Any three year old knows that money doesn't grow on trees – you get it from the bank machine. My five year old now understands that in order to get money out of the bank, you have to put it in. In his mind, what you really need is one of those plastic cards, preferably a gold one. Clearly, in order to protect my children from a financial crisis of their own making, something needs to be done. So how, and when, do you go about teaching your children the value of money?
The best way to teach your child how to develop a healthy relationship with money is to give them some to manage. And the earlier you start, the more practice they will get under your watchful and loving tutelage. We recently decided to give our five year old $5 a week, and because his three and a half year old sister has to be right there in step she gets $3.50. The allowance comes with three empty jars and some rules. The first jar, that my son decorated with a dollar sign, is savings. Ten percent of his allowance must go to his savings jar. The second jar is labelled charity: he drew a happy face on that one. Ten percent off the top goes to charity. The message is clear: you share what you have, not what is left over, which is usually nothing. And because we want our kids to understand the magic of compound interest, in six months, we will match the funds in his savings jar. The third jar is spending money: there's a pair of skis and a truck on that one. So 50 cents to savings, and 50 cents to charity: He is left with $4.
Some interesting things have happened. Like deciding that he really likes giving things away so he put all of his allowance in the happy face jar! So as not to have to deal with a torrent of tears as he watches his sister load up with booty, we managed to convince him that he deserves to keep some money for himself.
Do your kids deserve an allowance? Do they do their chores?
I believe that line of thinking is a trap. The purpose of the allowance is to teach kids how to manage money. It's not a reward. We expect our children to help around the house because they are members of the family. In return we thank them for helping, and we do not ridicule them for being slackers.
If you elect not to give an allowance, what are your alternatives? Inevitably you will fall prey to the dole out method. That is: they ask for something and you dole it out. Or not. In the first scenario you are teaching that money may as well grow on trees, and in the second they learn that if they really want something they need to become good beggars. If you are wondering how financially savvy your seven year old is, ask them whether they would prefer an allowance or the dole out method. Quicker than you can say double dip recession they will choose the dole out method. That's your clue that your kid is very numbers literate. Keep track of how much you dole out – it's a lot.
While the recommendation is that an allowance be a supervised exercise, ultimately the choice on what to purchase with their money must remain their own.
“Wow, look at that hot wheels truck. I'm gonna buy it with my own money.”
“Really? Are you sure?”
“You know, this new hot wheels cost $3.99. You would be spending your entire allowance and have nothing left. Or you could get six hot wheels cars at the Sally Ann. Not to mention, that with tax it will cost more than your allowance, so it probably isn't possible anyway.”
“You could lend me money.”
“I could, but I won't.”
“But this one is brand new.”
“Yes, it is. Will having one new shiny truck be more fun than having six less shiny but just as fast ones?”
“I want this one. Sister, will you lend me money to buy this car?”
“Sure.” (Great, now I have to try and explain the concept of charging interest to a three year old.)
At least sometimes, new toys lose their appeal even before they are out of the packaging. By the time we were ready to check out he had changed his mind.
“Let's put this back and go to the Sally Ann instead.”
“I think that's a wise choice.”
“I bet if we went to the dump, we could find some for free.” (Ah..like father, like son.)
*All of the concepts in this article are from The Money Tree Myth by Gail Vaz-Oxalde.