Even if you have one of those fabled money trees (a distant cousin of a ticket oak) in your yard, there’s going to come a time that you need to teach your children the birds and bees about money.
How to save. Smarter ways to spend. Borrowing. Negotiating. And yes, even when to let them screw it up for the sake of a lesson.
Here are some strategies to help you not suck at teaching your kids about money.
To Allow, or Not to Allow, Allowances?
There’s no real rule on how much, if anything, you should give your child for a weekly allowance. It should depend on your family’s finances. To make the math easy, some parents match the dollars given to their child’s age.
Some suggest giving an allowance that’s not dependent on chores, while others link the payout to completing a to-do list. But realize that giving an allowance that’s not linked to some kind of work or responsibility may send the message that you can get something for nothing — that’s not something I want to teach my kids.
My brood — 15, 12 and 9 (those are their ages; not their names) — have never had allowances. They don’t have a set list of chores, either. Rather, they know that being part of this family means they’re expected to perform certain household duties. And if their parents ask them to do something, saying “no” is not an option. In exchange, we’re willing to give them money for certain purchases. Others they have to save for — we’ll get to that in a moment.
If you do give a weekly allowance, there will come a time when your child asks for a raise — allowance inflation is real — or complains that she doesn’t get as much as her best bud Mary does each week.
While it’s tempting to say no, consider that your kid needs to learn to negotiate for what they want, whether it’s a raise at work, to have control of the television remote or whatever. Explain they won’t always get what they ask for, but encourage them to write up their reasons, or provide evidence, for why they deserve an increased allowance.
The Bucket List
Regardless of whether your children get money from an allowance, as a reward for a good report card, or as a birthday gift, you should instill some rules so they don’t blow it all in one shot.
The easiest way is to use three buckets: “spend later,” “spend soon” and “charity.” You can decide how much goes in each pot, but I’d recommend 45% to spend soon, 45% to spend later and 10% for charity.
The “spend soon” bucket should be one that your child can spend on anything he wants, as soon as he wants, and he shouldn’t need your permission to spend it. (Of course, you should still monitor where the money is going.)
The “spend later” bucket should be longer-term savings for something that’s too expensive for your child to buy right away. It’s something they need to save for over time.
The “charity” bucket will give your child the added lesson that sometimes it is better to give than to receive. You can go over possible charities your child might have interest in, and after a certain amount is accumulated, she can make her donation. While there are charities everywhere you look, consider giving to a local food bank or shelter where your child can see his money at work. Or maybe your child will want to start a charity drive of his own.
A Lesson in Budgets
While splitting up cash into several buckets can help a child with long-term plans, nothing will accomplish this goal better than setting a budget.
A budget will do several things. First, it will help your child plan for spending, but even better, it will show him where his money has gone over time. So when he complains he doesn’t have enough for that new PlayStation game, and you show him he spent $15 on candy in the past month, he may reconsider what he does with money in the future.
If your kid runs out of spendable cash, don’t come to the rescue. Delayed gratification is one of the most important money lessons you can teach.
Try these budget worksheets to help teach your kids about allotting their cash.
Bolster Saving and Start Investing
Even if your child understands he has to save money to afford his long-term wants, you can give some added incentive.
Think matching funds, just like you get for your 401(k) plan. (Read this if you need a primer.)
Perhaps you’ll invest 50 cents for every dollar Junior sets aside in his “spend later” jar. Or maybe you’ll go dollar-for-dollar, or more. Whatever amount you choose to match will motivate your saver to save just a little more.
Our family has put the idea of matching funds on steroids. Several years ago, we opened “The Bank of Mueller.” It offered 10% interest on any deposits every six months. Our kids started stashing away so much money after seeing the power on compound interest that we had to install a cap. Now, the first $1,000 of savings gets 10% interest, and all money after that gets 5%. (Establishing the cap was also a way for us to teach about today’s interest rate climate.)
And yes, even the 9-year-old has reached the 10% interest rate cap — but they all keep saving anyway.
In the beginning, when balances were relatively low, they used to love seeing all their cash at the end of six months. Now they only see it on paper. If we had to withdraw all their money just to show them the green, we’d need to hire an armed guard for the trip home from the bank.
They also keep some money in their bedrooms for their short-term spending.
If you’re not ready to open a family bank, at least teach your kids about compound interest. Try TheMint.org’s compounding calculator for help.
Once your kids start socking it away, you can introduce how the stock market works. Look around the house and pick a few products they like, and start monitoring the stock price of the company that makes the item. You can even have your kids create a mock mutual fund made up of their favorite companies — easy to track on any number of free stock market monitoring sites — and you can compare its performance to an index fund.
In addition to savings lessons, you can start teaching about spending with credit. You don’t want your kid to grow and up and head off to college without a real understanding of how interest rates are calculated and what late fees can mean.
When you’re shopping with your offspring, use a credit card and explain how it’s an I.O.U., and you will get a monthly bill with all the charges you’ve made.
When the bill comes in, use it as a real life example. Show them how interest is calculated — that you pay a price for borrowing if you don’t pay it off in full. Also show them how long the bill would take to pay off if you only pay the minimum.
Use TheMint.org’s debt calculator as a teaching tool.
And finally, take a listen to what index fund guru Jack Bogle has to say about kids and money.
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