Last week I wrote a post outlining the reasons why educating children about money in school is a failed concept. Like shoveling the driveway with a spoon in a snow storm – you could try it, but don’t expect great results. Until Warren Buffet starts making house-calls, buckle in parents: It’s up to us to teach our kids about money.
You might argue that many parents don’t have the knowledge to pass on to their fledgling spenders and savers, themselves, and that may be true. But if you’re reading this blog, at least you have an interest, and that’s a great place to start.
Whether you’re a parent with daily influence on the financial lives of your children, or a grandparent with a little more life experience, I hope this post will inspire you take a sincere interest in raising the money IQ of the children in your life, and maybe give you a few ideas about how to do it.
The 5 pillars of money mastery
When I talk to medical professionals about money, the first thing I do is empathize that personal finance can be intimidating. The second thing I do is offer a simple framework that organizes all the information and concepts. The way I see it, there are five pillars of money mastery: earning, spending, saving, investing, and giving. There are, of course, many ways to build these pillars, but no matter how you do it, this is everything we need to know about money.
In this post I’m going to share what we do as a family. In the comments feel free to ask questions and share what has worked/not worked for you.
1. Earning: All the ways to make money
We encourage earning money. Two summers ago our two oldest boys, then 12 and 13 years old, started “Mow Bros” – a lawn cutting business. Since then, Mow Bros has grown into a profitable neighbourhood business. More important than the bank account balances they have built, however, the boys have earned reputations as reliable, hard-working, and courteous young men. It’s tough work, and there have been a few difficult interactions with customers who were surprisingly discourteous (situations we coached the boys to handle themselves). But the fundamental concept is clear: you are not entitled to money – you get it by earning it. And you earn it by being kind, smart, and hard-working.
Of course, the way most kids “make” money is by getting an allowance. In our family we chose not to make allowance an “earned income” through chores, etc. They do their chores because they’re part of the family. It’s not an option. Social psychology research is clear that paying someone to do a task makes the doer less motivated to do said task. So, in our family allowance is not compensation, rather a tool to learn about, well, money.
But we don’t give a lot: $1 per week per grade level ($3 per week in grade 3, $6 per week in grade 6, etc.) – and it stops when you’re 14 years old (grade 9). For our family, this seems to be the sweet spot: enough that they can actually buy things (more on that in a second), but not so much that they aren’t motivated to find ways to make more.
Here’s one unusual tweak that we’ve been doing for years: Every time they reach a new allowance tier (the beginning of the school year), we ask the kids how much of their weekly allowance they’d like in cash, and how much they’d like deposited directly into their bank account. It’s always completely up to them, but we’ve been pleasantly surprised that at least 50% usually goes directly into the bank. Perhaps it’s because we’ve set up incentives for that . . . we’ll discuss that in the “investing” section.
2. Spending: Temptation and temperance
I think the most important spending lesson kids can learn is how to do it badly. When I was ten, our family went to the circus. As I sat in the darkness waiting for the show to start, a clown walked up the aisle doing tricks with a blue and red yo-yo that would light up as it spun. I was mesmerized. And I had to have one. Ignoring my dad’s gentle warnings, I shelled out two month’s worth of allowance. When we got home, two things happened: first, I learned that I suck at yo-yoing, and second, plastic light-up yo-yo’s don’t endure contact with the driveway very well.
That yo-yo was a waste of money. It was also some of the best money I ever spent.
Kids need the freedom to make mistakes with their money. In our family, we have a rule of thumb for spending: purchases under $20 can be made impulsively, while those over $20 require a waiting period. Better to make a mistake with $20 now than $20 000 when they’re thirty.
If one of our kids wants to spend a larger amount of money, even if it’s on something we think is totally ridiculous, we don’t say no. That will just make them want it more. But we do enforce a waiting period. The larger the dollar amount, the longer the wait. With a little time, the infatuation usually wears off, or they get interested in something else. If they’re still obsessed with that RC car in two weeks, the worst that can happen is that it’s a slightly more expensive financial lesson 🙂
3. Saving: It’s all about incentives
Spending is easy, saving is hard. That’s just biology. But saving gets a lot easier for kids once they see that account balance growing into the 4-digits. So, we do our best to incentivize saving in a couple of ways.
