Teaching Your Child About Finances Frank Gaskill, Ph.D.
Dad: “You’re 10 years old now, and I have decided to give you an allowance.”
Child: “Cool! How much money do I get?”
Dad: “Well, I've decided to give you $10 a week, but in return, you need to do your chores. Any candy or movie tickets you buy will be paid from your allowance. I also won’t be buying you these things anymore, unless it’s a special occasion.”
Child: “Can I pay you back if I forget my money?”
Dad: “It’s your job to remember your money, so borrowing won’t be allowed. Here is your $10, go add it to your money jar. You get paid every Sunday night.”
6 weeks pass
Child: “Dad, you haven’t paid me my allowance in a long time.”
Dad: “Um…oh yeah, I forgot. Sorry about that. You know, I’ve had to remind you about your chores too. Plus, I did let you borrow money last week for the candy, and you never paid me back.”
Olivia: “That’s not fair!”
Dad: “I know. I’m sorry. Let’s start over and see if we can make this work. Here’s $20 to make up for it.”
The child doubts this will happen, and she feels frustrated that her dad did not follow through on the system. Dad feels like he failed, so the allowance system limps along. No lessons learned.
As a child psychologist, my clients often ask me the question, “how much money is appropriate for my 10-year-old when I give him an allowance?” If you look online, the rule of thumb is to provide a dollar for every year of the child’s age. However, this is a highly simplistic approach and does not address the difficulties parents face when trying to educate their kids about money. So why is it that we find the use of allowances in the financial education of our children to be so difficult to implement?
There are many reasons why allowances are tricky: our lives are busy, we often forget to have actual money on hand, or we just plain forget. Additionally, if you ask a few people how they implement an allowance, you are likely to get a wide variety of answers, including some that tie chores (or even grades) to money. Some financial incentives are exceptionally intricate, such as a menu of chores with dollar values assigned. Others are very basic and loosely held together, resulting in an inconsistent distribution of money on an inconsistent schedule.
While having an actual plan can make allowances difficult, I think there is another important reason why parents have difficulty teaching their kids about money. In part, our approaches as parents to allowances and lessons about money can often get mixed up in crazy emotional messages we learned from our own parents early in our own lives. The lessons that we absorbed about money are often passed down to our own children without us ever being consciously aware. The penny-pinching mother and the free-spending father provide messages that unconsciously affect how we spend our own money, and how we teach those lessons to our kids. Money, like sex, politics, and religion, is hard to talk about. Let me share an example with you about how my own understanding of money was formed.
As a child, my dad would often let me invite a friend to go to the movies (being an only child was its own issue, but that’s another story). My dad and I went to the movies fairly often. Each time I invited a friend, they would bring their own money. But my dad would pay for their movie anyway, even as the kids insisted that their parents gave them money. He would always wave them off and even bought them popcorn. At the time, I thought it was great my dad would do such a thing because his act made me feel as if we had enough to pay for others. Over time, paying for someone’s way into an activity seemed to be the right thing to do. This message about money unconsciously taught by my dad made me feel proud. I’m not sure why he did this, but now, each time I take my own children’s friends to the movies, I feel like I should pay their way.
As an adult, until more recently, the same message would creep into my mind toward the end of the meal. I would seek out the waiter to give him my credit card, so the people I was out to dinner with would not have to pay. Even now, I feel somewhat guilty when I split the check with someone. Seeing my dad pay for others was generous for him to do and I am grateful that he did so. But as an adult, the message, “you should pay other people’s way,” can be very expensive. My dad never explicitly told me this, but this subtle lesson about money was unintentionally taught to me at an early age. I am sure my dad had no awareness his experience of growing up in the depression and having practically nothing drove him to make choices with money which affected me well into adulthood.
Lessons about car buying, clothing purchases, toys, school lunches, savings, and giving to charity or churches can be an emotional minefield for parents. Throw the reality that most families struggle to manage their own finances onto that minefield, and you get the most typical response to allowances: “Let’s just ignore it” or “Let’s use the same system we had when we were kids.” This continues the transmission of conflicting messages about money to the next generation. If a financial education is to be given to your child, then do so deliberately and intentionally.
Teach About Money and Don’t Helicopter!
Now, more than ever, I believe it is critical we teach kids the value of money. Each generation comes with their own baggage. Depression-era kids learned to save and value work. To the Depression generation, having a home loan and multiple credit cards with high balances was a completely alien idea. The Baby Boomers passed that message along to the Generation X as well, but over the years, the lessons of being frugal and careful with one’s finances have eroded. There is a myriad of reasons for this, including cultural changes, political shifts, and technological changes. And without digging too much into the details, in the last 10 to 15 years, a new generation of kids has been moving into the college and workforce environments, with many of them failing to be independent, financially or otherwise.
