Positively Parenting and Personal Finance for Kids

Positively Parenting Interview: Teaching Kids Good Money Habits

Roxanne Lochridge is a “Mama” to 3 youngins, a positive parenting evangelist, and a “family scientist.” In a recent interview, Roxanne grilled me on the following topics:

Want to know the answers? You can listen to the interview here or click on the links above to jump right to the answer in the transcript below.

[00:00] Who the heck are you?

Roxanne: Welcome everyone to the Positively Parenting Telesummit. This is your host, Roxanne Lochridge. Today I have invited Bill Dwight to tell us about teaching our kids good finance skills, and I am very excited for this call. I know Bill has a lot of good information to share. Before we get into that, let me tell you a little bit about Bill.

Bill Dwight is the Founder and Chief Dad of FamZoo.com. FamZoo’s award winning online and mobile software helps parents teach kids good personal finance habits through real world, hands on practice. Parents set up a private, fully customizable virtual family bank to manage their children’s earnings, spending, saving and charitable giving using IOU accounts or optional prepaid card accounts. FamZoo has been featured in the Wall Street Journal, the New York Times, NPR, PBS and several best selling books. A graduate of Princeton, Bill has been building software for 30 years. He has held executive positions at Oracle Corporation and several innovative start-up companies. Bill founded FamZoo in 2006 to help parents be more effective mentors to their kids for basic life skills like personal finance.

With that, hello Bill and welcome to the summit.

Bill: Thanks so much for having me.

[01:24] How did you get involved in helping parents teach kids personal finance skills?

Roxanne: We’re glad you can join us. The first question is: how did you get involved in helping parents teach kids personal finance skills?

Bill: I just fell into it. I’m not a personal finance guru; I’m just a dad, and actually I’ve been in software for many, many years and my wife and I have a lot of kids — five. When the older kids were getting into middle school, we looked at each other and thought: “Hey, shouldn’t our kids learn a little something about personal finance? That seems like a really basic life skill.” They just really weren’t learning anything systematic in the schools. Furthermore, it’s really something parents need to be involved with. We looked around for tools that could help us systematically cover the basics of personal finance. There just wasn’t much out there. We started having the typical conversations about allowance and putting some money in the hands of our kids so they could actually learn how to make financial decisions.

When you’ve got a lot of kids around the house and you’re just handing them cash to stick in their sock drawer or piggybank, you can get a little bit of theft going on! So, I said: “Instead of handing you this loose change, I’ll just keep it in the ‘Bank of Mom and Dad’ as an account that we’ll just keep track of as a number on a sheet of paper.” Then I moved it to a spreadsheet. In other words, if the kid got $5 of allowance during the week, then we’d credit their account. We just add to the number. When the kids wanted to buy something, then they would say “what’s my balance?” and “do I have enough?” If so, then we’d make the purchase. So that worked great, but when you’ve got a lot of kids, and they keep coming in your office to say “hey, what’s my balance?’, that gets a bit annoying. So, being a software nerd, I just decided in a couple of weekends to build a little private website for them. that way they could sign in and see what their balance was themselves without bugging me.

That’s how I started to use software to get this idea going of an online “Bank of Mom and Dad” where the kids could have training wheels for online banking, see what their account was, and make money decisions. So, that’s how it all started. As we saw how they were starting to actually learn some good lessons here, I thought: “Hey, other families could use this.” That’s when we turned it into a business.

[04:03] What is a virtual family bank?

Roxanne: I’m fascinated by this. So, what is a virtual family bank?

Bill: That’s the general idea of parents being the bank managers for the kids. There are a lot of things we want to do in our virtual family bank that a traditional bank wouldn’t support or facilitate. If the kids are around the dinner table and one’s insisting on burping during dinner, we can fine her. We can go debit her account right there. If that kid gets her first traffic violation, and she doesn’t happen to have the $100 or whatever it costs, you can debit her account and make it go even negative without incurring any bank fees. Then I can “garnish her wages” to have her pay it back over time. I want her to learn to be responsible and pay back her debts. This notion of parents running a “bank” and making the rules about what’s appropriate income for their kids — that’s the idea of a virtual family bank. It’s where the parents make rules that are aligned with their values, and then the kids have this experience that — as far as they’re concerned — is just like a real bank. They log in and see their account balances, and that governs how much they can spend. It allows them to practice making these money decisions so that when they get turned loose in the real world, they’ve actually had some experience. We obviously don’t expect kids to learn how to play something like lacrosse without giving them lessons or coaching. Why do we expect them to be so brilliant with money without giving them any practice? That’s the general idea of a virtual family bank.