First, we all know that making a savings plan automatic is one of the simplest and least painful ways to grow wealth. We do this for our kids by dividing their weekly allowance into a portion they receive in cash and a portion that goes directly into their bank account. Every month or so we will report their account balances to them, and they light up every time. Most of the time, birthday and Christmas money goes right in there because they get more out of seeing their balance grow than spending it.
The other way we incentivize saving is with more money. We have a deal with our kids that whatever their balance is when they start post-secondary education, we will match it. Instant doubling – cha ching! What we haven’t discussed is what that money can be used for, but I have a few ideas – i.e. not beer or motorcycles. Currently, I’m thinking it would make excellent seed money for their first real investment account.
It’s important to teach kids about investing, but I don’t want my kids picking stocks – mostly because I’m afraid they’d hit a home run. Undoing the impression that they can outwit the stock market can be a painful and expensive process. Instead, we start by making sure they understand what the stock market is, then make them active participants in conversations about how it is behaving – the pandemic has given us lots of material to discuss.
We also have a family RESP that the kids know about. Even though I make the final decisions, I invite their input on how money in their RESP might be invested, and show them how those dividend-paying stocks are growing over time.
But the truth is, choosing stocks is the least important aspect of a good financial education. Big concepts, like the effects of compounding and fees are far more essential.
I’m very open about the mistakes I’ve made over the years, including but not limited to trying to pick hot stocks, timing the market and paying ridiculous mutual fund fees. Like the yo-yo, I paid for those lessons, so I might as well pass the wisdom on to my kids.
One thing kids don’t get to enjoy these days is a reasonable interest rate on the money they do save. We compensate by rewarding them with Mom and Dad interest. Currently the rate is 5%, paid annually, but I’m thinking of making it 0.5% paid monthly so they can see the effect more frequently.
5. Giving: Because life’s not fair
Giving is something you do, not to wear as a badge of honor, but because it’s the only way to compensate for the world’s inherent unfairness. Can I take credit for being born into a middle-upper class household in Canada rather than poverty in rural Ghana? Is it fair that I’ve enjoyed four and a half decades of safe, peaceful, natural-disaster-free existence while millions of others suffer floods, famines, and political persecution?
Of course not. So, we donate. And we talk about it with our kids, always looking for ways to do more, rather than patting ourselves on the back for what we’ve done. World Vision is a great charity that encourages a long-term relationship with a specific child on the other side of the world. But the charity that is closest to my heart is Doctors Without Borders, which is why 20% of the donations to this blog are added to our family’s annual amount.
When it comes to school fundraisers, we don’t blindly support every one. Instead, we encourage the kids to learn about the cause, tell us about it, and figure out if it’s one that they want to give to. Then we match their contributions.
The one legitimate selfish reason to give money is for the warm fuzzies it provides the giver. If you’re in a funk, try making a donation to charity and see how you feel. It’s like magic. This is a little mental health trick we encourage in our kids.
That’s it – the inner workings of our financial parenting revealed. It’s a long-term effort involving recurrent conversations, and it’s about experience, not knowledge. That’s why school can’t do this; it’s up to us to teach our kids about money. Our methods aren’t the only ways to build those five pillars of money mastery, though, so please feel free to tell us about your experiences in the comments.
Last month, this little blog got a big boost. The September post, Stop saving for retirement. Start saving for financial independence, was picked up by the guys at The Motley Fool All-Star Money. If you haven’t heard of them, All-Star Money curates three great posts daily from the personal finance blogosphere – a great resource if you’re looking for more quality financial content.
For those who enjoyed this post but are still looking for their fix of dividend investing wisdom, Mark from My Own Advisor, has written a truly excellent piece on “Why Dividends Matter”. I particularly like the section on tax efficiency.
Lastly, a huge shout out to another Canadian dividend blogger, Bob Lai (Tawcan), who was recently featured in the Globe & Mail with Rob Carrick, discussing “Absolutely: dividends can matter to younger investors”. Way to go, Bob!
If you are beginning your investing journey, please make use of the free content on this site and grow your portfolio. If you have a few dollars to spare, I hope you will consider supporting DividendStrategy.ca. I’m not trying to get rich . . . 20% of donations are given to Doctors Without Borders. Thank you!