Alice in Financeland: Help Your Children Manage Money Well
What does parenting have to do with money? Well, our world is based on money (whether you like it or not), and children are an essential part of our society. The most important thing is, though, that today’s children are the adults of tomorrow. One day they will be the lever of economics – and maybe the ones who pay your pension out! Let’s make sure they are well prepared for the task, by investing in their (and through them, our own) future.
If you’re reading this article, you’re probably old enough to remember there wasn’t any financial literacy when you were school, and even now there isn’t much. If you have kids or you know people with kids you care about (nieces, nephews or friends’ children, for example) – or even if you yourself are a child or adolescent and would like to know how to understand our financial world, this post is definitely for you.
You wonder how to deal with simple money handling, so let’s start with a big one, which is…
…pocket money (or spending money)
There are two different schools of thought relating to pocket money; one advocates giving it and the other does not. Both of these philosophies have variations, though, and it all depends on you which you want to follow. Personally, I think each of them is fine, as long as you set some rules and teach your children handle their money efficiently.
If parents choose to give pocket money, they can set an amount each week or month and
a) let the child do whatever they fancy with their money, or
b) ask their children to cover some of their needs (age appropriate).
You can also choose to give pocket money for minor chores or for good school results.
I know a lot of families who pay pocket money to their children for errands such as tidying up their bedrooms, washing the dishes, cleaning the bathroom, vacuuming or taking out the rubbish. You do these chores (and much more) without being paid, so I’m not convinced that odd jobs are the best reason for pocket money. It seems like bribery to ask your child to do things which should be done not for a reward, but rather out of the kindness of their hearts- to help parents out. Beware of this tactic, as you might end up with a lazy teenager who won’t do anything unless he or she is paid for it. It would be a different story if a neighbour “hires” your kids to do similar kind of jobs and is willing to pay them.
If parents choose not to give pocket money, it could be for a number of reasons. Either they think the child is too young, they simply can’t afford to, or they figure the child doesn’t need any spending money (because as parents, they cover everything). Some parents may also prefer their children to earn the money themselves, through a part-time job for example.
Again, pocket money varies from family to family and obviously depends on the child’s age. When there might be a limited possibility for younger children to earn, there will be plenty of jobs for pre-teens or teenagers (e.g. washing a car, cleaning windows, mowing the grass, etc).
You should feel free to pay for a service which you would normally pay to a professional, and tell your child that normally you would pay so and so for the service, but you can pay, let’s say, 50% (or whatever you deem reasonable) to them, instead. In this case, the teen is happy that they are earning something and you are happy the car is washed, and also that you saved some money. The only unhappy person would be the car wash owner, but that’s the rule of the market! Why should you pay more if you can have a cheaper service (and don’t have to drive to get it)?
Teach your children that they should try their best to deliver the perfect service- you can give them a tip if you’re very satisfied (as you would probably do somewhere else). They will then feel they’ve been rewarded for this extra effort (similar to a reward or commission system at work).
As soon as your teen is eligible for work (an additional job in the evenings/weekends, for instance) you should agree with them to stop paying out the pocket money, or at least to reduce it, as they have to learn to take more responsibility for themselves and their finances the older they get. Obviously, when they become adults and have a regular job, paying pocket money no longer has a place.
The most frequently asked question is when and how much to give a child? You can set a weekly or monthly amount and you can pay it on a set day (like a salary for adults), or you can give it for each job (as soon as it’s done). Personally, I think the little ones will be more motivated by instant gratification, whereas waiting for a “payday” by the older kids/ teenagers will teach them being patient, and helps prepare them for their future adult life. After all, you also have to work several hours/ days in order to get your wages.
Some people decide to give a weekly amount according to and respective to the child’s age: for example, £7 for a 7-year-old, £8 for 8 year-old, and so on, as the child’s needs grow with them (and it’s also similar to an annual raise which you would get at work). You would have to explain your child that adults get different amounts and it’s not age related, as they have much more expenses and dependants to maintain. Otherwise, your child might think it’s not fair and demand an instant raise!
