Wednesday, December 19, 2007

Teaching Kids About Money

I recently read a cute post on Free Money Finance asking readers to comment about allowances and the tooth fairy. I really loved one of the comments left by a reader named Tom regarding what he does for his kids' allowances:

We give our 6-year-old and 9-year-old kids a $2 per week allowance… but with a catch. They have 5 different banks sitting on their dressers, titled "ANYTIME", "LONGTERM", "COLLEGE", "CHRISTMAS", and "GIVING". Each week they split their $2 into the banks like this:
* ANYTIME: $0.50 cents. This is the money they can use for ANYTHING, any time they want. Candy? Go ahead. Toys? Fine. We do not control their spending on this, though we do advise from time to time. Logan, you want to get a $2 popsicle from the ice cream jingle-jip man as he drives down the street? Go ahead. It’s your money.
* LONGTERM: $0.50 cents. This is money they save up to buy something special for themselves; usually a big toy or something relatively expensive (from a kid’s perspective). They can pick anything they want, and then they put a picture of the thing in the bank along with how much they need to save up. Then they save in this bank for months until they have enough to buy the thing. Once my older son saved for a year and a half to buy this incredible $60 Star Wars toy he HAD to have. Again this is something THEY decide on and the only rule is that they have to save for it.
* COLLEGE: $0.50 cents. When this bank accumulates $20 or so we take the money out and put it into their ING account. When that gets to a couple hundred bucks we roll it into their UGMA or 529b. Lather, rinse, repeat.
* CHRISTMAS: $0.25 cents. The kids thought up this category on their own. They save all year long and use this money to buy personal Christmas presents for their siblings and for us their parents. I think they get a lot of pride using their “own” money in this way, and the gifts they pick out are all the more precious to my wife and I than the ones WE buy for the kids to give us.
* GIVING: $0.25 cents. This money goes into the offering plate at church. Or the Salvation Army kettle outside the grocery store, or maybe a relay-for-life pledge. We think this may be the most important of the five banks, as far a building a child’s character is concerned.
My suggestion to parents is do something like this with your kids from an early age. Make up your own categories. Use whatever percentages you’d like. When your kids are really young, use this to teach them the value of money. Use it help them learn how much coins are worth and how to make change. Start by handing them 8 quarters and have them drop them into the proper banks. Later give them dimes and nickels. After that, dollar bills so they have to learn to make change from one bank to put into the other. Give ‘em a $2 bill and really mess with their heads! Eventually, hand them a $10 or $20 bill and teach them how to break that. When they get monetary gifts as, say, birthday presents, have them split those proportionally as well. If you increase their allowance (my teenager had his allowance doubled to $4 last year) keep the percentages the same.
So do this and as your kids get older watch them learn that, yes, if you spend all your ANYTIME money on candy, you won’t have any left to buy ; a hands-on Finance101 lesson. Watch your older children learn that a neat way to get that special LONGTERM item sooner is to apply some of their ANYTIME money to it as well! Watch your older kids be amazed at how those quarters saved for college at age 4 – through the miracle of compounding interest, regular contributions, and investing - have turned into thousands of dollars for college by the time they are teen-agers.
And if you are really really lucky, some day maybe your child will say to you, like my 9 year old daughter did to me one day: “Dad we are taking donations at school for Susie’s family whose house got burnt in a fire, but I only have $0.25 left in my GIVING bank… is it ok if I take out $5 from my ANYTIME bank and use that also?”
“Yes Lauren, that would be perfectly fine.” ;-)

What I liked about this idea:

- The amount is small. I don't think children need $10 a week unless you're going to put them in charge of some of their own expenses, like lunch tickets.

- The money is budgeted. Particularly with the LONGTERM bank, this seems like a great way for children to learn about delayed gratification, something our society seems to have some major issues with.

- It avoids the "gimmies". I don't have children yet, but if your kids have to buy all of their candy/trinkets out of their ANYTIME bank, you will hopefully avoid some of the whining that often happens at the checkout line!

I printed Tom's comment out and plan on filing it away for that day when my yet-to-be-born children are old enough to start learning about money.


Mrs. Micah (open ID was giving me an error) said...

My parents definitely instilled in us the virtue of saving up our own money for something. They'd say "That's why you have an allowance. If you don't want to use your allowance, then ask for it for Christmas or your birthday."

But if you cornered Dad and batted your eyes...sometimes, occasionally, you could get what you wanted. ;)

Becky said...

I'm glad that it worked for your parents (most of the time!). It's good to hear that something that seems like it should work in theory has actually worked for someone in reality :)

I must not understand the openid thing correctly. I'm (obviously) pretty new to this stuff.

FMF said...

Thanks for highlighting my post!

Becky said...

No problem! I love to read it :)

This 20 something lady! said...

I really enjoyed reading this comment. I do not have kids yet, but I feel that it is really important to teach kids financial responsibility at a young age. I will keep this in mind when I have little ones running around.

Thanks for sharing!