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Monday, May 1, 2017

Educating Your Kids About Money

Posted by Tim Stobbs on July 15, 2016

Warning: This isn’t a post telling you how to raise your kids, the following is purely what we have chosen to do.

I expect that most people would assume that my personal finance obsession would lead me to have children who can write a financial plan before they finished Grade 2.  Alas, that isn’t the case, actually if anything I’m trying not to pass along my particular obsession.  Rather I believe in letting my kids find their own interests and support them in those.  If they want to learn about compounding interest I would be happy to help, but I don’t intend to force the issue.

Instead I took a different approach to teaching my kids about money: I gave them some.  Actually come to think about it I’m not sure if my youngest son even recalls a time where he wasn’t getting an allowance.  Yes, we started VERY early with giving them allowance (we can’t recall exactly, but we think ages 3 and 6).  At the time I wish I could say it was for noble reasons, but in fact it was done to solve a very specific problem.

You see every time we took our oldest boy to the store, he would ask to see the toys and often we agreed to have a look.  This lead to lots of “I want THAT!”  Or he would see a commercial for something and say “I want THAT!”  And frankly, I got tried of saying ‘No.’  So instead we gave him and his little brother an allowance and now the answer was “Do you have enough allowance for that?”  It just saved us a LOT of discussions about buying toys.

Therefore we then had questions about: how much does that cost?  How long do I have to save for that? And of course we helped them count out their money every week after they got paid.  So their education began on saving money.  Of course what was particularly interesting for me was watching them spend it as fast as they made it in the beginning.  The results was a large collection of Hot Wheels in the house for a while as they could typically afford about one a week.  Then one day I had a chat with both boys in the store regarding delayed gratification.

I said as my oldest boy picked up another car to buy “I thought you wanted that other toy.”

He replied, “Yes, but I don’t have enough money”

“Do you want the other toy more than the car in your hand?” I asked.

“Yes.” He nodded looking up at the other toy.

“Just so you know, that if you don’t buy the car and you save the money you can get the other toy faster.  For example, it would only take you two more weeks to save for it.  But if you keep buying cars each week it will take you like six weeks to save for the other toy.”

He paused looked at the car again and then turned around and put it back.  “Okay, Daddy, I’m going to save the money for what I really want.”

My poor personal finance geek heart nearly exploded in happiness at that moment.  At the age of six, my son had learned something most adults seem to have problems with: delaying gratification.  While that was the first time we continued to have similar conversations as they spent their money on different things and helping them understand the consequence of their choices.   They learned by trial and error about savings money versus impulse buying.

Also we did one other thing, I NEVER told them how to spend their money.  It was always their choice not matter how silly I thought it was. I would advise against things but remind them the choice was theirs.  So by themselves they learned that dollar store toys aren’t worth the money, how some things cost more at some locations (like pop in a vending machine) and what happens when you lose money (no one offers you a refund, because it was your fault).

During the entire allowance pratice we also introduced some other related money concepts.  Like we expect some work in exchange for the money we give them.  In the beginning it was easy stuff like cleaning up their toys in their rooms once a week and making their bed.  Then as we gave them annual raises and added more work for those raises.  Now they clean their rooms, feed the dog, dust their rooms, help clean their bathroom, set the table, clear their plates and other chores around the house.

This also let us teach them another important lesson one week when they asked if they had to do their chores after complaining about them again.  I replied, “You are free to not do your chores, but you won’t be paid if you don’t work.”  Thinking perhaps I wasn’t serious one week they decided they were not doing their chores.  So I cleaned the entire bathroom without them.  Then the next day they asked for their allowance.  I reminded them they didn’t do their chores so they didn’t get any allowance.  They then asked to do them now and I explained I already did it, so they just weren’t getting paid.  Next week, they did their chores and oddly enough they have never asked to not do them again.

So in sort my entire teaching kids about money philosophy is basically: give them money, let them screw up and have consequences for their decisions.  The by product of this is my kids have learned many useful lessons on tiny amounts of money that will serve them well as they get older and now they are rather good at saving money.  They have even learned about pooling their savings to buy bigger Lego sets that they can share and using Christmas gift cards to help support their own savings.

Okay, now your turn, how do you teach your kids about money?

