July 06, 2005

Money Matters with Kids pt. 1

After graduating from Kindergarden, my son is eagerly anticipating his next exciting event in his life; that of opening up his own savings account. 2 years ago, I realized that my son didn’t understand the function of an ATM and a bank card. He was starting to believe that if I wanted to buy something all I had to do was go this machine, put a plastic card inside a slot, punch in some buttons and out would come lots of dollar bills.

So at age 3 and a half, I composed a list of what were his responsibilities (like putting toys away, brushing his teeth, putting dirty clothes in the hamper). So that he could remember and get used to things he needed to do to be responsible for himself. Then a few weeks later I introduced the concept of rewards, like ice cream for dessert (we normally didn't have dessert back then) for his extra help around the house like setting the table. After 2 months I introduced the concept of receiving money or an allowance for chores he would agree to do that were outside of his area of personal responsibilities. I also explained and showed him what doing a good job was and how if it was done well he would get a full allowance.

After the tooth fairy (in this case my ex-sister in law) left him 5 crisp dollar bills over a year ago, my son has been fascinated with the power of money, earning it and more importantly spending it. Sometimes he spends it in his mind 20 times over. Since he learned that his allowance could be increased for extra chores, he’s been extra helpful around the house, including offering to make dinner for me. Of course at age 5 a peanut butter sandwich is all he’s allowed to do. Something I finally accepted as a snack Monday afternoon after being sick for a number of days.

One of the things he’s learned to do when he receives his allowance every 2 weeks, is to divide his money up into 2 piggy banks: 90% goes into his “savings piggy bank” for school and other "important things" (as defined by mommy and agreed to by him), and 10% goes to his “fun money jar bank”. At age 5, he eagerly awaits for his 10% and proudly shows me that he’s completed all the chores on his list as we sit down to review what he’s done in the past week. We also discuss if he deserves to get a bonus for any extra work he's written down. Yes, we're on the honor system so far.

Well today, after hearing from my son how he earned his big $1.00 bill this past week(which he carried around in his pocket all day), two parents asked me to share with them how my son learned about money. Because it’s such an involved lengthy process I told them I would post it here. So over the next few days I’ll post the tips I learned from a true financial expert, Suze Orman, on teaching kids about money. I culled all of these ideas from her books, magazine articles and tv seminars on PBS.

Orman has some real simple money habits all kids need to learn starting at a very young age. She suggests that instead it an allowance we call it a salary, but I don’t agree with her because my son has the option of not doing these chores (as they are extra help). The only result for not helping is he does not get an allowance for that week (such as when he's sick). In real life, I don’t have an option not to do my job responsibilities, so I don’t want to call it a salary.

According to Orman, “An allowance/salary is your first opportunity to teach your children to respect money—to teach them that money is something that must be earned.” As she suggests in one of her early books, I simply set up a few chores, which I discussed with my son beforehand, that he felt he could handle help with tasks around the house. When he was 3 he had 5 chores to do: setting the table (minus knives); emptying all the nonbreakable items from the dishwasher; emptying out the wastebaskets in the bathroom and bedroom; helping to load the washing machine and folding laundry. Now that he’s 5, he has 7 more things he can do.

My son knows that his allowance is based not only on completion of a task, but also on the performance or thoroughness of it. Help with even more household work, especially if unsolicited, gets rewarded with a bonus or additional reward, which is not always monetary. Sometimes its taking him someplace special that he's been wanting to go for some time; other times it’s letting him have an ice cream cone (we normally don’t eat sweets). One thing I've found important, is to reward for extra work outside the allowance cycle and within 48 hrs of it being completed. It helps to encourage my son to offer extra help all the time.

When it comes to allowance/salary Orman has 3 basic rules:
- The amount and quality of work determines salary.
- Discussion of the work the child has done should be fair
- The child should be paid on time every week, preferably at a prearranged times.

I hope this was helpful to those of you who have kids. In the next post I’ll discuss how my son learned to delay gratification and to save up for those coveted toys he wants.

Posted by Michele at July 6, 2005 12:43 AM | TrackBack

Cool. I have been wondering when to introduce money to my son. Sounds like you are going to be a guide for me.

Posted by: vw bug at July 6, 2005 07:52 AM

I never had to work for my allowance as a child, but it was all the money I'd get that week, so I figured out for myself that it shouldn't be squandered.

Posted by: Harvey at July 6, 2005 11:12 AM

Very helpful. Lots of food for thought in that. I especially liked the idea of two piggy banks. That is going to happen soon in my house.

Posted by: RP at July 6, 2005 02:42 PM