“My parents didn’t teach me anything about money.”
That was my first complaint when, as an adult, I finally started to learn something about it. Since then, I’ve overcome the “blaming” mentality; I took ownership and resolved to learn as much as I could.
But it hasn’t stopped me from feeling baffled at just how little useful information we learn about money growing up. It seems the school system is somehow allergic to the topic. And the reality is that parents who don’t know much about money themselves aren’t able to pass along many pearls of wisdom.
Of course, we all absorb something along the way.
My parents taught me that you have to have a job; nobody likes a freeloader. They also taught me how to spend money as fast as I earn it. One of these lessons has proven more useful than the other.
In university, I took a course entitled “Engineering Economics.” It was mostly about the time value of money with a few engineering-ish problems thrown in. I got an A+ but remained financially illiterate for many years.
The job market of New York City taught me how to sell my skills and experience to the highest bidder.
I read The Wealthy Barber by David Chilton. It is very well written, but contains mostly high level “retail” advice on money: Invest in mutual funds.
Armed with this information, I charged into the world and made an absolute mess of my finances.
Years later, in my late 30’s, I finally started getting my head around my finances. And I vowed to do better for my kids.
But how exactly do you go about doing that?
In their book, Smart Money Smart Kids, Dave Ramsey and his daughter, Rachel Cruze, discuss how personal finance guru Dave taught Rachel and her siblings about money. One of the key tactics they recommend is finding what they call “teachable moments” to pass along golden nuggets of financial wisdom. This makes sense — kids have a lot to learn and must absorb vast amounts of new information every day. And they have an aversion to lectures from parents. So finding key moments to crystallize life lessons is critical to success.
But such moments appear and vanish again in the blink of an eye. To take advantage of them, you have to be well prepared.
This means knowing what you want to teach and being ready to talk about it when the situation presents itself. But it also means building some of the lessons into everyday life so they can be absorbed without the need for a long lecture. You might even manage to engineer a few teachable moments along the way.
For us, the whole plan boils down to answering two questions:
- How do you get money?
- What do you do with money once you get it?
In our family, we tie the concept of money to the concept of contribution. This forms the framework for answering the first question: How do you get money?
Children need to learn to take their place in the world as active and contributing members of society. To do this, they must understand how to look after themselves, contribute to their community, add value to society, and ideally create value to make the world a better place.
Based on a simple framework outlined in Robert Kiyosaki’s book Rich Kid Smart Kid: Giving Your Child a Financial Head Start, we break the concept of contribution down into four principles. We expect the kids to do tasks that align with each of these principles. A core concept is that we don’t pay kids just for looking after themselves and helping out with simple tasks around the house. Instead, we pay for completing specific agreed tasks. This way, we eliminate the traditional “allowance” of, say, $5 per week. For example, kids can complete five specific tasks at $1 each to earn the $5. The key is that the child is clear what exactly they are being paid for — and if the task isn’t completed, then they don’t get paid.
Principle #1: Personal Responsibility
Personal responsibility is about understanding that ultimate responsibility for how your life turns out lies with you. It starts with looking after yourself and involves learning many of the skills that will be required to do so in the future. Personal responsibility prepares children for independence.
Kids do age appropriate tasks for their own personal health and development. Tasks fall into the following general areas:
- Personal hygiene
- Cleanliness of personal spaces/cleaning up after yourself
- Ability to feed yourself
- Looking after your own things (toys, school bag, sports gear, homework, etc.)
- Understanding how to use and manage money
Toddlers and pre-schoolers spend a huge amount of time on this area alone: toilet training, learning to brush their teeth, getting dressed, putting toys away, and making their beds. It progresses into making snacks or a simple breakfast of cereal, then into sandwiches, and eventually learning to cook a few different meals. The whole idea of teaching kids about money management is under the umbrella of this principle.
We don’t pay for tasks that fall into this category; from an early age, kids gain the confidence to do things for themselves.
Principle #2: Family and Social Responsibility
Family and social responsibility is about being a part of a community. For a community to work, all members must contribute. Family and social responsibility prepares children for interdependence.
Determine certain tasks that contribute to the family or community. Tasks generally fall into the following areas:
- Setting and clearing the table before and after family meals
- Helping with the groceries (help find things on the list at the supermarket, put groceries away at home)
- Tidying common areas
- Following house rules
If your kids have a similar program at school for being helpful in the classroom, then you can connect the dots. You can also ask kids to help out their grandparents or even volunteer to help out in the community.
