Small children respond to their parents’ saving habits and attitudes, even when they are not being expressed directly. Children learn by living and observing. They are a mirror of their parents’ habits, both good and bad. It is generally accepted, for example, that obese parents will have a detrimental impact on their children’s’ health, just as parental divorce may affect their ability to form close relationships later in life. Parental attitudes to saving have the same effect.
It seems to be a mantra for every generation to look at its offspring and bemoan the fact that they do not realize what a tough time their parents had, back in the days when money did not grow on trees. While the voice is grumbling though, the hand is giving, subliminally conveying the message that somewhere there is indeed a bottomless pit of cash, rendering saving for the future a pointless exercise.
Now that the world’s affluent nations have run into the brick wall of financial reality, it is time to teach children by example about the old virtues of prudence, thrift and saving. These three cardinal virtues of personal finance always travel together. By learning to exercise self-control and persistence, and plan for future goals rather than instant reward, children lay the foundations for future financial security. A scientific paper published by ‘Science’ magazine demonstrates that children who show an ability to accept delayed gratification are more likely to develop into scholastically and socially successful adolescents. Fortunately, there is no need to treat children as laboratory experiments or expect them to read the finance pages of the New York Times. They simply need to be taught the three Rs of saving: Responsibility, Reward and Returns.
By the time children are five years old they have reached an age where they can be reasonably expected to do a number of small tasks around the house, not just for their own sake but for the benefit of the community in which they live, which in their case is their immediate family. Teach them to straighten their bed in the morning, to help prepare snacks and to tidy their toys away at the end of the day. Explain how their actions save work for Mom and Dad, who can then spend more time doing fun activities with them, and show how a tidy room makes a more pleasant play space for the next day. The tasks need to be real, not pretend ones. Children will soon see through a job that has been invented just to make them feel good.
Now is the time to give them a reward for their hard work, on top of your smiles and praise. If they have older siblings they will already understand the concept of pocket money. Have a family agreement about rates of pocket money, rates which recognize each child’s age and the number and difficulty of the tasks for which they are responsible. With each new birthday, add an extra task and award an increase in pocket money, payable at the end of each week if all tasks have been performed satisfactorily. It is important to pay an amount which is adequate (a five-year-old ought to ‘earn’ enough to buy a chocolate bar) but not excessive (a five-year-old should not be able to buy a new computer game every week).
Don’t dilute the effect of pocket money by handing out cash to them for no reason during the week. Buy them a piggy bank and show them how, by accumulating at least some of their pocket money instead of spending it all, they can build a bigger total and maybe buy that computer game eventually. Better still, open a savings account for them and explain how the bank pays for the privilege of using their money until they need it back.
This is when the message really comes home. The day they open the piggy bank, or go to the bank to withdraw their savings to buy a longed-for toy, is a starred day for their understanding of personal finance on a kiddy-economic scale. They have successfully made the connection between work, payment, self-control and ultimate greater fulfillment. Be proud. They are.
Don’t forget though, that you have to go with them on this journey. Make sure they understand that Mom and Dad work hard for the money that is used to provide them with a home to live in and food to eat. Explain that you are saving for a new TV instead of using the bank’s money and having to pay for the privilege. This will reinforce the lesson they are learning about delayed gratification. With a bit of luck, the next generation will still be able to deliver the time-honored lecture about learning from tough times, but they might also avoid some of the free-spending pitfalls that contributed to current problems. Responsibility, reward and returns could be the habits that build the financial future of the new generation.