The ability to manage cash flow is an extremely important skill for everyone. If you can help your children develop this skill you will give them something that will benefit them for the rest of their lives. The first problem in teaching this skill is that kids have no cash to manage. So how do you do it? Give them a bit of income. Yep, give them an allowance. The allowance is one of the strongest teaching tools you can deploy in teaching your children good money skills.
The allowance gives you, the parent, a way to teach basic cash management skills to even small children. There are a few things to remember. First is that the allowance is not payment for chores. Cores are a way of serving your family and not tied to payment. As I wrote in an earlier column it is OK to pay for special projects from time to time as part of developing the work ethic, but you do not want trash duty and bed making to be a paid position. Second: Keep the amount modest and in proportion to their needs. Five dollars may not seem like much, but compared to a five year olds need it is plenty. Third: Saving and giving must be a part of the process, just as it is for you. I know a family where each child had three jars: one each for giving, saving, and spending. In addition they had another jar that was kept in the kitchen. Every child had to put a portion of their allowance into this communal jar. Once a month the kids had to decide how that money would be spent. They called it “taxes”. Though that level of complexity and abstraction might be a bit much, the three separate jars is a good idea.
I covered giving in an earlier column, and we will get to savings in the next one, so let’s focus on the spending part. Past the imposed disciplines of giving and saving your child’s allowance should be theirs to spend. Be very careful how you manage your directions. Some kids will just grab that allowance and make haste to the corner store where it will all be converted into candy. (That’s one reason to manage the amount!) Others naturally hold on to some to spend throughout the week, or maybe even a bit of reserve for next week. That bit of delayed gratification could mean the difference between the balsa wood glider and the rubber-band powered balsa wood glider. (I may be dating myself here but I still like those things!) This exercise will help you identify the natural spending and saving tendencies of your children. The purpose is not to force them into a healthy pattern; it is to provide an environment where they can safely learn from their own successes and failures.
There will be failures. When I was little I loved comic books (still do, nerd that I am, though today they are more of the “Firefly” and “Dark Knight” type). In those comic books there were ads aimed right at young boys like me. One ad that consistently excited me was the “100 army men in a box”. The set included trucks, tanks, and a whole bunch of riflemen. The price was so low I could save a bit and buy that set. In my head I pictured the large, three-dimensional plastic army men with all their stuff, some of which I already owned. (Think of the soldiers from Toy Story). My mother gently suggested it might not be what I really wanted, but I was sure. When the box arrived it was rather small. I assumed it was just the first box; maybe it held a truck or a tank. No, it was the whole set: flat plastic toys that were not to scale and not what I was expecting. Though I played with them anyway I was seriously disappointed, and learned an important life lesson.
If your kids have certain reoccurring expenses, say club dues or comic books, the allowance is a good source. Teach them that, in order to afford to activity, they need to set aside a little bit every week. It can also be used as a way to give them spending control on bigger items. If your little fashion hound wants the $30 designer jeans instead of the $20 k-mart brand, then have them save up to cover the difference. When later they don’t have enough cash to run to Taco Bell with friends you will need to let that happen. Your kids will learn from mistakes only if you let them feel the pain a bit. However, resist the urge to say, “too bad, but you look good in those jeans”.
As to how much a rule of thumb of about $1.00 per week per year of age (in 2010 dollars) should work. Don’t break the family budget to do this, though. A smaller amount will work just as well as a teaching tool. Remember that the purpose is to teach them about budgeting, spending, giving, and saving early in childhood. Have fun and make a game of it. Children as young as four can begin to grasp the concepts behind money. For more about delayed gratification read the column on saving.
When the youngsters obtain a solid grasp of basic mathematics it is time to introduce the idea of a ledger. You can set up some sort of reward for keeping track of their spending. If you can make this into a game they might learn to like it. Consider using a check register; younger kids will get to copy something they see Mom and Dad doing. Also, most banks will give you blank registers for free. When they hit the ten years consider introducing them to Microsoft Money or Quicken. Also check out your bank for special accounts for children or teenagers. Your bank might even turn out to be a big help in teaching your children how to manage their money.
Next time we will take a look at savings and investing for kids.