08 Oct, 2011
Financial literacy for kids: part one of two
This post is the first of two about financial literacy for tweens, the writing of which was supported by a Mom Central Canada Blogger Grant. (Thank you Mom Central!)
When the kids were little I got tired of walking through the store and hearing the “I WANTS” all the time. I want this! I want that! This kind of running commentary drove me bonkers. It sounded awful and grated on my nerves. I hit a breaking point one day and told them it was ok to want things, but that they had to phrase it differently. I asked them to replace the “I want” with “I like” instead. It just sounded so much better: I like this toy! I like these funny socks! And you know what, I like my kids better when they put it that way.
Financial literacy encompasses a lot of different things. It’s counting. It’s problem solving, and reading and comprehension. It’s about developing some serious critical thinking skills too. No wonder people find it all so intimidating. Heck, I find it intimidating! When I’m sitting at the bank talking about our investments and RRSPs, I nod and smile and hope that Mark knows what the hell he’s talking about because I am busy trying hard not to look like an idiot. I don’t want my girls to feel like I do when I’m sitting at the bank. Knowledge is power, and I want them to be confident and knowledgeable about money.
I bet that money is the number one reason why marriages end in divorce. Credit card debt and student loan debt and mortgage debts are at record highs. Many Canadians live paycheck to paycheck. I’m not an expert, but I think a bit of financial homeschooling is really useful here.
Realistically, I realize that most kids won’t be taking out a mortgage or planning their retirement for a few more years, but they could be budgeting, saving, investing, and giving to charity. These are the foundations of financial literacy.
I think we can agree that financial literacy is important, and it’s especially important to teach it to children as early as possible. I think kids are ready to start learning about money as young as five. You can teach them the different denominations, for example. When you’re buying a pack of gum at the corner store you can have your child help you count out the coins and help pay for it. And then there’s the most valuable financial teaching tool of all: allowance.
Kids and allowance
We started giving our kids allowance when they were 8 and 6, but before we started handing over the cash we thought long and hard about it. I really didn’t want to mess this up because I felt that it’d be setting the tone for years to come.
The first question we grappled with was whether allowance should be tied to chores. My thinking at the time was that it shouldn’t be tied to chores and I still feel that way. We aren’t strict about chores around here. The girls are just expected to help out with anything we ask them to. We all take turns cleaning the kitchen after dinner, and usually remember to do a Focused 15.
It didn’t make sense to tie their allowance to ordinary chores. No one pays me when I do the dishes, but the dishes need to be done, and we all need to clean up our messes and tidy up after ourselves. But if the chore is way above and beyond what’s required I totally understand paying out. Cleaning the garage for example… I’d totally give them five bucks to help out with that.
The girls each receive $25.00 per month, payable the first of every month. We chose to pay out monthly because one of my first jobs out of university paid me in a big monthly lump, and boy, did that ever teach me how to budget.
From that amount, we set aside $5 towards a charity of their choosing and $10 to go into a bank account for longer term savings. The remaining $10 is considered pocket money which they’re free to spend however they like.
We’ve had some ups and downs with this cash-on-hand idea. As it turned out, one of our kids is a saver and the other is a spender. The saver misplaced a wallet that had $80.00 in it. It took us the better part of a year to find it. (It eventually turned up at the bottom of their costume trunk.) Part of financial literacy includes financial responsibility. At their age they should start to learn to keep track of their funds, whether it’s in a bank or a piggy bank.
The question still remains: will they be able to keep track of their purses/wallets? (Not if they’ve inherited their mother’s genes. Gah!)
One of the biggest advantages to the whole allowance idea is that it suddenly gave them the opportunity to distinguish between a want and a need. For example, we’ll be waiting in line at the grocery store when they spot a new Archie comic. It costs five dollars, exactly half of their pocket money for the month. First they ask me to buy it for them. I tell them no, it’s not in the budget, but they’re free to spend their own money on it if they wish. Ninety percent of the time they’ll put it back on the shelf. (Interesting how they suddenly don’t want it as badly eh?)
So they have $10.00/month to spend however they like and they are in control of this money. At first I was concerned they’ll buy dollar store junk with it, but they remember our past experiences with dollar-store goods and now they question those purchases carefully. After all, what’s the point of buying something cheap only to have it fall apart? They have made purchases they’ve regretted, but I think that’s good. In order to truly learn the value of money they should be able to make a few small spending mistakes.
Sometimes they use their money to buy candy and junk food, but they still have to abide by our rules about eating it (for example, they can’t eat it right before dinner).
The charitable component of their monthly allowance is added up in December, at which point the girls can choose where they’d like to donate it. In recent years we’ve donated to WWF and bought items from the World Vision Catalogue. This year I’m going to talk to them about helping some families in Sri Lanka by buying them some stoves. This doesn’t require nearly as much money as you think it does! (I could write more about raising charitable children, but perhaps this is a post for another day.)
The savings portion of their allowance hasn’t quite worked how I envisioned. I had planned to take the girls down to the bank every month to make a deposit, but we’ve been letting that add up too, and have been doing it once a year instead. They love seeing that number go up (even though the interest is paltry these days). We chose not to let the girls have debit cards yet. I don’t think they’re quite ready for that.
I’ve been thinking a lot about this lately, and I think this whole financial thing can be boiled down to one rule: don’t spend more than you earn. Yet many of us do that every day, don’t we?
Mark’s grandparents built their own house, slowly adding on as needs changed and they could afford it. Here’s the kicker: they never had a credit card. It seems hard to believe nowadays. Interest rates are so low that no one seems to save up for anything anymore.
Many kids don’t know what to do with money other than to spend it. Part of this problem is compounded by the fact (no pun intended) that it’s kind of taboo to talk about money. Complicating matters even further is that kids learn from their parents. They pick up the good habits as well as the bad ones. How can you teach your kid to save their pennies when they hear you talking about how your credit card is maxxed out?
Kids need to learn how much things cost. Go shopping, and compare brands. While you’re at the grocery store ask them which brand is the better buy. If they see something they want, ask them if the purchase is a want or a need. Talk about the value of things: “This shirt looks like it’s going to fall apart in the wash. Should we buy it?” Clip coupons. Show them the hydro bill. Do up a basic budget. Try a cash diet, or a Shopping Embargo. Talk about how much dinner costs when you make it at home vs. going out for dinner. Show them that if you’re feeling down you can make yourself feel better by going for a walk or doing something fun with your family instead of consoling yourself with a shopping spree. But most importantly, be open and be honest about money: where it goes, where it comes from, what can happen if you don’t have enough when you retire.
As your kids get more comfortable with the math side of money you can talk about investing and show them the magic of compound interest. Our eldest, who’s 12, got incredibly excited when she realized her money could actually make money. It’s practically alchemy!
Lately we’ve been talking about how much a post-secondary education costs and where those funds are going to be coming from. They are expected to contribute, which really puts a different spin on things.
Tomorrow I’m going to post some money-making ideas for tweens. Stay tuned!