Roxanne: And I like how it’s all intertwined; the money, the values and the family. You can work that all together. What a good idea.

[05:50] When should kids start learning about personal finance?

Roxanne: When should kids start learning about personal finance?

Bill: I think kids should start learning about personal finance as soon as they ask for that first thing at the checkout stand. If they’re asking for stuff at the checkout stand, they get that there’s commerce going on. Kids are pretty savvy. As soon as possible, I want kids to start appreciating that money is a finite resource. It’s not some infinite thing. If kids are always just spending your money then, in their mind, it’s infinite. As soon as you turn ownership over to the kid, that’s a whole different ball game. The checkout stand experience switches from:

Hey dad, can you buy that gum for me?

to:

Hey dad, what’s my balance? Because I want to see if I have enough to buy that gum. Oh, that’s right, I’m saving for an iPod too, and that’s going to set me back. Maybe I don’t want the gum after all.

Kids are much more judicious with their own funds and resources than they are with yours. So why not get them into that habit right away? Then you won’t have this situation where they’re confused when they get turned loose in the real world. They’ll have some experience managing a finite resource.

Roxanne: I love the sounds of that. I would love my kids to stop asking: “Can I have this? Can I have that?”

Bill: That’s the part of the virtual family bank that’s magical because before you have a system like that, kids are just going to ask until the cows come home. As soon as they have a system that makes them think, “oh, wait a minute, I’m spending my resources,’ it’s a totally different ball game.

Roxanne: That’s a great idea.

[07:45] Should parents pay their kids an allowance, and if so, should that be tied to chores?

Roxanne: I have a question about allowance. Should parents pay their kids an allowance, and if so, should that be tied to chores?

Bill: Now we’re getting into the great classic kids and money debate. Half the families out there think that allowance is evil, that it’s an entitlement, and that kids should work for every penny. The other half think allowance is just a tool to give kids this finite resource. I say there are no right answers; whatever works for your family. The only thing that I’m definitive on is: you need to facilitate putting some money in the hands of your kids. You decide how much of it they have to “work for,” but give them some funds to manage. Often when you talk to parents, they’re already handing funds over to their kids anyway; they’re just not doing it systematically. When I think of an allowance, I like to think of a budget. I like to think of it as money I would spend anyway for my kid, but now we’re just putting some parameters around it. We’re making a mini-budget. If it’s for little kids, we’re just talking about pocket money to buy that gum at the check-out stand. You might decide the allowance is enough to cover one a week or something like that. Then the kid has this resource of their own that they can start making the decision about whether they get the gum or not because maybe they’re saving up for that iPod. They’re no longer arguing with you about it; they’re making the decision themselves based on what they want to do most with that limited resource.

In our family, we do a regular allowance, but we also have a lot of chores around the house that we expect to get done. We didn’t really want to be checking off chores all the time, so my wife came up with this idea of what we call a chore fail chart. We give them a regular allowance but if they don’t do their chores, then we claw back some money from that allowance. That’s what works in our family. Anything goes. Whatever makes sense in yours. We also give them the opportunity to earn some extra cash through some extra jobs; maybe cleaning up after the dog in the backyard, cleaning out the garage, washing the car — those kinds of things might get you extra money.

Whatever works for you — maybe some combination of those kinds of things. Of course, as the kids get older, then you want to encourage outside work: summer jobs and things like that.

Roxanne: And then they are learning responsibility as well.

Bill: Absolutely.

[10:43] Do you have any tips on teaching kids to budget

Roxanne: Do you have any tips on teaching kids to budget?

Bill: Yes. I like to use some everyday experiences as little mini-budgeting exercises, especially for young kids. I like to treat my kids to the candy store every once in a while. When I do, I like to set that up as a mini-budget. I might spot my kid $2 and say: “That’s your candy budget. If you spend more than $2, then you’re going to pick up the amount over that, and if you spend less, you get to keep it.” That’s where our software really facilitates things because we can be approaching the candy store and I can say: “I just shot your card $2 for your little mini-budget and you make the purchase. If it’s over budget, it’s going to come out of your balance, otherwise keep whatever’s left over.” Taking everyday experiences and turning them into budgeting exercises is a clever way to go.