The lesson is that, even as an adult, we have social obligations. It starts with following rules (e.g. road rules, the law, etc.) and extends to paying taxes and helping those in need. In The Art of Exceptional Living, Jim Rohn discusses how paying taxes “feeds the goose that lays the golden eggs.” Financial success is achieved within the context of a larger system. That system must be healthy and functioning. (I’m not suggesting that you don’t get good tax advice, and I’m certainly not suggesting that you pay more taxes than you need to pay. But neither should we avoid taxes.) The concept of charity also extends from here. For us, charity is about extending a hand to help someone back on their feet.
We don’t pay for tasks that fall into this category, either. This is about being a team player.
Principle #3: Adding Value
Adding value is about performing tasks that people need done — and are willing to pay for. It prepares children to be a contributing part of the wider economic landscape and social prosperity. In other words, it teaches the value of work.
Determine guidelines that describe what tasks or duties will result in payment. Children should participate in the decision of which tasks they will take on each week. The reality is that as adults, we do not get paid for chores around the house. At the same time, children need to learn what is involved in looking after a household, and you need some jobs that you can pay them for doing.
Related: 5 Ways to Use Real Estate Investing to Teach Your Kids About Finance
In deciding which tasks to pay for, we use this litmus test:
- Would it be reasonable to pay someone else to do this (e.g. house cleaning, laundry service, yard work)?
- Is the job really simple (e.g. putting away groceries, bringing in the mail) or a bit more work (e.g. mowing lawns, cleaning bathrooms)? Reward children for the harder jobs.
The key is to clearly communicate what you expect from your child. Then inspect the work to ensure that it is done to an appropriate standard. You may need to demonstrate the first time or two. After that, track completed work. Young children should be paid immediately to reinforce the connection between the work and the pay. Older children should wait for a weekly “paycheck” or, better yet, be required to bill you for their services.
This principle extends to working outside the home at the appropriate age.
Principle #4: Creating Value
Creating value is about encouraging a child’s entrepreneurial spirit. It prepares children for understanding what drives the economy and what leads to social prosperity.
Encourage children to earn money by solving other people’s problems. Help them brainstorm for ideas. Share stories of how other people (including you) have earned money in order to open and expand their minds to the possibilities.
There is lots of room here for discussing the different ways in which people can earn money. Working for other people is covered by Principle #3: Adding Value. Some business ideas might still revolve around trading time for money, such as mowing lawns; others might lean more toward generating passive income, such as placing a candy machine in a club room and keeping it stocked.
The discussion isn’t just about how to make money, though. It’s also about training kids to identify a recurring problem and come up with potential solutions. They will also need to sell their solution and ultimately deliver results.
Kids that can master these skills before leaving home will have a world of opportunity available to them as adults.
Once kids start earning, they need some guidance on what to do with a dollar. Again, we have four concepts to be taught — this time, it’s the four functions of money. This helps children answer the second question: What do you do with money once you get it?
The four functions of money are as follows:
These ideas are not novel; you can even buy piggy banks that are divided into these four sections.
Introduce the lessons in a cumulative fashion over time, building on previous concepts. It’s important to note that the age boundaries are blurry. Some kids will struggle with certain concepts or, more likely, certain disciplines, and require a bit more time to practice. That’s fine. Just make sure that kids have enough time at each level to ensure that they absorb the concepts through extended repetition.
In addition, there are other important lessons that can be introduced and discussed along the way. A rough timeline looks something like this:
Kids are learning the basics of life, mostly in the area of personal responsibility and some family and social responsibility.
You can’t expect too much more than teaching kids to count at this stage.
- Begin to develop a work ethic by assigning age-appropriate tasks.
- Make the connection between working and earning money.
- Develop a sense of workmanship; have pride in a job well done.
- Pay immediately on completion of a task. At a young age, kids aren’t particularly motivated by things that might happen in the future. Ask them to do a job, ensure that it is completed, hand over the cash, and supervise it being deposited into the piggy bank.
- Learn about what money is and how it is used to obtain goods and services. Go to the store and learn how to purchase something. How much do I have? How much does that item cost? Can I afford it? How much change should I receive back? Basic math applied to the real world. Teach your child how to interact with a store owner. Work with small, round amounts ($1, $2 rather than dollars and cents).
- Money principle: When the money’s gone, it’s gone. If you spend your money, then you don’t have money to spend.
- Continue the lessons from above.
- Kids should be able to handle the math of dollars and cents.
