“Any fool can spend money. But to earn it and save it and defer gratification – then you learn to value it differently.” – David and Goliath by Malcom Gladwell
A few months ago, I started making my kids, ages 9 and 7, do weekly chores in exchange for an allowance. Nothing drastic – clean your rooms, put your toys away, put your clothes in the washing machine, etc. In return, they get an allowance. Despite my wife’s misgivings about the allowance (why should we pay them to do things they should be doing anyway), I thought it would be a great way to teach them some good money habits. I even opened kids checking accounts so they’d see the fruits of their labor – and those fruits are growing at 3% interest!
As a financial planner, you’d think I’d know all the secrets to raising children who want to frugally save all their money and ignore the latest Pokémon cards and overpriced Prime energy drinks. I don’t. But I have tried and failed, educated myself, and seen some things firsthand that I would, and would not, do to try and help my kids develop good money habits. Below are some of those things.
Spend, Save, Give
Thanks to the advice given by Ron Lieber in his book The Opposite of Spoiled, I divided my kids allowance money into 3 “jars”: (1) Spend, (2) Save, and (3) Give. The 3 jars serve the following purpose:
The Spend Jar
This money is for the kids to spend as they like, without approval from mom or dad (within limits). This is the immediate gratification reward for doing their chores. By giving them some free rein with their spending, they will probably make some unwise decisions (e.g., $7 baseball cards). I hope by allowing them to make the mistakes of quick, impulse buys they will learn the good money habit of saving and buying quality, longer-lasting items.
The Save Jar
The money in this jar is meant to be saved for future purchases of a higher value. In a kid’s world, this may be buying new sneakers or a new bike. If they want the bigger gift, they will have to delay gratification and control their impulses while their savings slowly grow to afford the bigger, better purchase. I think of this like a child’s version of a 401(k) plan. I’ve even offered a “parent match” – for each dollar they put it in this jar, I will put in fifty cents. I hope this builds the habit of one day contributing to a retirement plan and taking advantage of the free money offered via an employer match.
The Give Jar
This money is to be given to a charity of the child’s choice. There are two purposes to this jar. First, the importance of sharing with others who need it or organizations who rely on the public for their support (e.g., the zoo that they like going to so much). Second, it is a charity of their choice so they get to make to make the decision about what is important to them, who they’d like to help, and hopefully see how those donations help people. I hope this starts the habit of supporting causes that are important to them.
Needs vs. Wants
Another good piece of advice from the book is creating a line between Needs and Wants. I like the example Lieber gives of the Lands’ End Line. Lieber uses this to describe a “mid-priced merchant that sells quality clothing”. He and his wife are willing to pay for new clothing up to that point. That is a need. Any article of clothing with a price more than that is a want. If my son wants the new Nike LeBron sneakers (I wish this was a hypothetical), I’m willing to pay for a mid-range Nike shoe and he can use money from his Save Jar to pay for the difference. It seems like a good habit to distinguish between the need for sneakers and the want of a luxury item.
As parents, particularly in today’s age, it can be tough to say no to your kids. You want what’s best for them, right? The psychologist James Grubman says it’s much tougher to say “No, we won’t” than “No, we can’t”. “No, we won’t” requires an explanation. “No, we can’t” is self-explanatory. He says a parent must set limits. Rachel Sherman, the author of “Uneasy Street: The Anxieties of Affluence”, says the best way to counteract the desire for more is to not give them everything they want, allow them to work, and let them fail. If you can successfully set limits, your children will learn a good habit that just because we can afford it, doesn’t mean they deserve to get it.
The Importance of Work
The last youth money habit I will leave you with is the importance of having a job. This has been discussed in many articles and books. In her book, Raised Healthy, Wealthy and Wise Coventry Edwards-Pitt says parents “feel compelled to make their children’s lives easier. They hate to see their children suffer, struggle, or miss out on the fun elsewhere, and so they prioritize other experiences and underplay the importance of the child experiencing earning an income.”
I couldn’t agree more with the benefits of “experiencing earning an income”. One of my first real jobs (I don’t count delivering newspapers on my bicycle) was pumping gas at a gas station. I learned more life skills from that job than any other experience, including college and internships, in my life. As a young teen, I had to learn the responsibility of waking up at 6AM on Saturday to open the gas station, turn on the gas station pumps, and greet customers with a smile on my face while plenty of my friends were still sleeping. Naturally, I wasn’t too happy about this arrangement but looking back, I am so glad I did it. All the educational trips around the world and private music lessons wouldn’t have taught me the necessary life skills I learned pumping gas at a local gas station.
In conclusion, teaching kids about money isn’t just about giving them an allowance or opening a savings account. It’s about instilling values, habits, and lessons that will serve them well into adulthood. While there’s no surefire way to ensure perfect financial habits, these strategies provide a strong foundation. Our goal is not just to raise kids who can save money, but to raise financially literate, responsible, and generous adults.
