If you don’t teach your kids how to manage money, they will create bad habits on their own. It’s best to teach them before they become teenagers nearing adulthood. Once they get past that point, their habits have been formed, their concepts of money have been formed and the last thing they want is advice from their parents about money management. This means it may be too late to reverse course and help them get on track to adopting good money management skills.
However, the optimist in me says that it’s never too late to learn about good money management. It is a vital skill and having good money management skills or poor ones, can either help you or haunt you for the rest of your life.
The best place for kids to receive an education on good money management habits are from their parents. Of course, if your own money habits are poor, then this can be a life lesson for you as well. This isn’t something that is taught in school. So for now, parents need to be vigilant about a home-schooled education in money management.
First, I want to start with how kids can earn money. This is the biggest concept and the best place to start learning because they will want to know how they can earn money and they will be excited about it. Once they start earning, the lessons begin about how to manage that money.
You should create a list of chores they can do around the house, in the yard, or even outside of the house. However, be careful not to list all chores as tasks that earn money. There should be some tasks they perform in order to contribute to the household and they need to understand they won’t get paid for those chores. This is important because it will set them up later in life to be a giving person and to do things for others without expecting something in return.
The chores that you do list as paid chores, should have different values based on the amount of work involved and the amount of time it takes to perform those chores. You are not paying them by the hour and you are not giving them an allowance. An allowance is getting something for nothing and that’s definitely NOT what this is. The lesson here is that they are earning based on project work. Each project takes a different amount of time and requires a different skillset. Since the child would not be getting paid by the hour, it is to their benefit to get the chore (project) done as quickly as possible. However, what they will also learn is that quality can suffer if they do something too quickly. There are so many lessons here because the balance is to do the chore as quickly as possible without having the quality of work suffer.
Once your kids start earning some money, you need to decide how they are going to see it grow and how it can be used. A lot of people like to talk about keeping their kid’s money in a glass jar, so they can see it start to fill up the jar. I completely disagree with doing this. I believe that this teaches them to look at the money in the jar, but not pay attention to it. How do they know how much is in there? How do they know when they have reached their goal? How do they know when they have saved enough to buy something, or invest in something? They don’t.
There is a better way. If you have young children, then you act as the bank and hold their money, but you need to maintain a ledger for them and they need to know how much they have in their virtual bank at all times. You also need to give them interest. You should probably give them a pretty high-interest rate, so they can see the concept of compound interest a little easier and get excited about it.
If you have older kids, then you take them to the bank and open a UTMA (Uniform Transfer to Minors Act) custodial account for them, which is the most common type of trust for a minor, or a Minor Savings Account (I’m not a Financial Advisor, so you need to ask your broker or banker for advice on this). In most states, minors do not have the right to execute contracts and cannot open a bank account and own any assets on their own. With a UTMA account, the parent/guardian acts as the custodian for the minor’s account. A drawback to this type of account is that the minor is unable to access their funds before the age of 18. With a Minor Savings Account, it is jointly owned by the minor and the parent/guardian and the minor has the ability to access funds before the age of 18.
A UTMA custodial account can hold securities, real estate, and other assets, so there is a case to be made for this type of account, but not until they have learned to properly earn, save and manage their money. Once they are older, you can have a discussion around investments and passive income. If you introduce them to investing in stocks and bonds and they really understand the concept and enjoy it at an early age, it may make sense to open a UTMA account for them.
With minors of a younger age, it makes more sense to open a Minor Savings Account with joint ownership and the ability to access funds prior to the age of 18.
Once your kids understand project-based work (chores), how to earn money, and how to keep track of their money, the next step is to show them opportunity cost and deferred purchasing decisions. I don’t like to use the term delayed gratification. First of all, delaying something implies that it will still happen within a short period of time, and gratification implies that you will receive some sort of satisfaction or fulfillment from buying something. The act of buying should not be the fulfilling part. It should be the combination of earning, investing, and helping your money grow.
This is where opportunity cost and deferred purchases create weighted decisions. If your child wants to buy a video game for $60, but they need new sneakers, which also cost $60, what is the opportunity cost of not buying the sneakers? What about the video game? The best decision would probably be to buy the sneakers now, since they need them and save up again for the video game. So, they are deferring the video game purchase until the can pay for it.
Some of you are thinking that if your kid needs sneakers, you are going to buy them sneakers. Then they will be able to buy the video game with their money. If you do this, it will teach them that you will be there to buy them what they need when they need it, including their bills when they get older! They also didn’t have to weigh an important decision on how to spend their money. The decision was made for them.
I’m not saying that you shouldn’t buy your kids the things they need. What I’m saying is that once in a while you should give them a chance to make their own decisions about how their money will be spent and ultimately, how those decisions will affect the outcome of not only their purchases but their savings as well.
As they get older, it will be important to teach them about saving and contributing to their college fund, the importance of credit, the pitfalls of credit cards, and how to stick to a budget.
The last thing I want to leave you with is not really about money at all, but instead, it’s about making sure your child is content with who they are and where they are in life. Make them understand that you will never try to keep up with the Jones’s because your place in life is different from everyone else’s and your plan is not to spend money to show others what you can buy, but rather to save and invest money that you can spend on trips with your family, college for your kids and income in retirement.
Set a good example for your children because they will watch and learn what you do. If there is something you don’t want them to do, you had better not be doing it yourself.
