I am going to step away from my discussions on the Stock Market for a moment and answer a question that I get asked often by parents with young children. The question is "How do I teach my children financial responsibility?"
This is a GREAT question!
It is my firm belief (and the reason for this blog) that as a nation we are severely under-educated when it comes to finance. Ironic, considering we are the richest nation in the world and the founders of capitalism. Often financial lessons are learned the hard way and generally at the expense of our credit scores. The majority of our important life lessons are learned while we are still young children. whether we are talking about manners, good hygiene, sharing or financial responsibility.
My recommendation for teaching financial responsibility is simple really, an allowance but with a few significant tweaks. A typical allowance grants the child a set amount of cash on a weekly basis. This could be automatic or based on the child completing their chores. In my opinion, both of these methods are flawed.
How to teach the value of a dollar?
An automatic allowance teaches the child that they can get something for nothing and that just doesn't happen in the real world. I recommend a real allowance, not an entitlement. Tying the allowance to the child's chores is a step in the right direction. My concern is paying for chores that the kid should be doing anyway like keeping their room clean or doing the dishes after dinner. Those are obligations that are inherent to being part of the family. In an effort to teach the value of a dollar, I think an unintended consequence is a diminished acceptance of family responsibility.
So, how do you teach your child the value of a dollar without them trying to squeeze you for a few bucks every time they put a dish in the dishwasher or make their bed?
I recommend having two lists of chores. The first is a list of their responsibilities; things like keeping their room clean, helping with the common areas (vacuuming the living room, dusting the den etc), mowing the lawn and similar chores. This is stuff they do because they are part of the family and they live in the house too. I believe rewarding these things monetarily under-minds the sense of responsibility to family that we all want our children to feel. Somethings you do because it is right without the expectation of a cash reward.
For the second list I recommend focusing on chores that the kids can do that make life easier for the parents or save the family money; things like washing Dad's car, cleaning the garage, doing the laundry (at least, their own), weeding Mom's garden, perhaps mowing Grandma's lawn. For this list you can set prices and add new tasks to the list as you go. Some of these jobs might be one time things like helping Dad tar the driveway. If you want to make the lesson especially realistic, you can focus on jobs that are unpleasant and time-consuming.
This teaches the value of hard work and of the all-mighty dollar but it doesn't necessarily instill the best spending or saving habits.
How to teach your child to save?
For this I recommend opening the First Bank of Mom and Dad. Make a deal with your kids that at the end of each month you will give them a nickel for every dollar they save. You can choose whatever interest rate you like of course but I think 5% is enough to make them think twice about spending without breaking your own piggy bank. In a previous blog (here) I wrote about the power of compound interest. Arming them with this knowledge early on can have a huge impact on their financial health for years to come.
How to teach financial discipline?
Financial discipline is all about delayed gratification and spending within your means. This is perhaps the most important lesson of them all because as soon as your children turn 18 they will be assaulted with dozens of applications for credit cards. While credit cards are not evil, they can cause a lot of damage if not handled correctly.
So, you have already provided an incentive for saving money but what do you do if they want advance on their allowance. Well, the First Bank of Mom and Dad can handle that too. If they need a loan, offer them the same terms (5% a month) with an additional fee if they are late with a payment, maybe an additional 10%. This may seem harsh but it is far more lenient than the credit card company will be.
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