Now, you are probably interested how we resolve the kids’ money in our household. Our children are only 8 and 6 years old, but are used to earning and saving their own money. We do this because we want to reward them for their efforts, while at the same time showing them that (almost) nothing in life comes for free. As an adult you wouldn’t get money if you hadn’t worked. So, our kids have a system in place which is a combination of some of the ideas mentioned above, and this allows them to earn some money, so we can teach them how to handle it from a young age.
They are not paid for simple chores, however. If they do something extraordinary they would get a golden star, which goes on their star chart (instant gratification). In this way, whenever they collect 10 stars, they get £5 paid (a salary system).
We also give them a reward for excellence in their school reports- any annual learning results or exams they pass. Our responsibility is to work, earn and maintain our family. Their responsibility is to attend school and learn as well as they possibly can. We reward them accordingly to the effort they put in.
When they reach ten, we will change the system to a non-star instant earning one, as we cover everything else. In secondary school I suppose we would like to give them a certain amount weekly, and then monthly, and set the rules for what they would cover from the allowance so that they can learn to deal with expenses. There will be still an opportunity to earn something extra.
The very moment that the money is theirs, they are allowed to do whatever they want with it. They can decide whether to spend it or save it- however, we do stress the importance of saving for more expensive goals, and they know that sometimes you have to be patient in order to afford something better.
We do have, however, some concrete rules – they are not allowed to spend money on games without our knowledge (we always check if they are age appropriate and do not have unwanted content), and they are not allowed to buy some specific beverages or food products we have agreed not to have at home (for example, we don’t drink any soda, and on top of that our son is allergic to some food products).
Because they have their own money and they know how to save, they are…
…responsible for covering their own fancy spendings
We cover most of their needs, but if they want something that goes above our family budget, or they want another set of Lego or another toy, they have to cover such expenses themselves. It’s a great way to teach them three important skills: patience, perseverance and prioritisation of their goals. They are more aware of what they need/ want, and have to consider whether it’s worth spending money on a lot of small pleasures or to save it for one bigger, longer-lasting goal. In this way, in the past they have bought some things which would be quite an expense for us if we were to buy them without saving.
You can help your children to save for various goals by making some jars or tins with different spending goals on them (eg a new bike, Lego, Cinderella’s castle, laptop, etc.). They will decide how much they want to save for each goal and that will help them persevere and not to resign from achieving their goal just because they have a new one on their minds.
If they are close to a goal or they want something instantly because there is a discount on a product which is worth consideration, you can lend the missing amount- but you should agree on when, how and with what interest you will get the money back. This shows the kids how banks work, and how they earn by offering loans.
The same should apply if you ever need to borrow money from your teenager. You have to agree the interest and pay it back all at once or in installments.
Because, our children can do their own shopping they know…
…how to read prices and how much everything costs
We show the kids how to properly understand prices. Nowadays, you can see mainly prices which are confusing to a financially illiterate person. Instead of £10 you will see something like £9.90 or £9.99. We want our kids not to be confused or feel cheated after all, so we would often have a conversation like:
“Mum, can we buy this? It’s only £9.”
“Are you sure? You know how to round numbers from school. Which one is it closer to, nine or ten?”
“Hmmm, I have to take away 99p to get it to nine and add only 1p to get it to ten. You are right mummy, this costs almost £10!”
They are also savvy in discovering real bargains in shops, instead of just taking something because it’s discounted. Sometimes a rebate is not really a discount – you will find that buying a product which is bigger and doesn’t have a dropped price tag can be cheaper than the one with the discount. It’s important to check the price per/kg, per/100g etc on the bottom of the tag.
Not only do we take our kids shopping, but the older they are, we explain how we earn money and how we spend it on rent, bills, food, etc just to show them how much is left and whether we can or cannot afford something.
This way they also control their own savings and spendings and take any…
…consequences for their financial decisions
We let them experiment by buying things which in our eyes might be completely unnecessary (obviously within the agreed rules I mentioned above).
