Raising money-smart kids and grandkids

Creating a successful financial legacy isn’t just about leaving money to kids and grandkids; it’s also about the financial tools and skills you help them develop along the way.

When I was a kid, my dad urged me to save money – even opening a bank account with me and giving me my very own bank book (it was 1981 and the dinosaurs were still using bank books). I really wanted to be a saver, but at the time, saving it felt like something other, more virtuous kids did. I was more of the spend-it-all-and-feel-bad-about-it-type.

This, needless to say, was probably not the lesson my father intended.

As it turns out, there may have been a reason for this breakdown. Financial education for kids and teenagers doesn’t end with sitting down with them to explain the concepts of the time value of money or paying yourself first. In fact, in many cases, you can skip that entirely.

The key to financial education, researchers are finding, is delivering it “just in time.” In other words, we look for teachable moments in the course of our kids’ and grandkids’ childhoods, whether it’s an allowance, a holiday windfall, a shared family financial goal, or the purchase of a first car.

With this in mind, when we started paying our daughter an allowance, we decided to bake in the saving behaviors. Every week, she earns $15 (which is a lot, but we expect a lot out of her for the money she earns). Out of that $15, $10 goes into her pocket and $5 is split among three savings accounts: Education, Fun, and Giving. Each week at allowance time, we sit down and look at her accounts so she knows exactly how much she has in each. To demonstrate the power of investing, her education account “grows” 7% per year, allowing her to see it growing in real-time.

While the education account is more or less off-limits, Lily controls how she spends money from the other two. Using money from her Fun account, she has recently purchased a refurbished iPhone. Using money from her Giving account, she was able to get her mother a very nice gift for her birthday. Each time she makes withdrawals, she uses checks, giving her some close-to-real-world practice. She takes both satisfaction and pride in having saved toward different goals.

In researching allowance best practices (yes, there are allowance best practices), we made sure to do the following:

  • Pick the right amount. One rule of thumb is a dollar per week for every year of the child’s age. Lily’s “take-home” equals her current age.

  • Determine if chores are necessary. If they are, define the duties and then NEVER tie the allowance to completion. Bosses don’t dock pay for poor performance; they counsel their employees and use other forms of leverage to extract adequate performance. With Lily, we use access to screen time.

  • Create rules for saving and spending. Lily’s Fun money is available just as long as her intended purchase exceeds $50. Otherwise, she has to budget out of her allowance for it.

Beyond saving

Learning to save isn’t the only financial skill kids need to learn. They also need to learn how to track and budget their money, spend it wisely, be on the right side of leverage (more investing, less credit use), and how to use money to do good.

How do we do all these things? We seize the moment.

  • A ledger for spending, ideally hand-filled by the pediatric citizen you are hoping to make upright, is a fabulous way to impart money tracking.

  • Shopping during sales and comparison shopping when the kiddo is mad after the latest Shopkin or stuffed jackalope or whathaveyou is the perfect opportunity to impart some wise shopping skills. Holiday shopping is another opportunity to teach kids to shop wisely AND operate within a budget.

  • Family-centered activities can help teach lessons about saving toward financial goals. Start with a jar of money in the kitchen and add change to it toward a goal of, say, pizza or a trip to the ice cream store. When it’s time to cash it in, younger kids can do the counting. An added benefit of a shared food goal is the lesson of discipline: “We’re not getting that candy now, but when we have enough in the jar, we’ll go get ice cream.”

  • Another beneficial family project centers on giving. For several years, Brandon helped Lily do a lemonade stand where she raised money for the Humane Society. Usually, she was able to raise around $30 for critters in need. She also got a lesson in cash handling and entrepreneurialism in the process. Not bad for a day’s work.

  • In doing research for this article, one approach I came across for teaching kids about investments and the time value of money is to substitute a ridiculous interest rate in place of money allowance. Say the kid has $200 in his bank account. By paying him 6% monthly on his “investment,” he receives a $12 monthly allowance. But if he ups that to $1,000, he’s cleaning his parents or grandparents out of a cool $60/month.

This value of discipline can’t be overstated. Kids who have strategies for self-discipline grow into adults who are better with money. In our family, we work to talk about the difference between wants and needs, say “No” and hold the line, encourage self-soothing and distraction, and talk about goals when kiddos want to splurge: “If we buy these chips, we won’t be able to buy those Legos later on.”

Oddly, modeling reliability is also important for teaching kids discipline. If they know the money will be there later, they’re more likely to save it. In other words, resist the urge to pilfer a child’s piggy bank or bank account (yes, even we are tempted at times when we need cash for something).

If you’re a grandparent, you can make modifications in order to step in and offer just-in-time lessons. For example, you can offer to do a “matching” program for financial goals they’re pursuing and characterize it as an investment with a 100% return. See if your grandchild’s parents would let you take over allowance and use the monthly compounding model instead of the weekly payout model. Or do a giving project when you’re together for a visit.

If you have other ideas about how to raise money-smart kids and grandkids, we’d love to hear them! Email erica@montoyawealth.com or call 928-308-7650.

Photo by Ben Wicks on Unsplash