I think the next step up, especially for slightly older kids, is: “Hey, you’ve got some birthday event or something coming up, why don’t you help me make a budget for that event? Why don’t we plan how much we’re going to spend for the party items and things like that?” That’s a great way to engage your kid in a very well scoped budgeting exercise. I think the risk you run into as a parent is over-complicating things by trying to get them to do the uber budget that covers everything. That’s just too complicated. But if you take an event like a birthday or maybe Halloween and have them help out, I think that’s a great way to go.

As the kids get into the teen years, I like to take an area of spending that you might be doing for them. The classic example is clothing. My daughter was really into clothing in her high school years, and this can be fertile ground for lots of arguments. The old: “I want this, I want that, my friends got that.” We said: “Here’s the deal: we’re going to set up a clothing expense account, but we’re going to fund it based on a budget that we all agree to.” We sat down and made a budget. We had her propose the initial budget, and then we said: “Those designer jeans are too expensive. You can buy those on eBay. Why don’t we cut that part in half. Oh, and you might want to wear some underwear, so include underwear and socks in your budget.” A little back and forth, but ultimately we agree on a budget. I think a monthly budget is a good way to go. Then turn the decision making over to her.

It’s a total game changer. Since they have a hand in making the budget, they feel responsible for hitting it, and you don’t have to nag them about what they do or don’t buy. Win, win! When my daughter was a sophomore in high school and she was going to prom with the older boyfriend, she decided: “I really need that Neiman Marcus chiffon gown for this one time event.” I’m like: “really?!” So, I gave her my best fatherly advice which was: that’s an idiotic purchase (said in some diplomatic way). She dismissed it, but I didn’t have to argue with her. I said: “Its your budget, you can manage it how you want,” So she bought the dress, and then she had the wonderful experience of going for four months without being able to make a clothing purchase. That experience was infinitely more powerful than any brilliant lecture that I could give her. As much as I think I’m terribly wise; she tends to have thought otherwise — especially during that period of her life. She totally got it by living through that experience, and that’s what we’re trying to facilitate with this virtual family bank. It’s a safe way to make mistakes and, in effect, pay for those mistakes. As a family you can do that, whereas a financial institution doesn’t really encourage that experience.

Roxanne: I like that you’re allowing them to experience the consequences so that they learn more effectively.

Bill: We had enough arguments with the kids; we want to eliminate them if we can. The neat thing about having a system is that it’s really hard to argue about numbers as much, especially ones that you helped create. Having a system is really comforting. We’re got enough chaos in our lives. That’s why we call it FamZoo, by the way. It’s short for “my family is a zoo.” I’m sure most parents out there can relate.

Roxanne: Aha! Oh, that’s funny.

[15:55] How do you teach your kids about planning for and paying bills?

Roxanne: How do you teach your kids about planning for and paying bills?

Bill: That’s a great question because one of those areas where kids tend to not have much of a clue is how much certain basic things that they use every day cost. The classic example is the cellphone. There are a a lot of kids running around having no idea that cellphone plans actually cost money. Furthermore, there’s an economic incentive for families to have everyone on a family plan so there’s not separate billing. So, one of the things we added to the virtual family bank was the ability to set up recurring expense sharing with your kids. In effect, for them it looks like bill pay. For example, my teenagers get automatically billed every month for their share of the phone plan. This is nice for two reasons: one is it makes them viscerally appreciate that these things actually cost money so they’re not surprised when they go out in the real world and they’re like “oh my gosh, these things cost money!” The other is that it gets them to do a little bit of planning because they need to know that they need to set aside $20 in their mind and keep it in their account so that when the monthly billing comes around from dad for the cellphone, they can cover it. We found that’s a really effective way to enlighten kids.

It’s funny, some people say: “Oh, your kids must hate that,” No, actually they feel pretty grown up. They feel like they’re taking care of their responsibilities. That’s one of the things I think we forget often as adults. Kids crave responsibility. If we can give them ownership and responsibility, they really dig that — especially teenagers. I think having a system that allows you to do that is useful.

Roxanne: Yes, and it gives them a great sense of empowerment.

[18:01] Are prepaid cards a good idea for kids?

Roxanne:What are your thoughts on prepaid cards? Are they a good idea for kids?

