What else can our kids learn if we let them learn through real experience? The list is long: The quicksand of credit card debt, the importance of budgeting, the wiles of advertising, quality over quantity, reaching out for help, and on and on. If they have access to trial and error in these areas while they are young, they will develop confidence. Money won’t overwhelm them or own them when they are older.
By the way, if you have enjoyed some of the concepts we have covered in this blog, I think you would enjoy my new book called Living a Rich Life: The No-Regrets Guide to Building and Spending Wealth.
James Lenhoff is the president of Wealthquest, a Cincinnati-based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.