Here’s a piece contributed by Will Hepburn, Hepburn Capital, originally published here in 2004.
We all have aspirations for our children to be successful at what ever they choose do. Many parents even have good ideas of how to help their children become successful. But unless children are prepared to deal with the fruits of successful labors, the happiness that we assume will come with vocational success may be elusive. Money can bring lots of worries if we are not careful.
So, how can you prepare children to handle money? Simple. Give them some and let them make mistakes. By starting young the mistakes will normally be small, inexpensive ones.
Most kids get allowances, but by getting creative with the process, we have an opportunity to teach them a little about how the world works.
Try having your child split their allowance into 4 equal piles, with _ going into a jar or piggy bank for long term savings, _ into a jar earmarked for gifts and taxes (mostly gifts at this age – church, charity, friends at Christmas, etc.), and _ for spending money. At our house we use wide mouth glass jars so our son can see his money and get his hands on it easily.
In the process the child learns that they don’t get to spend everything that comes in (remember the shock of seeing taxes taken out of your first paycheck?), and that supporting those people and institutions that support us is both important and costs money. They get to experience the good feeling of giving their own money to a charity or buying a gift for a child on an Angel Tree. They also learn how to shop for gifts for friends with their own money. With luck they will realize that their friends really don’t need $25 Star Wars light sabers after all.
Long term savings means that the child will be able to buy his own car when he grows up. This is a good, tangible, long-term goal. As the savings jar fills up, trips are made to the bank to deposit the savings in his bank account. Although I hate the tiny returns on savings accounts, I think the process of going to the bank is important. When the bank account fills up, money can be transferred to a growth investment of some sort.
The child’s spending money is just that, his to spend. In our family, Mom and Dad still pay for a lot, but we rarely say no to his requests. When we don’t support the idea of buying a particular item, we just say, “you can buy it if you want to, you have your own money”. Like magic, 9 times out of 10, the item goes back on the shelf. And miraculously we have a discriminating shopper rather than one that wants everything in sight.
Whenever our son needs money away from home, Mom or Dad become the bank and will loan it to him until he gets home and “restores his credit”. The rule is that he doesn’t get a new loan until he pays off the last one. Only a few declined loans and this lesson gets remembered!
Simple accounting sheets help keep track of what is in each jar. The child gets practical lessons on math, accounting, and not moving money from one jar to another.
With this system, concepts of credit and consumer decision making come to life. Give it a try!
Will Hepburn is the President and Chief Investment Officer of Hepburn Capital Management, LLC, in Prescott, Arizona. He specializes in developing, implementing and teaching innovative investment strategies that Adapt to Changing Markets®. He may be reached by emailing admin@HepburnCapital.com, or by calling (928) 778-4000, by writing to 2069 Willow Creek Road in Prescott, AZ 86301, or by visiting our web site at https://hepburncapital.com/.
©2004. Permission to copy granted when the above attribution is included. Reprinted here with permission of author.