Bill: That’s really interesting because, two years ago, I really didn’t know what a prepaid card was. I had a checking account, debit card and credit card, and I was saying: “what’s this whole prepaid thing?” But, the use of prepaid has exploded. It has really coincided with people freaking out about going into credit card debt. The neat thing about a prepaid card is it has no debt component. You can’t spend more than what’s on the card, and you can’t overdraft. It turns out that with debit cards, you can actually overdraft because of the timing of things. Prepaid cards are the perfect vehicle for immature spenders, which is what kids are. I don’t mean that pejoratively. They’re just learning how to manage their money. The last thing you want to do is give them some payment vehicle that’s going to rack up a bunch of unplanned fees. We parents have enough chaos in our lives.

I have found these prepaid cards to be just fabulous vehicles for kids. If it’s something like a MasterCard prepaid card, then it’s accepted widely. They’re accepted online. So, instead of having your kid purchasing songs through your credit card backed account on iTunes, set up a separate account that’s linked to their prepaid card. Then they can’t spend more than they have. Prepaid cards are really cool, and that’s why we’ve integrated them into our virtual family bank.

[19:45] What are your thoughts about giving your child a loan?

Roxanne: What are your thoughts about giving your child a loan?

Bill: A lot of parents say: “I don’t want my kids to ever deal with debt. Never give a kid a loan!” But, I’ve actually found a loan to be a great learning experience for a kid, especially for a big-ticket item. This all came about when I had a son (and our kids are all radically different) who turned out to be a heavy metal drummer — which sounds kind of funny for a nerdy computer science dad. He needed Garage Band and a fancy Mac laptop to record his music with his buddies, and this was really encouraged by his music teacher. I’m all for helping finance the creative passions of my kids. A lot of parents feel that way.

I bought him this nice laptop. Lo and behold, six months later or so, he had trashed it. I was furious. He just had no appreciation for the expense of this thing. I had foolishly run out and bought it for him because I was so excited about music (and vicariously satisfying that secret wish every parent has to be a rock star). When you have a kid who can really play, it’s like: “Wow! Awesome!” I was furious to find out the laptop was broken, and to hear him casually say: “my music teacher says I need a new one.” So, I said: “Here’s the deal: I’m not going to buy you one, but I’ll give you a loan, and I’m going to garnish your wages for the next year and a half to pay this thing back.” It was great because every week he saw 40% of his allowance going to pay this thing off. That meant there was less money for pizza with the guys on the weekends or whatever. He was reminded constantly that he had bought this pretty expensive item, and he was paying it back. He took really good care of that thing. He had that computer longer than any computer I could remember. It was a total game changer.

There are situations where learning how to manage a loan and learning to appreciate the expense of a big ticket item (especially these days with kids running around with iPhones and fancy stuff) can be a really positive experience. That’s the situation where I say loans for kids are a good idea.

The other time a loan is a good idea is the unplanned situation where the kid couldn’t possibly cover the expense. Maybe they got that driving ticket or whatever. That’s where I want an account where I can keep track of the amount so they actually have to pay it back. I don’t want to just pay it off for them and forget it. I have to pay it initially because they can’t afford it, but I want a system to be able to say: “you need to pay this back over time to me.” A virtual family bank system helps me do that.

Roxanne: Once again, you’re instilling more responsibility in them.

[23:02] How do you encourage your kids to save when their saving and investment options have such tiny returns?

Roxanne: How do you encourage your kids to save when their saving and investment options have such tiny returns?

Bill: I don’t know about your local bank or your big bank, but if I took my kid’s birthday check and put it in a savings account, he might earn maybe a penny after a year or something. It’s hardly compelling. Where I come from, kids call that theft. They say: “What did you do with my money?’ That’s one of the really neat things that you can do with a virtual family bank that a real bank can’t do. Remember, you’re the banker, so you can set the interest rate. I pay my kids a crazy-awesome interest rate. I’m not even going to tell you what it is because everyone subsequently comes up to me and says: “Hey, can I bank at your bank? Ummm...no! It’s the Bank-of-Dad rate only.’ If you think about it, one of the great, smart ways to invest these days is to buy an index fund that mirrors the whole market. So, instead of gambling and picking a particular stock, a lot of investors advise you to just buy an index fund that mirrors the whole market. If you keep it in there for a super long time, you’ll actually get a pretty good return. Kids can’t do that because they don’t have enough money to make the minimum investment. The nice thing about a virtual family bank is: you’re the one making the rules. You can pay whatever return you think is appropriate and is making enough difference that they notice. You can do it in a time frame that a kid appreciates, because remember kids operate on a much faster clock. Their weeks are our years. In my case, I actually have it set up so that every week my kid gets a little payment on his prepaid card that’s calculated on the balance. He gets .2% per week for the balance on his card. That’s an encouragement. It actually ends up being 10 cents, 20 cents. But every week, he’s getting this little text message that says “ you just got credited 10 cents because that was the interest you earned on your balance for not spending.” If I can create a repetitive system where the kids think before they spend, or they see a positive reward for saving, then maybe it’ll become a long-term habit. Compare that to getting a penny after a year at a commercial bank and never seeing that money. I don’t think that’s going to create a habit. That’s one technique.

