RAISING YOUR KIDS TO BE MONEY SMART
By MARY LYNNE DAHL, CFP®
June 15, 2017
There are remedies, however. There are very effective ways raise financially literate kids, with the financial savvy to become responsible and successful in managing their own money. This article will explore some great ideas for teaching your kids how to be good money managers.
The first thing to know is that it is ok to start when a child is very young, as young as 3 or 4 years old. In fact, if the lessons are simple, this is the ideal time to start.
The second thing to know is that young children can work. This is important to understand because the best way for them to learn about money is by associating it with working to earn that money. A 3 year old child can carry kindling, as an example of work, and be paid for her “work”. By doing so, she learns very quickly and easily that work results in money, and this is powerful for a child to understand. If the work is age appropriate, the lesson will be successful.
The third thing to know is that “chores” are not work and a child should not be paid to do his chores. Chores are separate from work. They are part of being in a family. The danger in paying for chores is that it becomes a negotiation, as in “how much will you give me if I clean my room?” The answer is: “nothing; you will clean your room because you are part of our family and your room needs to be cleaned”. As an example, taking out the garbage and emptying the dishwasher is nor more “work” for a child than is cleaning the garage or removing a dead tree from the yard “work” for the parents; both are chores that are necessary for the family and everybody pitches in. Work is separate from chores. Make that a firm rule.
A fourth key to be aware of is that you can teach your children to be generous. Studies show that when kids are taught to be generous as young children, they have a much higher incidence of being financially successful as adults. Generous adults tend to have better jobs, better salaries and a higher standard of living and studies indicate that one of the main reasons for this is that they have learned at an early age how to save, invest and share their money. The lessons learned in childhood prepared these adults for a financially secure adulthood.
An effective way to teach kids how to save, invest and share money is the “3 jar method”. This involves keeping 3 glass jars (so the child can see the money in them), one labeled “Save”, one labeled “Spend” and one labeled “Give”, or labels similar to those words. The idea is that when a child receives money, from work or as a birthday present etc., she should divide the money into 3 portions and put some in each jar. The “Save” jar is for long term, such as college or a major purchase such as a car. The “Spend” jar is for stuff the child wants to buy now. The “Spend” jar should never go empty, so that the child can see that he always has some spending money. Seeing this visually has a lot of impact on the child, especially a younger child. The lesson is not to spend it all every chance he gets and that it feels good to avoid running out of money.
The third jar, labeled “Give” is for charity, preferably one that the child can understand and support, such as an animal rescue organization or a community food program. Sometimes it is useful to add a little bit of community service to the effort of giving money to charity by volunteering in the charity for a day, to show the child that real people are helped personally by her gift of money. Seeing in person does drive the point home and connects the child’s generosity to real people with real problems that your child is now working to solve. A great example of this is to volunteer in a soup kitchen with your child and suggest she might like to put money in her “Give” jar for food for this soup kitchen. Your child will instantly understand she is feeding people who need help and feel very good about being able to do this. Her resolve to be generous will be made much more solid with personal experiences.
It is important to allow your child to decide himself how much of his money to put in each jar each time he receives money from any source. He should be given the right to decide for himself, even if you need to help him think it through, whether or not to divide his $12 up as $4 to each jar or $2 to charity, $4 to spend and $6 to save. Making this decision is another major lesson that happens internally in your child’s mind as he thinks about it and considers his reasons for his decision. He is learning to prioritize and make value judgements about money, a valuable skill to have and which will serve him well as an adult.
Another interesting lesson to offer a child, from age 5 or 6 all the way up to teenagers is to ask the question of “what can you do with money?” You will initially get a lot of different answers, such as “buy a bike”, “go to Disneyland” and “download a bunch of games”, among others. Then rephrase the question to “Can you spend the money? Can you save the money? Can you eat the money? Can you burn the money?” When you rephrase it this way, a child gets it. All you can effectively do with money is save or spend it; there is no usefulness in eating it or burning it. That brings the issue down to way to save and ways to spend, and now you are in a conversation with your child that becomes important and meaningful….to both of you. This conversation opens a door that you and your child can go through and benefit from in many ways.
Are there some things NOT to do? You bet! For starters, do not argue about money in front of your kids. They will get that it is a source of anger in your home, which will set them up for all kinds of wrong ideas about money. Do not refer to your family as “rich” or “poor” and do not compare your finances to others; this sends a subtle message that having more makes you better or worse in some way than others, which is not true. Do not tell your kids how much you have in savings or retirement plans and do not tell them your salary or income from self-employment. Instead, answer these questions by telling them what you do for a living and how your savings and retirement plan accounts are invested. Explain that the value of invested accounts changes daily and that you add to these accounts regularly (if you do). In other words, give them information but do not let them put you on the defensive or be the subject of an inquiry that they should not conduct.