Comments

6 Responses to “Educating Your Kids About Money”
  1. I am still considering what to tell Baby Bun about money.

    I have about one more year left before I want to start imparting PF wisdom but for me, I think I don’t want to tie chores to money as you have, mostly because I want them to realize being part of the household and living on our money, is already compensation for their chores as part of a contributing member.

    Now, if there was something I hate to do and they would do it for money like wash my car, or whatever else, perhaps I would pay them for that… as it would normally be me doing it.

    Or maybe not. I am still mulling this one over.

    I want them to be able to manage money though, so I considered perhaps each year allocating an amount in September towards clothes & school things. They need to list out what they need, write down the cost by researching it beforehand, and then decide between things they want and things they need.

    Then the money they save, can go into a reserve and we can use it for replacing lost bags, etc.

    I’m gathering ideas right now, and your post has been very helpful with your experiences of how they learned. I particularly want to impart delayed gratification.

    Perhaps by also role modeling.. as in: We don’t have money for Mommy to buy a piano right now but Mommy will save X amount and in a year she might have enough. We will track it on a tracker on the wall and you can help Mommy!

    Something like that.

    Your kids sound great :)

  2. Gloria says:

    We have three kids and have also taken the allowance approach to teach money management, saving and delayed gratification. Other than birthdays and Christmas, the kids have to buy anything they “want” (not necessities like clothes and food of course!)

    As with the previous comment, we don’t believe in tying allowance to chores – As members of the family, they must contribute to household management, and doing chores is an integral part of that. No one is going to pay them to clean their own bathrooms or dust when they grow up. There is the occasional complaint but quite frankly I just don’t tolerate it. If they aren’t willing to help out, I’m not willing to help them out (e.g. drive them to a friends etc). They get the message pretty quickly that it’s not acceptable, and the chores get done.

    Good blog topic!

  3. Lena says:

    I am with the other commenters; I don’t tie chores to money. I certainly don’t get paid for doing dishes!

    Although I can see some benefit to this as well. For me it might come to a management time issue: I have to value the chores and ensure they are completed and be willing to do them myself if my children are not motivated by money that day.

    Although I am always thinking and refining what I do. We have 6 kids and I have suggested to their grandparents that it would be really fun if they gave them a loonie or something if they are inclined. (My grandparents did this for me.)

    Then it is just a lovely gift.

    So they each get small amounts of money.

    We actually spend a lot of time talking about utility. Like you can buy a $5 game on Steam that is a year old or a $60 game that is new.

    And then delayed gratification: if you wait 6 months, the $60 game will be $5.

  4. Clarence says:

    I like that you tie work to money, even if it’s household work. My grown children all have a strong work ethic now.

    One other suggestion about compound interest. We kept a ledger of their allowances and gave them 1% per month on any remaining balance. They learned that keeping some back also has potential — not just for consumption but for investing.

  5. Tim Stobbs says:

    Thanks for the feedback everyone. I have heard other people state they don’t pay their kids for chores. It is a common choice and I understand the point of view, but we just don’t follow it ourselves. I rather like getting them into ‘working’ for their money. Even if the work is something they won’t be paid for in the long term.

  6. Ishmael says:

    We follow a system similar to yours – kids get an allowance, and they can buy whatever they want. I’ll offer recommendations and compare things to experiences they’ve done in the past (i.e. “That toy is similar to XYZ, which you used for only 2 days before you lost interest in it. Are you sure you want to get it?”), but ultimately the decision is theirs.

    One of the most important things I want my kids to learn is how money can be put to work for them, so we implemented a simplified investing system:

    Every allowance day, they can earn extra cash if they have savings from before. I toyed around with compound interest, etc, but I was having trouble balancing a timeline that would keep their interest (weekly) vs what made sense to give them (money compounding weekly adds up FAST, even for small interest rates!).

    In the end, we use the following chart:
    $0-$20 saved = no extra interest
    $20-$40 saved = $1 extra (i.e. a 20% bonus)
    … etc, up to $100+, where they can potentially double their allowance.

    We keep track of everything on a sheet, although perhaps actual piles of cash would be better – more visual.

    Of course, the grandparents like to give lots of little cash gifts which distorts the picture a bit, but it’s working pretty well overall.

    It’s interesting seeing the difference in their personalities. One kid is a natural saver, who doesn’t really want things very much (yay!). The other is more of a spender, and dreams of getting rich one day so he can buy lots of stuff :)

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