We have two children. My daughter is 7 and my son is 5. My wife and I have been thinking about how to teach our children about money for quite a few years (basically as soon as my daughter was born) and have read a ton about other parents’ ideas on the subject. I’m presenting the basics of how we do this with the hope that it may help other parents think about money. One reason for doing this is that someone close to me recently asked how we do things so they can think about it and develop their own system that fits their goals. We receive next to no financial education on this planet in school. I have met many accountants, doctors, business owners, and those with advanced degrees in finances who know next to nothing about the basics of managing money. Most of us learn about finances from our parents. Think about your parents for a moment and ask yourself: “What did my parents teach me about money, budgeting, saving, investing, and spending?”
It is fundamental the you think about what you are attempting to teach your children in how you dole out an allowance. Our primary purpose in giving allowance is teaching money management up to the age of 18 so that our children are able to manage money for the rest of their lives. We want to teach our children how to budget, delayed gratification, a generous spirit, bookkeeping, and a foundation for investing right from the beginning.
Our primary purpose in having an allowance IS NOT to teach our children about household chores, obedience, or rewarding or punishing them for anything. This is an important point! We give out the allowance each week regardless of their obedience because we teach the importance of obedience in other ways. We have three stages to how we are going to give out allowances. The first stage is simply money management, the second is beginning to understand how to generate their own money, the third is focused on facilitating independence with money management.
During this stage we simply want our kids to learn what to do with money when they have it and explore what that means as well as teach delayed gratification and documentation for money. The way we do this is by giving them a dollar per for how old they are; we give our 5 year old 5 dollars per week and will soon be giving her 6 per week (when she reaches her sixth birthday). We have decided that money should be separated into 4 categories (in order of importance):
1. Giving to others in need (generosity) = 20%
-This is for gifts. That’s it. For people who need something, our daughter always has money handy.
2. Investing (paying yourself first) = 25%
-She recently purchased a portion of her uncle’s new property purchase ($20 worth). She will be able to track, and therefore learn about, various investments in mutual funds, stocks, bonds, real estate, businesses, GICs, and even precious metals or money market accounts if she desires to in the future. As she tracks these investments over 10-13 years she will begin to understand how they work and what she desires to invest in for the future.
3. Saving (delayed gratification) = 45%
-Simply delayed gratification. As long as it’ll take more than 3-6 months to earn enough for something we are ok with whatever she chooses. Right now she is saving up for a horse! We’ve told her it may take until she is a late teenager and she is fine with that. She talks about it all the time. Can you imagine the impact this will have on her when she finally purchases that horse! She learns that she can afford almost anything if she is willing to sacrifice for it. She can realize these desires even faster if she finds other ways to generate cash.
4. Pocket money (for enjoyment) = 10%
-She can spend this, literally, on anything she wants. So far it is Lego (she has to save up for a couple of months just for the basic sets). If she purchases candy my wife and I reserve the right to facilitate her consumption of that candy by regulating how long it takes:)
These percentages will likely change as time goes by and that’s fine. We have criteria for each category and each time our daughter is given her allowance or spends anything she writes it in a ledger with our help. She delights in the ledger book that is only for herself and we opened a bank account in her name that she was super excited about as well (when she turned 5).
For us, if our daughter is punished by not receiving an allowance it is robbing her of the opportunity to learn about money. We aren’t giving her money in order to teach her obedience. We are giving her money to teach her about money. We’ve decided it is counterproductive to not give her money because it steals from her education at this point in time.
At this time we will give $10/week but not give more as our children age. When they hit 11 years old, they will still be receiving $10/week and we will begin to teach our children how to generate money in other ways. We haven’t completely decided the exact ways, but this will most likely not be tied to common household chores. Our kids are expected to do common household chores along with us because that’s what is needed to have a family function properly. There is a chance, however, that if they want to help with things outside of normal chores that add value to our lives in some way that we could pay them. For example, if they are creative enough to wash our cars for us, build something useful for our family or house, or take on someone else’s chore in return for some money… I’m comfortable with that. In my opinion my kids will be learning to think of new ways to generate income.
Our daughter has already begun thinking in these ways. She goes around the neighbourhood and asks people if they want her to pick the apples off their trees in late summer. This helps the neighbours because the apples don’t rot on the ground. My daughter then sells these apples to others in our community by offering them hand picked, tree ripened apples for less than people can purchase in a store. The beauty of this is that our daughter is helping various groups of people and bringing value and receiving compensation for that value (which is the most basic concept of good business). Hopefully we will be able to teach her how to scale this business as time goes by so that she learns even more! This past year my wife and son helped her pick and sell the apples. After she put all the money she made into the 4 categories we have, she used the giving and pocket portion of what she made to buy gifts for my wife and daughter. She learned that when people help you in business it is fun to say thank you out of the profits (again, a key good business concept of paying your employees). It is our hope that our daughter continues to learn these lessons when she is in the 10-14 year old range.
At this age we have a choice to continue to giving some kind of allowance for specific reasons: see the note below or simply allow and expect them to make their own money in their own ways. At the moment I lean toward giving them an allowance for specific items they need to learn to manage, help them learn to work within a budget in order to reach their short and long term goals, and help them learn to start their own businesses and make money on their own. If they choose to be an employee somewhere on a part time basis, I’m alright with that as well. One of the great lessons they can learn about money management is that if they are an employee they most likely will need to settle for smaller dreams or simply not reach their dreams and goals. The hope at this stage is to both allow our kids to learn on their own and be prepared for leaving the home (from a financial standpoint) as well as to discover their passions and do what they enjoy doing (or, alternatively, to discover what they really don’t like doing so that they make choices not to continue on those paths of making money).
Note: Regardless of our children’s age, we still expect them to divide their money into appropriate categories that we come up with together. We are open to discussing these allocations with them if they bring up valid arguments. At later ages we may introduce other categories (education, clothing, basic necessities) and set the basic allowance we give them to be used for these categories in the way our kids choose. If they want to buy one pair of expensive jeans and have only one pair, that’s fine. If they choose to shop at a second hand store and have more clothing, that’s also fine. We could also simply give them a greater amount of allowance in certain categories for this purpose; ie.$10/month on clothing to be used as they see fit.Another idea we have for the future is to eventually begin handing over some of the grocery shopping to our kids with a budget and the expectation that they shop for the groceries and cook a meal each week and see how far their money goes. I’m positive we will have hiccups along the way. I actually welcome these hiccups and difficulties because each one of them offers an opportunity for learning and growth.
It has been a delight to watch our kids learn about money thus far. They have quite a bit of control for their ages (my son less son than my daughter), and yet consistently make fantastic choices with their money (they love helping other people out and dreaming about the horses they want to own one day). I believe one mistake parents can make is to give your kids money without teaching them. Another is to base the gift on attitude or behavior in any way where they now have the option (through their attitude) of not learning about money. My belief is that as long as my wife and I spend time on the purposes for the allowance and we adequately plan to accomplish those purposes, our kids will learn what we desire to teach them. The biggest mistake a person can make in finances or life in general is not to think about their purpose for the actions they choose to take. I’ll end with a great quote I’m sure you have heard from an individual who understood life on many levels:
“By failing to prepare, you are preparing to fail” – Benjamin Franklin