It is also generally accepted as not a good idea to give a kid a credit card, buy her a car, co-sign on a loan or pay for her smart phone extras, like the data plan and apps that cost money. Many families want their teenager to be able to drive, but this does not mean it is ok to buy them a car, even a used car. Instead, either allow them to drive your car or encourage them to buy their own car by working for it. You may disagree with this, but study after study shows that kids who are given cars by their parents do not understand or appreciate the cost, the responsibility or the significance of having that car. Instead, they view is as their right and just one of many big ticket items mom and dad will pay for. If you allow your kid to drive your car, require that she pay for her own gas and if she works, contribute towards the cost of putting her on your insurance plan. Also teach her to check the oil and tire pressure regularly, not just drive the car. If she has responsibilities attached to using the car, she will be more careful and appreciative of her driving privilege.
According to studies conducted by Carol Dweck, a psychologist at Stanford University, another mistake to avoid is telling your kid how smart and brilliant he is. According to Dweck’s studies, telling your child how smart or brilliant he is hampers development of a strong work ethic and ends up as a source of real frustration to your “really smart” kid when he discovers how hard it is to work out there in the real world. She explains that it is ok to praise his efforts but not his intellect or perceived brilliance.
Likewise, most experts on the subject agree that you should not assist your child in her efforts to do paid work. If your child wants to deliver newspapers, let her do it on her own. Do not get up at 4:00 a.m. and drive her around to deliver the papers. If he wants to pick up and recycle cans, let him do it without your help. Do not participate in the work your kid does in order to be paid; give him the benefit of doing it all by himself. This builds the work ethic that he will need to be successful throughout his life, with other things as well as with money.
I should not have to say so here, but it goes without question that you should also not allow your child to shop online. Especially not for music and games! Experts warn that this kind of instant gratification is very harmful to a child’s understanding of how to manage money wisely. It is almost like magic; you press the keys for the items you want, they show up or get downloaded and suddenly she has all the stuff she wanted so badly. This kind of shopping is dangerous and you should not allow it. If your child wants to download music, require it be free (not pirated) or require she pay for it herself, which she generally will not be able to do. It also should not be necessary to say that you should not allow your child to demand fashion brands when you buy clothing for him. He will not wear his fashion clothing long enough to get enough value out of it and if he does get it, you are teaching him the social illness of keeping up with the Joneses, something that will dog him his entire life and usually creates so much pressure to spend unwisely that the result is debt, a lot of debt. Save your child from this sickness by putting her on school clothing budget and keep it lean so that fashion wear is not possible.
Speaking of budgets, a good way to teach your child how to manage money wisely is to have a family budget session several times per year and include your kids in the discussions. Many kids are very interested in this subject, so take advantage of this and bring them into the picture when your family budget is discussed. You can also suggest to your child that he have his own budget, if he is earning money from working, and show him yours as an example. Don’t have a budget? Better get one started.
A key to being successful with your son or daughter’s financial education is to teach them that restraint is good. A famous example to start with is a study called “the marshmallow test”. It is used on fairly young kids, not teenagers (generally). In this experiment, young kids were offered a marshmallow now or 2 marshmallows if they would wait 15 minutes. This test was part of a study that tracked the kids it had tested, for decades. The researchers found that the kids who waited for the second marshmallow ended up with better relationships and were more financially secure as adults than the other group. Statistically, the 2 marshmallow group had attained better educations, including scoring 210 points higher on their SAT exams (on average) and had better jobs with higher salaries than the 1 marshmallow group. The point is not that one group got more stuff than the other. The point is that one group enjoyed more success because they had learned restraint at an early age. Teaching your kids to restrain themselves will help them become very good money managers.
A good way to do this is to offer them a choice that results in more, or better, if they wait. This is not hard to do, especially if they ask for things. For example, you are at the grocery store with your 8 year son, who asks for a pack of gum at the checkout counter. You say “I can buy you 1 pack of gum today or you can come back to the store with me on Tuesday and I will buy you 2 packs of gum”. If he opts for 1 pack of gum now, remind him when you and he return to the store on Tuesday that he cannot have gum because he chose the 1 pack earlier. Repeat this with him until he decides to restrain himself, then buy him 2 packs and tell him it is a reward for waiting. He will get it.
Another easy way to teach restraint is what I call the “5-day rule”. Here is how this works: your child wants something badly, now. She has the money to buy this item she wants so badly. But instead of buying it now, tell her to wait 5 days. At the end of 5 days, tell her to ask herself “do I still want this thing badly?” Statistically, the chances are pretty good she will no longer want it. For whatever reasons, waiting and practicing restraint stops the intense desire to have something badly that is not needed. In this case, you will not have to lecture her; she will learn not to impulse buy all by herself. This, too, is a powerful lesson. Keep in mind that this does not always work that your kid will decide not to buy the item, but when it does, it is golden. Your child is learning to be patient about getting the things he wants and is willing to work for. This is a very good habit to develop.