More and more parents are being seen on college campuses helping their kids with schedules and life organization. One university professor recently shared with me she has never before seen so many parents on campus trying to get involved with their college-age student’s life. She finds them struggling to function independently. She also noted that these college students feel more to her like early high school kids, and she is dismayed by their lack of independence and need for handholding.
Many parents are clearly doing too much for their children to the point where they do not know how to be independent. School lunches are packed for them, or a debit card is filled for them to buy whatever they want. Kids with plastic credit cards –instead of real money – have become the norm. Money is an intangible object to kids with almost magical properties that appears just in time to meet their needs.
In 2015, 50% of 25-year-old males in the U.S. are currently living with their parents. Think about that. Never before in modern history has that number been so high and much of the reason for that falls on the shoulders of parents who are helping too much. Providing for all the needs of your child without teaching tough financial lessons often results in failure as your child becomes an adult.
A research study from Brigham Young University studied 438 undergraduate students at four American universities. The study focused on parenting style and the effects “helicopter parenting” had on the students. Helicopter parenting is a style of parenting in which you hover and then swoop in to prevent your child from being exposed to stress or unnecessary difficulty. According to the Brigham Young study, the effect of helicopter parenting was a demoralization of the young adult and significant lack of self-worth. According to several other studies, when a parent prepares or completes tasks for a child which are developmentally appropriate for that child to complete on their own, the child’s self-worth and sense of independence decrease. Additionally, these children are far more likely to abuse alcohol and drugs in college and beyond.
Yes, making the bed is important. Having a child learn to do laundry, fold and iron clothes, as well as do yard work and meaningful chores around the house are activities falling by the wayside. Kids are today are missing out on all the old-school work values that taught valuable lessons. It’s not too late! New learning can begin at any time, so why not right now? Even if your child is 15 years old, you still have time to teach lessons that can last a lifetime.
Now you know why we must teach finances to our kids (i.e., to grow an independent young adult). But the how is the trick. Please, let me emphasize that there is no particular way to accomplish this task, but here are some suggestions based upon developmental stages.
The Early Years (4-8)
As early as possible, teach children the value of money. I mean this literally. Make sure they know the values of pennies, nickels, and dimes. Consider buying a toy cash register, but replace the toy money with real money. Assign values to toys allowing for an association between how much money is needed to purchase things they want or need.
For your typical four- and five-year-old child, you have many opportunities to teach them the value of money when you go to the grocery store. Helping them understand the terminology of dollars and cents is a foundational conversation. Financial conversations should occur regularly and should span a child’s development through the years.
During your conversations regarding money, introduce early on the concepts of need, want, and wish. A want could be a new scooter or bike, while a wish could be a trip to Disney World. These three concepts provide excellent discussion points on your trips to the grocery store or to the mall. Ask your child, “is that Lego set a need, want, or wish?” Allowing your child the chance to critically think about which category fits their considered purchase is an exercise in self-determination and self-worth. In addition to need, want, and wish are the financial action terms of give, save, and spend; emphasizing giving and saving in your conversations can change the emotional message of money in your kids’ and even your grandkids’ lives.
And even at this early age, let your child make mistakes. If a child remembers to take their money to the theater in hopes of spending quarters on candy and treat machines in the lobby, let them do so. Allow them to put those cherished quarters into the machine with the robot arm that, if maneuvered correctly, gives them a stuffed animal or toy. And sadly, watch them as they spend all of their money on this machine without ever getting a toy. When they that see all of their money is gone and they cry, give them a hug and tell them you love them. However, do not give them more money. Allow them to spend that money to learn the lesson in the future. A helicopter parent would warn them not to spend that money and not allow them to learn that lesson. Making mistakes allows the child to learn.
Teach the valuation of money at an early age, allowing them to play with actual money using a toy cash register and pretend product.
Introduce the terms need, want, and wish as well as the terms give, save, and spend. Make financial conversations a consistent part of your dialogue with your child.
Allow your child to learn from their mistakes, and allow them some independence in learning how to spend their money even though it may be painful to watch.
Late Elementary to Middle School (8-13)
Hopefully, you have been having financial conversations with your child from an early age. But if you have not, do not despair. Financial conversations can begin at any time. So, if you have a late elementary to middle school child, now is the time to introduce an allowance into their lives. This time period is also when most of my clients begin to question me about an appropriate system for their children’s allowances. While I do tend to adhere to the “one dollar per year of a child’s age” rule of thumb, there can be exceptions.
