If there were only one lesson that I could teach my children about money it’s this: budgeting is critical.
Every retailer and credit-extending entity in the world works hard every day to teach that living within one’s means is not just unnecessary, but actually quite stupid. Their siren call is relentless but predictable: Why wait to buy something? You want or need it now; buy it now. We’ll let you pay for it later.
Disciplined, sophisticated consumers can actually come out ahead if they are careful in the way that they use available credit like this guy. There are rewards to be earned/redeemed and there is interest to be earned. The trouble is that most consumers are neither disciplined nor sophisticated, and they fall into the easily avoidable trap laid for them by companies looking to make a profit.
Kids don’t instinctively know how to handle money.
Some children are predisposed to saving and managing their money carefully, but most are not and do not. Even those who have a knack for good decision making still need help developing skills that will help them build their net worth.
Public schools don’t spend any time teaching kids how to budget or handle money. It’s much too important for parents to expect their children to learn it somewhere outside the home. Example and hands-on experience are probably the most effective means of instructing children when it comes to finances.
Sadly, according to this article even certain types of education fail to teach the fundamentals that people need in order to properly handle the responsibility of managing their own money.
“Nothing ever changes unless there’s some pain.”
Tears for Fears’ Roland Orzabal wasn’t the first to ever express that thought, but his putting it to music made it that much more likely that I’d give it some consideration. It is another facet of opportunity cost and delayed gratification.
Pain is a powerful motivator and has the ability to modify behavior. Many adults still don’t know what it feels like to forego a purchase because a budgeted amount has already been exceeded. Credit cards to the rescue!
If a child doesn’t learn financial planning skills at a young age, they’re much more likely to make bad mistakes as an adult. Some parents give their children money whenever it’s requested, but this approach only teaches that mom and dad (or perhaps someone/something else) will always be there to bail them out.
Careful budgeting (combined with diligence and self control) is one of the surest ways to live within one’s means and eventually achieve financial independence. This is where the (financial) pain comes in, and better sooner rather than later.
Repeat after me: Allowance.
An allowance is a great way to put children in charge of a set quantity of money. Depending on your philosophy, the allowance may be tied to acceptable completion of household chores or the practice of a musical instrument (as was the case for me growing up). Have the kids set aside a consistent amount for savings on each “payday” so they get into the habit of not spending the full amount. If you are a member of church, synagogue, or mosque you may want them to set aside a consistent percentage as a donation to that organization.
When children ask for money, remind them that they get an allowance which must cover their discretionary spending. The critical piece here is that parents must communicate expectations to the children before the money is doled out so the kids know what they’re responsible for purchasing. Having everyone on the same page means that consequences can be justified.
Parents would do well to consider the children’s alternatives to giving up the ability to make certain purchases when determining what expenses the allowance must cover. For example, if a child spends their fun money too quickly, what are they likely to do? Resort to stealing? Borrow clothing from friends? Shop at a thrift store? Pick areas of responsibility where the alternatives are going to have the maximum educational impact with the lowest possibility of circumvention or misbehavior (e.g., stealing, etc.).
As the children get into junior high and high school, their allowance could be increased to include money for clothes. They can blow their money on fast food and music if they want, but that means they gave up new school clothing as a consequence.
You may also enjoy these posts regarding some bloggers’ approaches to allowances with their children:
There’s no secret to budgeting with the intent to increase net worth; you must live within your means and invest wisely. Similar to how students benefit from internships because it prepares them better for what lies ahead, children need hands-on experience with managing money. No other teaching method can have as profound effect on them, and nothing short of strong budgeting skills (with the discipline to see it through) will suffice.