This is their money and if you agree to give your children anything, do not decide for them, and never ever touch their money without their permission. This teaches them respect for personal finances and the importance of choice (even making bad decisions). Whenever they practise this right, though, they have to live with consequences! Beware of buying them something just because they cried over a toy they bought; a day later it’s boring and actually they wanted something else, for example. They have to learn that money spent is money gone, and it doesn’t grow on trees. They have to make an effort to earn more money in order to afford a new goal. This will only lead to better decision-making in the future.
They have to learn that whatever decision they make, it will help them to either get closer to or further away from their goals. To understand this better, we…
…play board games which involve finances
Monopoly is a well-known game which is perfect for kids to learn how to count money and to understand how to earn and spend it. When they were little, we played Monopoly Junior because the only cash unit is one Monopoly, and they were learning how to count.
Now our daughter is eight, we have invited her to play Cashflow with us. For those unfamiliar with the game, Cashflow is a product of Robert Kiyosaki, who wrote “Rich Dad, Poor Dad” and designed it to help other people to understand concepts of investing and making money.
The game is based on Monopoly, however it has two stages instead of one, which are Rat Race and the Fast Track. The first one simulates real life conditions where the players have a certain profession, income and expenses. They have to raise their character’s passive income level to exceed their expenses, only then they’re starting the second stage (Fast Track). Then the first person to be able to “buy” their dream or to accumulate £50,000 in monthly cash flow wins. As there are financial statements provided and it involves to do the accounts by the players themselves, they can see more clearly what is happening with their money.
During the last Easter holidays, it was the first time we had played Cashflow for a long time and the first time we decided to invite our daughter to play with us. As I mentioned, she is only eight, but being an academically gifted child, she grasped the game in no time. Obviously, she had a lot of help from both of us during the first session; however, the more we played, the more independent she became. We wanted her to make her own financial decisions and take her own risks, so that she has more satisfaction after managing to escape the Rat Race. Obviously, the biggest help she needed was to fulfill the financial statement properly, but we have already noticed that she has been trying to do it by herself.
For the first few times in a row she was beating us unmercifully; we reckon it was not only due to beginner’s luck but because she had a fresh insight to the game, a fresh attitude. She was in learning and applying mode, more keen on investing, taking risks (probably she didn’t feel the value of the money as much as we did, but also she knew it’s a game and the fake money). Our attitude was more cautious; to stay on the safe side, as we know money’s value and we have experienced different situations in life before.
The most important learning is that of her counting abilities and dealing with money (being a banker was a very useful experience as she still would confuse the number of zeros by bigger numbers like 10,000, 100,000 or 1,000,000). She has been noticing saving and spending patterns; she has started to stay away from “empty pleasures” and to invest in valuable things; she has been learning to make wise choices and she applies it now in real life, as we’ve noticed she chooses to save for things which are more useful or valuable than she did before. The game has also stimulated her imagination, as she thinks of ways to earn some money on a larger scale- like opening her own online bookshop, or building some domestic robots.
Playing such games is an amazing opportunity to teach your child how finances work, but also you can learn new things from them. And be encouraged to try, as…
…it is never too early
Whatever you choose, just try to engage your child in finance, even from a very early age. First, focus just on their counting abilities, and then try to count money (before our children were able to recognise value of money, we were simply counting coins). Then increase the level of knowledge each time, to that which you think is the best for your own child (as we all know, kids are all different and develop at a different pace).
However, properly handled, your kids could surprise you what they are capable of. One day my friend approached me after being surprised by my 5-year-old doing up his own shoelaces.
“Wow! Amazing”, she said. “I heard they are not capable of doing this until the age of seven”.
“Well, maybe”, I replied. “Luckily, he hasn’t heard of this rule- he was convinced it’s normal for every 5-year-old, and so he has learned it”.
Similarly, let your children believe they can be the best in dealing with money, give them choice, and don’t be afraid of them suffering some negative consequences. This is how they learn, and the greater responsibility they have, the greater those things coming their way.
Your trust, gentle encouragement and constant motivation will make your child financially savvy and prepare them for a great, economically fulfilled adulthood.
(PHOTO: The Manka Family. A regular conversation about money is a part of our family weekly routine)