The other technique that I love is agreeing that you’re going to take a percentage of their income whether it’s from allowance or birthday checks or whatever, and put that into a savings account. We have three types of accounts in FamZoo; spending, saving and charitable giving. Before they even have the opportunity to spend, take a percentage and put it in that savings account. Maybe you’re giving them a crazy-awesome interest rate on that savings account. That way, they get in the habit of putting money aside for important things before they even think about spending. That is probably one of the best personal finance habits you can have. If you think about saving after you spend, you’re not going to do it. If you save first as well as set aside some money for charitable giving, then you just make due with what’s left over for spending. That’s a great habit to get into.

[26:47] What are some good ways to introduce kids to philanthropy?

Roxanne: Speaking about charitable giving, this is our last question here. What are some good ways to introduce kids to philanthropy?

Bill: This is something I worked on a lot with my kids and is something in which I have a big personal interest. I didn’t really get into philanthropy until I was approaching middle age, and I was thinking: “how do we get kids in that habit?” The way I like to do it is, as I mentioned earlier, pulling a percentage out of their allowance or their chore payments or maybe their birthday checks for charitable giving. But I like to have that discussion with the kid first. In other words, I don’t like to dictate: “you’re going to do 33% here and 33% there.” I’d rather say: “We’re going to take some income and we’re going to set it aside. What percentage do you think is appropriate?” It’s really interesting, because your kids might surprise you. They end up being very generous. You can always adjust the percentages too over time. I think it’s a great conversation to have with your kid. Introduce the idea of philanthropy and setting some money aside, then engaging them in giving opportunities. What I like to do is we have each of the kids pick a percentage that they set aside into a charitable account, and then whenever the balance hits $50, we have a conversation about where you they can donate the funds.

The Internet has become a great way to give small amounts. That’s perfect for kids. There’s a great site I like called donorschoose.org. It’s where teachers post classroom projects that they’re trying to run in their district and it’s typically an underfunded district. If they want to buy musical instruments for their class or whatever, they post a project on donorschoose.org and donors can partially fund it. If a kid wants to put $25 towards this project, they can. What’s neat about donorschoose is that kids go to school, so they relate to school and things that are done in school. Kids can donate to particular interests — whether it’s music or art or whatever. It’s a neat engaging way to introduce your kids to the idea of philanthropy. At the end, the kids get feedback about the projects when they finally get funded. They see pictures of the kids enjoying the results of their philanthropy. It’s a neat site, but there are lots of sites out there like that.

The point is: set up a regular routine for giving. I’m talking about monetary giving here obviously, but hopefully you do some service as well. It’s not all about money. Setting up routines and automating things is one of the great personal finance tips I would say. It really turns it into a no-brainer; you don’t have to think about it. You’re following a good habit because automation is helping you.

Roxanne: That’s good to be reminded of. We are out of time now but I understand that you have an offer for our listeners today. Could you explain that to us?

Bill: Yeah. We’d be delighted to give you an extra free month of FamZoo. We always have a two-month free trial but if you type in a coupon code...

Roxanne: Was it....? (Listen to the podcast to hear the coupon code!)

Bill: That’s it. If you type that in, when you register or if you’re already registered for FamZoo you can go to the store tab when you’re signed in and click on redeem coupon and type that in and you’ll get a free month on FamZoo on us. We’d be delighted to serve your families.

Roxanne: Great. All your information is at famzoo.com, correct?

Bill: That’s the place to go. We always love talking to families. Feel free to contact us.

Roxanne: Thank you so much Bill for being here with us today and sharing all this wonderful stuff about finances.

Bill: It’s my pleasure. You’re most welcome.

Roxanne: Thank you. I’d like to thank everyone here also for joining at the Positively Parenting Telesummit at raisethemstrong.com. Have a wonderful day, and happy parenting!

The FamZoo Family Finance Blog Preparing kids for the financial jungle.