It is also easy to teach your child several other valuable financial rules, but you do not have to refer to them as rules. Just share the information with your curious kid. One is the “rule of 72”. Lots of kids love this, especially if they like math as well. The rule of 72 is how to calculate how long to invest your money to make it double in value, or conversely, how much you will have to earn on your invested money to make it double in a certain number of years. For example, if you earn 10% per year on your money, the rule of 72 says that your money will double in 7.2 years (72 divided by 10). Or, if you want to double your money in 4 years, you will have to earn 18% per year (72 divided by 4), every year, on your investment, which is much harder to do. This rule demonstrates how money can compound with investment earnings and often opens up the child’s mind to the magic of long term saving and investing.
For many parents, taking their child to work for a day is also a valuable way to teach about money and earning it. I recall when my own kids were little that I took each of them to work with me one day. Upon coming home that day, his father asked my son “what did you do today”, to which my son said that he went to work with mommy and announced that mommy gets paid to talk on the phone and drink coffee. My son also related to his father that he, too, had worked that day. He was 5 and was dressed in a suit he had been given by grandma, so he looked pretty sharp. While at work with me (I was drinking coffee and talking on the phone), he suddenly was not in my office area. I looked up and not seeing him, went looking for him in a panic. I soon found him in the hall, in the elevator of my 5th floor office, running the elevator up and down, accepting quarters for pushing the buttons for people riding up and down in the elevator. Relieved that he had not been kidnapped or hurt, I hurried him back to my office, where I found his pockets full of quarters from “working”. Somehow, he had gotten the message that we were there to work. Although scary, taking my son to work was a success!
When your child becomes a teenager, allow and encourage her to work. The ideal circumstance is to work all summer long, but no more than 15 hours per week during the school year. Summer jobs are possible in many communities and there are shortages of workers for summer jobs that many adults will not do.
Working for pay is good for kids. According to Ron Lieber, author of The Opposite of Spoiled, studies show that part-time jobs correlate positively with good GPAs and higher college expectations. Studies also show a zero-sum trade-off between working and studying. The trade-off will be TV, hanging out with friends and online entertainment, not studying. In addition, work experience greatly helps with college admission applications and interviews. Starting with jobs at home (not regular chores), your grade school child can work at small jobs, then move to working for the neighbors, then eventually get a real job, with a written paycheck, based on having some prior experience at showing up on time, doing the assigned tasks, completing the job and doing it properly.
In a fascinating report on kids who work, author Ron Lieber tells the story in his book that in Japan, school children as young as 6 work in their school lunch program on a scheduled basis, taking turns. At lunchtime each school day, those kids scheduled for lunch duty that day march off to the school kitchen and serve lunch to the rest of the student body, then clean up afterwards. The adults do not assist and are not present. When some American kids attended a Japanese school where this was the norm, they told the Japanese kids that in America, grownups are paid to cook, serve and clean up lunch for the kids, but nobody believed this. The Japanese were shocked that adults would cook, serve and do K-P for kids who were capable of doing it for themselves.
Finally, another valuable lesson that that builds resourcefulness and reduces the blatant materialism of today is to subject your child to an experience called “symbolic deprivation”. This is a situation you allow your child to experience that removes all of the luxuries of their lives at home and puts them into an environment where they have to take care of themselves, under adult supervision. Although many parents would never let their precious children experience the discomfort of any kind of deprivation, it can, as an experience, teach them powerful lessons about money and their own resourceful capabilities.
One way to achieve this is at a summer camp that is very basic, perhaps primitive, sometimes with no electricity, no tap water, no hot showers, no internet, no tennis courts or swimming pool, no team sports, no cell service and no indoor toilets. These places are often the most fun, where kids are busy with camp chores, are allowed to swim and paddle for hours, can create their own homemade entertainment with skits, storytelling and music they perform for each other and where they can gain personal skills by learning to cook, serve, create ,build, repair and invent. Most of them will remember those camp days and nights for their entire lives, fondly. You can also simply take your child into the wilderness hiking or camping, if you are capable, for the same experiences, if you prefer. Either way, the goal is to allow your child to experience “symbolic deprivation”.
You may or may not be able to provide your son or daughter with all of these tools and experiences, but if you can see the logic in them, you can apply enough of them to do a good job of giving your child the chance to learn how to work, save, invest, share and be totally capable of managing his or her own financial lives successfully. The road to raising kids with money smarts is not complicated; like everything else, it just requires effort and some ideas. I hope this article gives you some ideas worth trying. Good luck!
Books on the subject that may be helpful to readers are:
On the Web:
©2017 Mary Lynne Dahl, CFP® is a Certified Financial Planner ™ and partner in Otter Creek Partners, a fee-only registered investment advisor firm in Ketchikan, Alaska. These articles are generic in nature, are accepted general guidelines for investment or financial planning and are for educational purposes only.
Mary Lynne Dahl©2017
Mary Lynn Dahl can be reached at firstname.lastname@example.org
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