Wednesday, July 14, 2010

Starting Early in Teaching Financial Responsibility

In a recent discussion on Lion's blog about children and money I made a suggestion based on something we did with our own kids. Lion suggested it would make a good post here, so here goes.

When they are young children often receive money from others, be it for birthdays or Chanukah, or losing a tooth or what have you. In addition, some families give their children allowances--a weekly, bi-weekly or monthly sum, sometimes based on their completing certain household chores, sometimes not. And what do the children do with that money? If they are typical, they think of things they want to buy with that money. And they want whatever those items are NOW. And then tomorrow comes and they just may not have any money left to buy what they want tomorrow, or the tomorrows that follow.

We took a different tack with our kids. We set up home checking and savings accounts for this type of money. Yes, we made them formal. We got blank checks from the bank and each child got a check book. They also got a computerized savings passbook. If the children wanted to buy something, they first had to look at their checking balance/savings balance and see if they could afford the item. If they couldn't, they didn't get to buy the item at that minute. Our home bank was not in the business of giving out loans nor of covering overdrafts.

My husband taught each of the kids how to write out a check, how to enter it in the check registry and how to balance that check book. Each month they got a statement of deposits and withdrawals. They could see in black and white what they received and what they spent on. Yes, and they also learned to check that the bank had not made any errors on their statements.

Items that cost more than they had in the bank? They had to save up for those items. And yes, we discussed with them the idea of spending everything on one item versus having the money for smaller, less costly items.

Lion asked me what we did if the kids wanted to buy an item, one they might have had money for, that we didn't want them to have. We used two approaches. The first was the "age appropriate" approach. We pointed out that in the "real" world there were age requirements in place in some areas. You couldn't vote when you were 12, you couldn't drink at 13, you couldn't be under 16 in our local mall and be in the mall on a school day unless accompanied by an adult. You couldn't get into certain movies unless you were a certain age, or go to a movie by yourself if you were under a certain age. Certain items they wanted to buy we, the parents, put into "your not old enough to buy that" categories.

The second approach was an economic one. We introduced the kids to the idea of service charges and taxes. Just because an item says on the price tag that it costs X amount doesn't mean that is what it really costs. There are taxes to be added in. There may be shipping and handling costs. Sometimes there really were these charges on items that we were letting the kids buy and they learned early that what is on the price tag may not be the bottom line. We also used these extra charges and taxes when we didn't want them buying something, as a way to discourage the purchase. By the time we added on luxury taxes, sin taxes, sales taxes, shipping/delivery charges, reservation charges and the like, the price of the item usually at least doubled. And the kids lost interest in the item in a fairly short amount of time--spending $10 was one thing; spending $20 was quite another.

Yes, on occasion, a child would hit the middle of the month and have nothing left to spend until the next "pay day." This was the point where we could point out that planning ahead was important, that budgeting was necessary. They could have $5 worth of ice cream one week, or they could have $1 worth of ice cream each week of the month with a little left over in savings. One upshot of this system was that the kids also learned to parcel out what they purchased. Buy a pack of gum for a nickle (yes, that's what it cost back then) and chew all five slices today and you had nothing else to chew for the rest of the week until you had that nickle to spend again. Parcel out that gum across five days and you could have enjoyment over a longer period of time.

Eventually all the kids got the skills and got the idea that money is not fungible, and that budgeting is a necessity, not a parental evil. We believed then and still believe now that economic/budgeting skills need to be developed young and worked on until the child becomes older and independent. To leave any financial education until the point that a person is engaged to be married is a real disaster in the making. Learning to budget money, to spend wisely, to conserve funds, to delay gratification is something that CAN be taught to even young children, and the sooner you begin, the better off both you and the kids are.


Margaret said...

This sounds smart and quaint at the same time. My husband and I use a check once a month, for rent. We also only rarely carry cash. While my husband and I always pay our bills, save, and never overdraft, I'm worried about teaching our kids that when you swipe plastic you get stuff.

ProfK said...

You're right that none of us are using checks quite as much as we may once have done. But for very young children using a checking account system to introduce savings/spending/finances works because it's a tangible, hands on method. Hopefully, if kids learn early, they won't look at those credit cards as magical things--just swipe and you can have anything you want. Once they have gotten the hang of checking the balance in a checking account, it should be easier to explain the idea that you can't spend what you don't have no matter if writing a check or using a credit card. And then you get them into the habit of checking their credit card balances daily as well.

JS said...


Interesting system. There are parts I don't necessarily fully agree with, but I think the overall goal is a good one. I think the main point kids have to come to understand is that things cost money and money is not unlimited. Little children tend to think that you just go to a store and pick up whatever you need - if you need a tomato the cashier gives you one, if you need gas the gas station attendant fills you up. Even if young children understand that money changes hands, they don't understand how that money is earned or that it is limited. Simply having children understand those concepts is key. When a parent refuses to buy something for a child or says it costs too much money, it is critical that a child understand that it's not just a parent withholding something from the child or making up some excuse, but part of a larger system of understanding wants versus needs and developing the right skills for making these decisions.

Simply having children aware that there are bills that have to be paid and a monthly budget is important. Again, most kids think money is magical.

Allowance or not, simply setting a dollar limit on what a kid can buy helps them come to terms with you can't just have whatever you want. For example, you can have any toy for your birthday under $50. That alone teaches kids to look at prices and make decisions such as one big toy or several smaller toys.

I also think it's smart to let kids have the autonomy to make mistakes when they're young. Better they learn the lesson when it's a few bucks now than hundreds or thousands of dollars later. I took all the money I earned over a summer as a teenager and put it in the stock market in various stocks I was sure would go up quickly. I ended up losing maybe $500. That taught me really quickly how not to invest and made me seek out books on personal finance to learn from (I use vanguard index funds now). But, better that lesson as a teenager than not being able to buy a house or retire due to the same stupidity.

Anonymous said...

One of the best ways to learn some responsibility is for kids (obviously not the little ones) to have jobs. Once you realize that that must have sweater or sneakers or cell phone or whatever translates to 10 hours shoveling snow or mowing lawns or bagging groceries or scraping paint, it makes one have a whole different relationship with money. It also gives tzedakah a whole new meaning if you are giving money that you earned or saved up from gifts than when your parents give you a quarter or dollar to put in the can.

JS said...

Is lion's blog invite only?

ProfK said...

I don't believe so. If you scroll down the screen here, on the right hand side there is a blog list with LionofZion in it. Clicking on that link should take you directly there.

ProfK said...

I have to retract the previous answer. Somehow the link shows that only invited readers can get into the blog. I've sent Lion an email to find out if this is accidental or on purpose.