What is the underlying goal of childhood financial education?
=> Self-generated, lifelong financial stability
I’ll run through to tools we use to equip the kids to pay their own way in life.
Allowance => simple formula: weekly deposit into an account with the Bank of Dad, deposit is $1 for each year of age, and the deposit balance earns 10% per annum.
Many families view the purpose of an allowance to teach a kid how to spend.
The purpose of an allowance is to create a positive emotional association with the power of compounding.
Our oldest has been rolling her allowance since Kindergarten. She now earns $7 per week from compounding and $13 from being 13 years old.
Compounding is an ever growing sum. When they enter high school, I’ll run through the math behind it. I have a spreadsheet by week.
In time, I will let them know I grew my net worth by 15% per annum for many years, mainly by saving half of what I earned. This habit bought a lot of time.
To put off the discussion of “why am I saving?”, I have them pointed at “saving up for a car.” When we get closer, we will sit down and look at the impact of swapping their earnings (from doing nothing) with a set of bills for owning a car (insurance, maintenance, taxes).
Uber is going to look VERY attractive against 10+ years of compound interest. That lesson plan might be: keep depreciating assets variable and stay invested.
Earned Money Is Their Money
To effectively learn about spending, one needs to earn the money being spent.
This is because spending other people’s money feels different.
Sometimes really different…
Spending other people’s money, with a credit card where you don’t see the bill, feels better than free!
Don’t hook your kids on this form of pleasure. We tell ourselves all sorts of BS to self-justify this situation.
Our greatest financial achievement in 2021 happened by accident. We got our oldest off the payroll. She started babysitting and stopped asking us for money, for anything!
This opened her up to the real world of: lending money to friends, spending paycheck-to-paycheck, buying poor quality goods on impulse…
…and because it was HER money, she learned very quickly from her errors, and her friends were not (indirectly) placed on our payroll.
Self-Earned Money + Scarcity + Freedom to Err = Learning
Also… “if you want to buy friends then you’ll have to do that with your own money. Your choice. I think you are a star.”
Our other kids aren’t old enough to babysit, yet. They get assistant sitter gigs, and do yard work in the neighborhood. The work pays well in kid-terms. I supplement with odd jobs.
This is enough to make the whole family “kid rich” => rich enough to buy whatever they want, from their own money.
Quite often, what they wanted was LEGO and it was tempting for me to use my own money to “make them happy” thereby facilitating consumption.
One of our family values is we each pay our own way. Elders are to avoid facilitating consumption. With this in mind, I made a choice to reward my kids with time and I remember…
When you are spending other people’s money you can easily get trapped into dreaming of more, more, more.
This is because we are chasing something stuff can never buy. The journey of adulthood is about discovering our personal “what.”
With the shift towards their own money, supplemented by Christmas, birthday and summer reading prizes… they noticed…
New stuff is fun, but only for about a week, then it sits on a shelf.
I let it sit on the shelf, for years, then one day…
I never play with my Legos, they are kind of a waste of money…
So the current lesson: we buy luxury goods at retail and sell them at wholesale (if we are lucky!).
Thanks to a very kind cousin, we are in the process of converting Lego sets to cash. Lesson to come will be comparing “cost to buy” against “net realized value from sale”.
“If you want an iPhone then earn the money to buy it”
In 2020, our oldest sold 200 masks, at $5 a mask, to earn the cash to buy herself an iPhone. No social media on that phone and we financed the sewing machine and materials. She handled marketing and mask production. She shut down the “business” the day after she had enough for the phone!
- Allowance creates a positive association with compounding
- Earned money is their money
- Listen to their errors, give time and positive attention to their lessons
- Celebrate “getting off the payroll” => they also make their own lunches, another big win.
Let scarcity teach and create incentives to reward work.
A valuable lesson for them, weekly humility training for me…
We split the house into Five Zones:
- Cat Room (dirtiest room in house, done by our youngest)
- Sinks, counters, baths and showers
- Toilets and floors
Same zone each week, no excuses.