Discussing an allowance should occur as a more formal conversation allowing for input from the child and an appropriate exchange of ideas. Ask the child what he or she thinks they should spend their money on, and make sure they know that they have a voice in the discussion. Often, a child will come up with interesting new ideas that a parent had not considered. One example of outside-the-box thinking would be allowing a child to spend part of his allowance on an Xbox Live account. Another example would be a child who volunteers to spend her own money on movie tickets but refuses to ever go to the movies. She came up with a way to gain more money and save it by refusing the privilege. Kids can be very creative during these years.
From the ages of 8 to 12, I encourage an allowance to be distributed in the form of cash. If an allowance is $10, give your child one five-dollar bill and five one-dollar bills. Holding and counting this money encourages the child to understand further the value of money which corresponds to their developmental level. Money can be kept in an old-school piggy bank or jar, so they can visually see the money accumulate over time. After a year or two of handling real money and saving it in a fun way, consider moving into technology which will make your allowance system ultimately much easier.
While it may seem very old-fashioned, I do encourage families to go to the bank and open up an account in their child’s name. Helping them understand that there is a physical space where their money is housed can help dispel the myth that money magically appears. While there is some value in understanding the old method of a check register, providing this as an educational foundation for money is unnecessary at this point. However, introducing them to spreadsheets, QuickBooks, and online banking is very important at this age. Kids are technologically savvy and are likely to be more invested if there is a technological component to their allowance system.
Once you have their account set up, the rest is easy. On your own online banking account, you can now create a recurring payment to your child’s account in the amount of their allowance. This makes the consistency of distributing an allowance supremely easy. However, making the allowance distribution easy could let most parents off the hook.
Technology allows for consistency of an allowance system. But technology does not replace financial conversations which must continue throughout the middle school years. Renegotiating what a child pays for and what a parent provides can be and should be an ongoing conversation. In the past, I have had some parents provide a $300 a month allowance. While this sounds shocking, these kids were also responsible for their year’s clothing allowance as well as gas for the car and other entertainment expenses. These teens were exceptionally mature but ultimately gained a tremendous financial education. While this may be an extreme example, as mentioned earlier, allowance systems should fit a particular family and a child’s nature rather than adhering to some rigid standard.
When giving an allowance, make sure the money is physically given, so a child understands that money is real and is not based on the magic of a credit or debit card.
Have open conversations about how money is to be used and for what the parent and child are each responsible.
Open a bank account with children, so they understand where money is stored; teach them how to account for the money.
Help them set up an Excel spreadsheet or an envelope system which helps them understand how their money is being given, saved, and spent.
Use technology to make your life easier and allow for consistent distribution of money.
Never stop having regular conversations about money and continue to use real-world examples of purchases. Included in these conversations should be the concept of sales tax and interest.
High School (14-18)
High school is where the fun begins. Developmentally, this stage of life is where the most enduring lessons are learned. I strongly encourage families to aggressively help kids understand budgets and the true value of what it means to live within a reasonable budget. The lessons explored during this period of child development include discussions of utility bills, home insurance, and what a mortgage means. Understanding the difference between a lease of a car and a purchase is a conversation that few children have with their parents.
Financial conversations should be deliberate and consistent conversations during this time of development. Interestingly, if you have developed your child’s financial intelligence quotient over time, your child will begin to comment on how you and their friends use or misuse money.
Sitting down on a weekly basis to improve your child’s financial education is invaluable. Helping your young-adult children understand the stock market, interest rates, and the emotional role that money plays with people increases their financial IQ. Making your high school student more aware of the family’s financial goals can only help them. Helping a child understand the value of their home and the associated expenses, including property taxes and house insurance, as well as home repairs, can open up their eyes in a healthy way and allow them to prepare for their own futures.
Keep the financial conversation going.
Accept and welcome critiques of your own spending habits from your child.
Continue to allow them to make mistakes.
Open up the world of the family’s finances and help them think through their own futures.
Barbara Coloroso, author of Kids Are Worth It and other great books, speaks of the four C’s of parenting. The first C stands for Care, which involves caring for the child, changing diapers, and meeting their most basic needs. The second C is Control. Learning to control a child from running into the street or making decisions which will be harmful to them represents the second C. The third C emphasizes Coaching. Coaches do not need to explain the rules but instead enforce them based upon consequences which affect the player. Lecturing and nagging do little good with a teenager. This fourth C represents you as a Counselor.
The hope is that if you successfully navigate the first three C’s, you will find yourself in the position of a counselor. With successful financial conversations throughout the lifespan, you can potentially become a financial counselor to your adult child. You can become a person whom your child will approach for advice because financial conversations will have become devoid of emotional baggage. You will become a parent who has successfully provided financial choices and a financial education to your young-adult children. This education is communicated to generations to come and ultimately reverses the trend of helicopter parenting and the emotional baggage attached to money.