We often receive the questions “How do I help my child learn the value of money?” or “How do I teach my kids to save?” from clients who are wanting to help their children become good stewards and understand how to make fruitful decisions with money. There is even an annual date on April 22 designated as “Teach Children to Save Day”. It is all about helping young people become smart about money from an early age.
Now, I am well aware teaching children about money and savings is not an easy task. You may have children that can be taught things and you also may have children that just have innate wiring. As a father of four children ranging from 12 to 16 years, I have the whole range from the saver end of the spectrum to the spender end of the spectrum.
It will come as no surprise with this being my profession, but this is an area where I spend a lot of time thinking and reading, so I want to share five ideas from both the perspective of a financial planner and as a dad. For the sake of complete transparency, many of these ideas that I’m about to share with you and that we use in my family come from a wonderful book, “The First National Bank of Dad: A Foolproof Method for Teaching Your Kids the Value of Money” by David Owen. If the author’s name sounds familiar to you, David Owen is a staff writer for The New Yorker and a contributing editor of Golf Digest.
If we teach our children to be savers or teach them to good stewards, the first step is to teach them to have some responsibility. There are two parts to this.
Part 1: If I want to teach them to be responsible with their money, I need to give them money. They are going to need to have some funds for which they are responsible. Generally, around age six, children begin to understand a vague concept of money. This is when it makes sense to start giving them an allowance. The rule of thumb I picked up for determining how much to give them is somewhere around two times their age as a bi-weekly or possibly weekly allowance, depending on how you want them to use it. For a six-year-old, it would be $12 every other week.
Part 2: In addition to giving them an allowance, you need to allow your child to make whatever choices they want. Meaning they can waste it. I even remember having a battle of wits with one of my children about whether he can just rip up the money, which he did, and that was pretty painful.
They need to have the same autonomy over money that you and I have. Of course, that means the choices they make and the behaviors they exhibit have an impact. If we just give them money and say “You have to put it in a giving envelope or have them give it all away.”, we haven’t really allowed them to learn their own responsibility to have money. The flip side of that coin is that they need to be responsible for spending it on certain things.
One of the specific examples that we use in our family is when we went on vacation, we would give each of our children a daily allowance or trip credit, in the range of $5-$10. They can either spend the trip credit the day they receive it or wait until it accrues, but that was the money for their souvenirs.
Their regular allowance can be used for candy, to attend movies (once they open back up), or things of that nature. Keep in mind that when you give your children responsibility over their money, they will need money and the things that they are responsible for purchasing.
The second aspect of teaching kids, and all of us in some ways, about money is to institute a little bit of a governor or throttle in spending.
We all know how easy it is to spend a lot of money on impulse purchases when you wander the aisles of Costco or Target, or even on the Amazon website. So, our children need to learn restraint and decision-making skills. One of the things we have done with our children when we are wandering through Target, for example, in search of something specific we came to buy and they see something they want, we say “That’s fine. You can buy it, but we need to wait until tomorrow.”. Most of the time they forget, but if they still would like to purchase the item, we will come back or purchase it online the following day.
Of course, if they see something on Amazon or another online retailer while looking for something else, we say the same thing – you can buy it, but you need to wait until tomorrow. By doing this, we are helping them begin to develop that habit and the muscle of not succumbing to impulse purchases but instead, make a decision based on what they really want for their money.
When you give a child cash, it could end up in a pile, in the trash, another sibling may borrow it – it can just vanish without a trace.
There is a reason why adults don’t keep their money in cash around the house. Primarily, there is no interest, and it is not exceptionally safe. For the same reasons you and I keep our money in a bank, I want to teach my children that the same characteristics are true. As an example, I let my children know that instead of keeping $15 or even $150 in cash in your room, if you will put it on deposit with me, I will guarantee that it will be safe, that your siblings will not take it, and it will not get lost at the bottom of your backpack. I would write them a little post-it note receipt and give it to them so they could remember how much they have for when they are ready to use it. I promise to give it to them on demand, essentially just like a bank does for you and me.
Historically, when we put money on deposit with a bank, the bank, in turn, pays interest on the money. As David Owen points out in his book, banks pay interest to keep as an incentive to save your money there. We do the same thing in the family bank and pay interest to our children.
Now, with children, I need to pay more than one or two percent to get their attention. In our family, we pay 10% monthly interest up to $10. For example, when a child has $50 and asks to put it into the family bank to keep it safe and keep it in there the entire month, I will pay $5 interest on that $50. If they have $100 on deposit, it will pay $10 in interest, but then the next month, their balance of $110 still only earns $10 interest, so there is a limit. It’s a high rate of interest because it needs to be a significant enough dollar amount to get their attention to feel meaningful.
With these interest rates, I did have many friends and neighbors offering to put money on deposit as well. However, our family bank does not extend beyond those older than 16.
The final point I believe is helpful is to help demystify money for your children. For many folks, as they were growing up, money was a point of secrecy. In some ways, money falls into the category of religion, sex, and politics – things you don’t talk about in mixed company. However, I think it is incredibly beneficial to discuss money and financial decisions. In this context, talking about the times where savings have been helpful to you is valuable to your children. It is vital to let them see where having money saved helped your deal with an unplanned car repair, a vacation, or an unexpected life event. This will underscore the importance of building and having savings.
Saving money is a habit that can take time to build, and we know that some of us never really master it. It can help to go over lessons that will help your children learn the skills to save in both good and bad times. Although “Teach Children to Save Day” only comes around once a year, lessons in savings and being a good financial steward can be taught and learned year-round. Making money and finances a regular part of your child’s routine can lay a firm foundation important for a bright financial future.
If you have questions about savings, investments, retirement, estate planning, or anything else that is part of a comprehensive financial plan, set up a time to speak to one of our financial planners.
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Shane Tenny is the managing partner of Spaugh Dameron Tenny. Along with hosting the Prosperous Doc® podcast, Shane has a true passion for behavioral finance, helping clients and audiences understand how to develop successful strategies based on their unique temperaments. An accomplished and highly engaging speaker, Shane is regularly interviewed for television and podcasts, is actively involved in the Financial Planning Association®, and contributes to industry advisory boards.
