In this week’s blog post, Karen Ramsey continues with her tips on how to help your children become financially responsible adults.
4. Give your kids an allowance and cash gifts on special occasions to help them discover the power of saving. If you choose to give your children money, you can use it as a way to help them become more conscious about money and allow them to discover the power of saving.
I suggest splitting the cash gift allocation into four buckets; 1) Tithing; 2) Immediate Gratification; 3) Delayed Gratification; and 4) Long term goals:
- Tell them that 10% of their money has to be given to someone in need. This is the “tithe” allocation. My younger daughter Annie told me, “I want to send money to an orphanage in China.”
- Thirty percent of their allowance can be spent on anything they want right now. This is the “immediate gratification” allocation. If they want to spend this 30% portion on movies or candy or whatever, that’s their choice.
- They need to save 30% for things that cost more. This is the “delayed gratification” portion. They may want a camera, a cell phone, an archery set, or in-line skates. They have to save until they can buy them.
- The last 30% is for long-term goals, like college, or a trip to South America when they are sixteen.
Each portion of the cash gift has its own purpose. Each portion has a lesson that the child can learn from it. Incidentally, the above method of allocation is a valid practice for adults, as well.
For younger kids, give them jars for each portion of their allowance. You won’t believe how focused they will become, how fascinated and proud they will be, seeing the longer-term jars fill up. Visitors to your home will be escorted to the kids’ rooms to see their jars of money. In later years, you can set up a savings account instead of jars for the kids’ longer-term goals, and they will learn about the power of compounding interest.
I started Lydia, my oldest daughter, on a 25-cent allowance. When her Long-term jar got full, we set up her savings account at the bank. When her first statement arrived, showing she had earned 21 cents interest, her eyes lit up.
“How did that happen?” she wanted to know.
“Isn’t it amazing?” I asked. “All this time while you have been sleeping and eating and playing, your money has been just sitting there growing. And they gave you almost a whole quarter for it.”
She couldn’t believe it. Now every month, she can’t wait until the bank statement comes. She wants to see how much she earned while she was sleeping, eating, and playing.
5. Let them know what it costs to run a household. Allow children to participate in the choices about how to spend money and the reasons behind them. In junior high or high school, let them in on how the family finances work. Let them sit with you while you pay the monthly bills. Let them observe you writing the checks. Or let them write the checks and record them in the register. You can show them how much will go for groceries, etc. and how much is left at the end of the month. This is not intended as a guilt trip, but as an education. It allows them to feel that they are included in the overall picture. And they will have a better understanding of why you sometimes have to say no. As a result of this involvement, they will develop an understanding of good money management that will be invaluable to them later in life.
By not giving your children everything they desire, setting clear financial boundaries, helping them learn how and why to save, as well as what it costs to run a household, you are likely to help your children develop a better relationship with money. They will be more apt to solve their own problems, earn their own rewards, and mature normally. When the inevitable day comes that they get in trouble, they will not need to turn to you for financial assistance because you’ve helped them to learn how to make good money decisions on their own.
Going through this process will teach your children important lessons they would not learn if everything were just given to them. We don’t include our children in financial discussions because we don’t want them to worry about money, but including them makes them feel more valued and respected. Don’t you sometimes harp on your kids to be more responsible? Involve them in family financial planning, and observe the result!