Written by: Chuck Donalies, CFP
I think it’s safe to say all parents want their children to possess financial skills that will allow them to be happy and successful in life. The problem is not every parent has strong personal financial skills to share with his or her child. That’s understandable because we all have different strengths and weaknesses. Unfortunately, we can’t count on our kids learning these important skills in school because many schools no longer teach basic personal finance!
So what’s a parent to do? A quick Google search will provide you with many ideas, but you’re busy and you may not have time to research this subject. Luckily, I’m here to share four ways to make managing money a regular part of their lives. In fact, my wife and I use the following methods with our girls (now five and seven):
- Allowance: There are many questions that need to be answered before giving your child an allowance. What does the child have to do in order to earn the allowance? How much should you give them? In our case, we expect the girls to keep their rooms clean, do their homework, etc. They have to go above and beyond basic family responsibilities to earn their allowance.
- Learn by Doing: Sometimes the best way to learn something is simply by doing it. If you want your child to become an active and effective money manager you need to allow them to manage money. Our girls receive their allowance as cash. They’re taught how to organize it and to keep it secure.
- The Bucket Approach: Once your child has money you need to determine how much freedom they have to spend it. We decided to teach our girls to manage their money in “buckets”. Their weekly allowance must be divided up between Saving, Giving, and Spending. Bonus: It’s not unusual to find our girls pooling resources from their Spending bucket to buy treats at the local farmers market. I believe this further improves their sharing and negotiating skills.
- Gift Cards: It can be easy to lose sight of the cash value of a gift card. I’ve found it best to talk about the amount of money on the card with the child prior to going shopping. Once you’re at the store, the child can weigh the pros and cons of buying whatever they want. This is a great way to introduce the concept of the opportunity cost (i.e., the difference in value between a chosen item and one that must be passed up).
In the end, keeping the process fun is key to keeping your child engaged and learning. They may not like having to give things up, but they will enjoy having the freedom to make calculated financial decisions.
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