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Saving the world with your allowance: Teaching kids about money

When my kids were small, I was in the financial planning profession, but had not thought much about how it applied to children. As with so many things in parenting, my initial approach to managing my children’s financial education was less about having a grand vision, and more about solving a problem. I was tired of hearing “Can I have that?” My eldest was four years old, and I decide to start giving her allowance and teaching her what to do with it. It was a brilliant plan, and as I set about implementing it, I realized I had an opportunity to build a context that would help her understand our family’s values.

I created a simple plan: Each week, you get $1 per year of age. She was four, so she got $4 per week. I required her to save 10% and donate 10%, so that left her $3.20 per week to spend. That may seem like a lot for a pre-schooIer, but at the same time I stopped funding many treats and trinkets, so she had to make choices. It was good for her, as she began to appreciate the power of choice. It was great for me, because I got to stop making those choices for her, something I often found stressful when I was tired and distracted. It made me her partner instead of her adversary. Now, when I heard “Can I have that?” I’d say, “I don’t know, let’s check to see how much money you have. Not enough? Let’s figure out how many weeks it will take you to save up.” It was a great relief. It was also the beginning of an important excursion in learning with my kids.

In the beginning, we used coins and bills and a change purse to show how the charity pot and the savings pot accumulated, and the spending money went into a small wallet. When the savings pile got big enough, we would put it into a brokerage account. Often my kids would receive cash gifts at Christmas and birthdays. Since they were flush with cash and also with gifts, I might suggest that they should consider putting some of the holiday funds into long-term savings. I never insisted, but I would usually match any optional contributions to the investment account to create incentive. I would invest the funds and show them the statements from time to time. My goal was for each of them to have enough money for a decent used car at the age when they would need one.

We stayed with the formula of $1 per week per year of age, and eventually moved to a spreadsheet rather than coins. Sometimes they had more money than they knew what to do with, and often they spent it unwisely. I never forbade them to buy anything with their own money. I would sometimes gently remind them that cheap toys often break, and we really might not have room for a 26th stuffed animal, but I left the choices to them in the end. I watched my kids make a hundreds of poor financial decisions, and sometimes it was exasperating. But it turns out that this is exactly how children learn to make good financial decisions! I gave them the autonomy to make mistakes at a young age when the consequences were manageable, so that they will learn good financial habits by the time the consequences are more significant.

Meanwhile, my kids developed the habit of saving and donating a portion of their income. In helping them manage the charitable funds, I’ve made a rewarding global journey with my children. I have always left the choice of charities up to them, and I often match their contributions. They have sponsored anti-malarial nets in African communities, hurricane relief in the US, orphans in the Middle East, diabetes research and so many more. When they hear of something bad going on in the world, they start to figure out how they can help. Our donation discipline has helped them develop compassion and empathy, as well as making them feel empowered to make things better.

Saving 10% of their income seemed pretty abstract for the kids at first, sort of a novelty that might pay off someday. I invested the funds for them, which they found vaguely interesting. It all got quite a bit more real recently, when my eldest began driving, and was able to buy a used blue Volvo wagon with the proceeds from her investment account. She named the car Elvis. She’s had her first part-time job for several months now, and although she saves most of her earnings, she is keenly aware of just how long it would take her to save up enough for a car. She has a visceral understanding that the money she spent on the car grew out of small and regular contributions to a disciplined savings plan, and the power of compound interest. I believe that experience will serve her well in her financial future.

Kids need to be educated about how to manage money. Someday, when I’m in charge of everything, financial skills will be taught in school. At the moment, it’s up to parents. It’s not too early to start! Call me if you need suggestions to make it work.