Although most children are used to dealing with money from a very early age in the form of allowances, gifts, and even bribes it is rare that they are taught how to manage those funds properly. The choices of how they invest or spend their meager incomes is often left to them. Making money grow and work for them rarely being addressed and seldom a priority as images of sweets, treats, and toys dance through their minds.
Generations born after the ‘baby boom’ era may need to rely on a strong foundation of how to grow their money that they were taught early on. Some estimates and predictions about their financial reliance on government programs such as social security retirement funds may yield little to no return when it comes time for them to exit the workplace even though they may have been contributing all the while. This effectively puts their futures financial stability completely into their own hands with no safety net so to speak. Earlier generations had the ability to mismanage money and still end up with some form of fall-back retirement fund, even if meager. Those days may be long gone before we know it unless drastic changes are made to the way social security is funded. With that in mind parents taking a pro-active role in their children’s budgeting and financial investment skills is a great way to plant a seed that will yield its fruit in seasons to come and ensure that they will not develop bad financial habits that they carry into adulthood.
We don’t have to try to teach them advanced investment techniques. Our role is to simply plant the seed of good money management and growth. There will be plenty of opportunities to learn the more advanced lessons, when they are ready to apply the foundation laid down early in their childhood.
Some of the first lessons involve simply respecting a savings account and the process of savings. From each allowance, gift, reward, or even bribes received they are to first pay their savings 10%. This is money they cannot spend, not now, not later. It is wise to save a bit more than this, but 10% is the minimum that should go into savings. Savings can mean a jar, a piggy bank, an old sock, or a real savings account. If we teach them that no matter how much or how little they receive they need to set aside a minimum amount that is not to be touched, in this case 10%, then that behavior will hopefully continue on into adulthood where paying thyself into a savings account can build a buffer for the unexpected expenses or contribute to not living paycheck to paycheck no matter how large of small that check happens to be. In my case two separate jars, one for personal savings and one for long term savings, the first I could spend how I wanted and the later I could not spend at all.
EARNED MONEY IS WORTH MORE THAN FREE MONEY
Another lesson about money is simply the power of earning it. Most people including children will spend money they earn with much more caution than money that is simply given to them.
Going back to my own childhood this is one that I clearly remember making a big impact. Being an average student I was content to get less than exemplary grades in certain subjects, while excelling in those that kept my interest. My father on the other hand thought it be best that I excelled in all my subjects. Through trial and error and many failed attempts at motivating me he eventually instituted a reward system for ‘A’s and ‘B’s, it wasn’t much, but it was enough to make me want to work harder and keep focused to earn more by getting better grades, at least for awhile. I worked hard for that income and I was also much more excited to show my parents my report card knowing I had worked for that reward, and the simple act of me dropping a few bills here and there into my savings jar was instant gratification, even if I didn’t spend it. I knew it was mine and I was getting whatever I wanted with it.
When it came time for a family vacation I had earned over $200 that year which I spent very carefully, knowing I was spending my own hard earned money. It wasn’t long before that simple lesson translated into me working hard to earn more by cutting grass, fixing bicycles, anything I could do for a neighbor to earn a little extra went into that jar.
COST OF LIVING
As the children grow in age and responsibility allow them to purchase their own disposable goods on a budget. Allowing them to purchase their own supplies such as bathroom incidentals. In the process of choosing the soaps, shampoos and little odds and ends that they have to keep re-buying every month on a budget allows them to start looking at prices and comparative shopping. If they have their own bedroom and bathroom give them the responsibility of stocking their own reusables. Only a certain amount is given for these expenses to help them learn to stay within budget and do price shopping. If they run out, they buy it out of their allowance or personal savings. This also helps give them a sense of independence about their expenses, and understand exactly how much they are costing. When parents buy all their needs and everything just magically appear in the cabinets and drawers it is difficult for them to understand the value of all those things, and gage their own expense. Why wouldn’t children ask for anything if they have no idea how much it costs to acquire them…for them it is a matter of asking and it simply appears there one day. I wish it were only that easy.
A good friend of mine this last summer helped his son understand prioritizing and the difference between wants and needs when he had to choose different summertime workshops and projects he could take part of. Initially he had 10 or more choices as the ones he absolutely wanted to do, thinking that dad was paying for all these events. Once his father explained that he was welcome to do as many as he would like, but that he would be paying for their fees out of his own savings he was went through his list of workshops and selected those that really attracted him, the ones he knew he would finish and enjoy the most. Subsequently his list went down to three or four workshops, mixed in with several free events that he found out about.
Small savings bonds and ‘fake’ savings bonds based on return principles can help understand investing. Create a ‘family’ bond that the children can buy into that yields them a moderate return or reward after a period of time. This reward need not be monetary. It doesn’t have to be much for it to plant the ‘seed’ that an amount invested now can return a greater amount later, if you can wait. My father taught me about government bonds and their return over time, postal bonds, and savings bonds. Whatever amount I invested I received a small increase over a period of certain time…that time varied based on what the return yield was and usually set to something just beyond my patience limit or what I was willing to wait. Hence I learned delayed gratification. That will vary for each child. Some are more patient than others. As they learn more patience the time limits for a decent return also should grow.
These simple lessons can help to create a foundation of money management and growth that will serve them for many years to come.
Most importantly keep it simple, we are merely planting seeds that will be harvested much later.