Take a moment to think back to that well-taught, highly practical personal finance class that you experienced in school. This was the class that taught us to maintain and balance a checking account. This was the class that taught us to save each month, one-twelfth of the amount needed to pay an annual insurance premium so we wouldn’t get caught short of cash. This was the class that showed us that $5,000 saved every year between age 25 and 65 would grow to $603,000 if the money earned an annual average return of 5%. This class also showed us why $603,000 might not provide a retirement lifestyle with which we would be satisfied. Do you remember that enlightening class that forever changed your behaviors around personal finance in a positive way? If not, you’re not alone. No such class existed at any of my schools, either.
When my son was five, I started thinking about what I wanted him to understand about finance. There are many resources available on the topic of teaching financial principles to children. For the past two years, I have been helping my son, now eight, implement the ideas of saving and spending found in the book Raising Financially Confident Kids by Mary Hunt. The broad idea begins with giving your child a set amount of money each week. There are no stipulations of good behavior or completed chores attached to receiving these dollars. This money is given freely, solely for the purpose of learning how to manage money.
Here’s how it works in my home: currently, my son receives six dollars per week. We have agreed that he is to divide the money thusly: 10% to his “Giving” jar, 15% to his “Save for Future Purchases” jar, 15% to his “Retirement Savings” jar, and 60% to his wallet. We also have a clearly defined, printed list of items that my son understands I will not purchase for him. Included on this list are apps for his tablet, convenience store snacks when we are traveling, toys, and a bag of chips or a cookie when I buy his sandwich at Subway. Also on the list are paying 50% of the cost of movie theater tickets, birthday presents for friends, and arcade video games.
Most children think about how they can persuade parents to give them money for something they want. The approach in this book gives the child responsibility for his own money and forces him to think about the management of that money. By giving my son control over money that belongs to him, and by giving him a clear list of what he is responsible for purchasing, he has been learning to think carefully about the opportunity cost of each purchase. For example, not being able to attend a friend’s birthday party because he doesn’t have enough money in his wallet or in his Save for Future Purchases jar to pay half the cost of a gift would be an unpleasant situation. At least twice a month, I do remind him to consider possible consequences such as this. We also talk about upcoming events and travel, how much money he might want for these, and whether he is on track to have the money available to him.
As my son ages, his weekly pay-out will increase, along with the list of items for which he is responsible for purchasing. The book addresses this, and many other ideas for you to consider when designing a money management system for your child. The ideas in this book are powerful teaching tools, and they are easy to implement. I encourage you to use them to give your child a strong foundation of saving and spending principals.