- By this age, you should be able to pay weekly. Try to be consistent and definitely keep track. Better yet, get your kids to keep track and invoice you.
- Combat entitlement. Kids don’t receive an “allowance” — they only get the money if the job is completed correctly.
- Teach the fundamental principle of paying yourself first.
- When you hand over payment, supervise kids putting some of that money into a separate piggy bank or jar designated for savings.
- Set a savings goal. Is there a particular item that your child would like to purchase? Encourage them to set a medium-term savings goal and then go out and purchase the item.
Spend. Save. Donate.
- Introduce the concept of setting aside money to give to those in need.
- You can introduce the concept of giving at any point at which a child becomes curious about what some people have and others don’t.
- You can prevent this from being a “feel-bad” lesson if you align it with a jump in how much money kids can earn, whether through doing more jobs or bigger jobs.
- Ensure that there are opportunities for kids to give — whether through church, fundraisers that turn up at shopping malls, etc.
- Provide opportunities to see mom and dad doing various things: budgeting, paying bills, giving, saving for specific big purchases, and investing for long-term.
- Introduce concept of entrepreneurship. If they catch on, they might run with it.
Spend. Save. Donate. Invest.
- Within the bounds of your local laws, encourage kids to work outside the home to earn money from a source that is not their parents. This can be through getting a traditional job and/or through entrepreneurial efforts. Learn about income tax, working for other people, and minimum wage versus skilled or higher paid work.
- Major savings goals during this time include:
- Save for car.
- Save for college/university.
- Do a budget.
- Have a checking account.
- Teach how to manage money. Put money into their account for things like clothing, activities, etc. and require them to manage it.
- Have them set aside a bit of money for an emergency fund to cover unexpected expenses. By high school, these will be turning up from time to time.
- Try to strongly encourage some amount of entrepreneurship.
- Teach them about investments. Because of some of the major items that kids have to save for, their ability to invest may be limited. If they have a job, perhaps they can start contributing toward a retirement account. Talk through the pros and cons of that. Discuss other investment types and your involvement in them. See what interests them and help them make some baby steps in that area, e.g. purchasing stocks or starting a small business. Explain how real estate investing works.
Start by paying kids in cash. While the world is becoming more digital, tangible money aids learning. During the high school years, you can transition to digital payment; at this point, kids can use bank cards for purchases.
Start with small amounts. A 4 to 6-year-old doesn’t need more than a dollar or two a week. This leaves room to grow later. Dollar stores are a great place to visit in the early years when you are working with small amounts. As we found out, even a $12 price tag will seem overwhelming to a child earning a dollar a week.
A 7 to 8-year-old might earn up to $5 per week. Make the shift in combination with teaching the “save” concept. Pay in a form that can be easily divided. If the child is earning $5, pay in $1 denominations and encourage the child to set aside $1 for savings.
A 9 to 12-year-old might earn up to $10 per week. Again, make the jump in combination with introducing the “donate” concept and ensure payment can be easily divided into spend, save, and donate piggy banks.
Finally, don’t forget to set aside enough money in your own budget to pay your kids! Depending on how many kids you have and their ages, this could start adding up.
We had our first real teachable moment when our eldest was just 5 years old. We were in a store, and she saw something that she really wanted for $3. After some discussion, my wife said that she would purchase the item, and my daughter could pay her back with the money in her piggy bank when we got home. Once home, my daughter opened her piggy bank and counted out the money. It was all she had. Tears welled up in her eyes as she looked at my wife and said, “I don’t have any left.” Needless to say, it’s a tough lesson for a 5-year-old but one better learned at age 5 than at age 35.
There’s a lot here to consider, but you don’t want to overload your kids either. The idea is to strike a balance to ensure that kids are learning the key lessons in a consistent manner without making life all about work — or money.
As Ramsey and Cruze point out, your kids will learn a lot just by watching you. Ensure you have your own financial house in order and try to include your kids in certain aspects from time to time. They don’t need to know every detail of your finances. But anything you can teach your child now will be a valuable insight as they learn to manage money for themselves.
Ultimately, you want your kids to leave home with the tools they need to be successful in life. This doesn’t mean that they will agree with all your ideas nor will they make all of the same decisions that you would make. But with the knowledge and years of experience with different approaches to earning, saving, donating and investing money, they will have the tools they need to apply to their own lives as they see fit. Applying the principles of wealth building could allow children to achieve financial independence by age 40 or potentially even earlier. Perhaps the most important lesson of all is that each of us is in charge of our own financial futures; a life of abundance is within reach.