Financial Lessons for Kids

[Lone Wolf]

As a parent to very young children, I don't want my kids to fall victim to the total financial illiteracy that's discussed in this article.  The summary is that on the whole the people surveyed didn't understand simple interest rates, inflation, or the markets.  And these were people over 50!  (Thanks, Storm, for the post... and for the ulcer!)

Financially illiterate is no way to go through life, so I'd like to give my children the tools they need to build a solid financial future (rather than a solid collection of lottery tickets and cigarette butts.)  I'm not sure why I learned to save money other than that it's how I saw my parents behave.  One story that stuck with me was learning as a child about how Benjamin Franklin turned $4,000 into $2 million simply by letting it sit for 200 years gathering interest after his death so that children 200 years in the future could benefit from it.

What approaches do you all like for getting these messages across?

[MediumTex]

Reading Benjamin Franklin's "The Way To Wealth" is a good thing.  It's short and insightful.

Asking your kids to put in some of their "own" money into things they want is also good.

[moda0306]

I don't have kids but I imagine a responsible parent teaching money management skills may seem quite difficult, especially as they're probably seemingly blowing off everything you're trying to teach them.

I know I'll struggle with it, but my dad, I thought, did a good job (or maybe he just did his best, and the "thought that counts" rubbed off on me).

My dad would subsidize responsible purchases, but not stupid ones.  He 50/50 helped me through college, if my car (in Minnesota) was rolling on 4 bald tires, he'd pay for half of the upgrade.  He also helped me out with the downpayment on my home... in loan form, not a gift.  He'd always pay for any educational or extra-cirricular thing that I wanted to do.

I've seen other things that I would think might work pretty well.  My wife's aunt and uncle are making their son pay for his college 100%, but they secretly are going to reimburse him after he gets out.

I have seen a lot of dependency develop from entreprenurial, wealthy parents wanting to give "their kids the opportunities that they didn't have."  It probably happens just as much in middle class families, but is much easier to see on the wealthy end of the spectrum.  I really want to avoid this with my kids.

I think it always helps to make your kid do humbling work around the home and yard, drive a humbling car, and maybe work a humbling high-school job.  I don't think "opportunity" means buying your kid a Porsche or Audi for his 16th birthday. 

[Storm]

One thing that seemed to work for me was my parents took me to the bank at a young age, around 10 or so, opened a savings account with me, and said "instead of paying you an allowance, we're going to put it into the savings account instead."  I think my allowance was all of $5 a week for doing chores around the house.  This was during the 80s so I would go to the bank with my dad once a week, deposit my $5, and kept a ledger at home.  I got to see first hand how compounding interest worked.

[quenali]

Lone Wolf,
You may not realize it, but you are already teaching your kids about money.  They listen to your conversations with your spouse about bills to pay, they watch you shop for groceries and clothes and how you look for value, they watch you at the restaurant with tipping, they already know whether or not you are a complusive shopper, etc.  What you do will probably have more of an impact than what you say or teach.

One caution I would give to parents;  I have experienced a tremendous amount of enjoyment saving & investing through the years so I naturally wanted to help my kids out.  Running my own business, I employed my kids as soon as they were old enough to push a broom and started IRA's for them.  Then one day, I realized that I was robbing them of the satisfaction I had saving & investing. 

[moda0306]

To both quenali and Storm's points.

Instilling a sense of ownership and choice, even it's somewhat false or manipulated, can make those brain wrinkles start to happen pretty fast.

I would like to develop a theory on "How much to let your kids screw up, hoping the learning from their own mistakes will result in a better decision maker of an adult later on?"

This is something I constantly think about with my nephew and for me when I have kids.  I can show them their savings accounts and explain compound interest and savings when they're young, but when they turn 16 part of them is going to want a fast, fun car.  How much, and with what inputs, do I discourage that?

I don't think I'd have studied as hard without involved parents, but I also don't want to try to prop up a young adult that feels like they can't be their own person or make their own life-choices (not that that's how I feel) or that because of my influence they're not doing what they want with their life.

[Lone Wolf]

A lot of great ideas here.  Thanks very much.  I'll be archiving these in my personal notes for consultation down the road!

A friend of mine offers her young son 10% interest on his money every week in a (so far) futile effort to clue him in on saving money.  (Not 10% annualized, that's 10% every week.)  I like to think that as a kid I'd have been all over that.  Nothing would teach you the value of compound interest like forcing your parents into bankruptcy.

And no, her son is not allowed to accept deposits from "investors".  And yes, I asked. 

[HB Reader]

LW --

It may sound a bit odd, but another possibility to consider:  At about the age they begin to learn long division and multiplication (around 4th or 5th grade, as I recall), denominate their allowance -- or better yet, a new secondary allowance -- in another currency or even weights of gold or silver.  Every time it is due, make them calculate the conversion into dollars or receive payment in the original denomination.

Our family lived in Colombia for several years when I was that age.  My sister and I received a weekly allowance denominated in pesos and a monthly allowance denominated in dollars.  If I wanted to spend the monthly allowance locally (the usual case) I had to make the conversion on paper and show it to our dad.  We were allowed to get the allowances in either currency (sometimes we wanted dollars so we could mailorder stuff).  We did this for about 3 1/2 years.

In addition to the practical application of math, the fluctuations in the number of pesos I had to buy bbs, fishing lines, candy, etc. led natually to all kinds of educational questions and practical decisions on my part:  How come I'm getting more or less pesos or dollars this time?  Who makes up the exchange rate?  Why are there two currencies?  Will I get more or less if I wait to make the conversion or purchase?  If I save some, which currency should I save?  How come some stuff can only be bought with dollars or pesos?  Whey do they call them pesos or dollars?  Who else has to put up with this and are they getting the same deal I'm getting?  etc.

Just an idea.

[MediumTex]

HB Reader,

Everything you post is good.

Your allowance idea is brilliant.  It's like teaching your kids a new monetary language.

[Lone Wolf]

It may sound a bit odd, but another possibility to consider:  At about the age they begin to learn long division and multiplication (around 4th or 5th grade, as I recall), denominate their allowance -- or better yet, a new secondary allowance -- in another currency or even weights of gold or silver.  Every time it is due, make them calculate the conversion into dollars or receive payment in the original denomination.
...
Who else has to put up with this and are they getting the same deal I'm getting?  etc.

I love it.  I can't think of a better skill to teach than the ability to ask the right questions.

Of course, now that we've got Wolfram Alpha, my kids will probably just hit up the internet when presented with their allowance:

http://www.wolframalpha.com/input/?i=ho ... ld+cost%3F

[HB Reader]

Of course, now that we've got Wolfram Alpha, my kids will probably just hit up the internet when presented with their allowance:

I wasn't aware of that website.  It's pretty neat.

Maybe you'll have to require them to do the conversion on paper and show it to you.  Kind of like a math test in school.  They may groan and complain, but, hey, they're getting money!

Of course, if you're like me and always use a calculator, you may have to refresh your own basic math skills first!

[moda0306]

Even more...

If you wanted to illustrate the different nature of a fiat-currency world, you could try this (a MMT "game" that attempts to illustrate our current system):

http://bilbo.economicoutlook.net/blog/?p=1075

To throw a little "lesson" in there, you could start manipulating things (giving cards to the wife for free and having her "pay" the kids to do even more chores)... trying to simulate the manipulation of currency and crony capitalism.