I gaze at these 5 cute little faces peering down from my bookshelf every day. Where does the time go? Already 2 in college. Yikes! I can remember taking those pictures like it was yesterday. Now it seems like it’s only tomorrow that they’ll be off on their own. Will they have the basic life skills they’ll need to thrive in the real world? I sure hope so. It can be harsh out there.
Those critical life skills include personal finance skills. Are you mentoring your youngsters in that department? Perhaps I can help a bit. Based on my experience with our 5 kids, here are my top three tips for teaching kids solid money habits:
Tip 1: Set up a simple family banking system.
Give your youngsters an account at the “Bank of Mom and/or Dad” where they can make deposits or withdrawals and keep an eye on their balances while they save for their own purchases.
My favorite resource for this approach is the book The First National Bank of Dad by David Owen (works for Mom’s too!). You don’t really have to read a whole book though. The idea is really simple. You run the bank and you keep track of your kid’s deposits, withdrawals, and account balances. The current balance represents an IOU from the parent (the bank) to the child (the customer) — just like a real bank. You can even offer interest on deposits to encourage good saving habits.
You can keep track of your bank in a simple paper ledger, in a spreadsheet, or in one of the growing number of online virtual family bank offerings built for this purpose. Review a “bank statement”, savings goals, and budgets with your child regularly as a way to maintain an ongoing, practical dialog about personal finance.
Tip 2: Start early, start simple.
I like the idea of starting your family banking system the moment your child asks you to buy something — that first discretionary purchase request. It’s the perfect teachable moment to start discussing wants vs. needs, what a bank is, how to save, and how to make purchasing decisions.
The longer you wait, the more you encourage the “gimmies” and a growing sense of entitlement. Do yourself and your child a favor: nip that at the bud. We opened our youngest child’s first account at the “Bank of Mom & Dad” when he was 4. Initially. it was just a safer place to keep his money. When you have four older siblings, an unsecured piggy bank is a very risky repository!
He deposited loose change he found under car seats, the occasional quarter from Mom for helping out with an odd job around the house, and his very first “paycheck” — a gargantuan $20 windfall from a photo shoot he did for a local parenting magazine. His very first purchase was a Hot Wheels Car for $1 followed by the classic video game Frogger for $19.92. His first donation was to the Polar Bears via the World Wildlife Fund after saving up for 8 months in his charitable account. These were very proud, self-reliant moments.
I’d recommend starting simple with a single account (or just a piggy bank) and a single purchase goal. As your child matures, you can add sophistication to introduce increasingly advanced concepts. You might add multiple accounts to distinguish between spending, longer term savings (perhaps with compound interest), and charitable giving (we did that at age 6 with our youngest). As you approach the teen years (gasp!), you might consider making loans for big ticket items like a laptop computer and establishing a formal budget with matching allowance for a specific area of spending like clothing.
Tip 3: Match your system to your values.
There’s no shortage of definitive advice out there for parents when it comes to kids and money. (You can read over a thousand articles here.) Pay them an allowance. Don’t pay them an allowance. Pay for chores. Don’t pay for chores. Get a job. Don’t get a job. Never loan them money. Loan them money, but make sure they pay you back. Never give them a credit card. Give them a credit card, but teach them now to handle it. And so on.
I don’t think there’s one right answer to any of those questions. In fact, we’ve used a hybrid system with our kids over the years that includes regular allowance split between spending/saving/giving, expected chores (with penalties for blowing them off), paid extra jobs, compound interest on savings, loans for big ticket items like computers, clothing expense accounts with formal budgets, debit cards, and, in the end, credit cards. We’ve found that the right approach varies with situation, age, and even from kid to kid. Our 5 kids are very diverse.
In my opinion, the most important thing is to have a clear, explicit system that is consistent with your family’s values and your family’s situation. Then, let your kids practice and make mistakes while under your guidance. Better now than when they hit the unforgiving real world.
And, trust me, that day isn’t as far off as you think. Like the old insurance commercial used to say: “Life comes at you fast!”