Derek McGowan

Financial Education for Children

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My idea....

The standard method used to educate children about money is an allowance. The child does a set of chores and/or does extra homework then receives money at the end of the week. This is to instill the concept into the child's head that money has to be earned.

Sometimes the parent will add a second level to the allowance experience by telling the child to split their allowance into spending and saving piles. Its this second level that, though it is done for thoughtful reasons, highlights the problem with the standard approach to financial education in my opinion.

Firstly, financial knowledge (the fundamentals) is NOT knowledge presented by someone, instead it is a restructuring of your mind. The young brain does not simply understand that money has to be earned or that bills have to be paid because someone told them (after all most if not all teens are told that credit is not your money and that it has to be paid back and interest rates and such) but only after they are exposed to painful consequences does the restructuring set in.

Thus, instead of giving a child 5-10 dollars a week, give them something more like 50 dollars a week (and I'm talking about 6 -7 year olds) and then charge them for everything. Meals, gas for transportation, water for baths, access to internet, television use, electricity, etc. I haven't worked out the math as to the costs of these things but it would leave them with say 25 dollars after expenses.

This would help the brain restructuring in two ways.

One, the ability of an adult to look forward and save for something is based on experience when you actually have some money to work with. A child's brain is still learning to look forward in general but dealing with finances it's impossible. If your allowance is 5 dollars a week and you want those cute shoes that your 1st grade friend had on, or go to dance camp in 6-8 months, it simply wont happen. You have to rely on the parents and thus the brain continues to believe that money grows on trees. Having the internal conflict of cutting back on extras (snacks, television, etc) in order to save for a future AND THEN actually achieving that goal is essential to changes the impression that money is an unlimited spout to a limited pool that needs to manged.

Second, again becoming familiar with idea of responsibility and money's connection to it. You have to work for money. Then, you see this pile of cash (and I would give it to them as all one dollar bills) but you learn to understand that all of it is not spendable. You have used resources and they have to be paid for. If you can't pay for them then you can't use them.

Of course there will be a shock period. There will be points where the child has messed up the budget and is crying at the unfairness of the consequences BUT how is that any different then when it happens to them later in life and from my perspective its better for them to get over that shock when the stakes are relatively low vs when the credit card offers start to arrive in the mail and ten years later they are thinking how stupid they were while still paying back the balances.

No, it would not suddenly be laissez faire though. Yes the child has more money then ever and the ability to choose what to spend on..... to an extent. They get charged for bath water but that doesn't mean they can simply not take a bath. They cannot choose on a daily basis to ignore what the family has made for dinner and instead order pizza every night.

Also there would be a budget book written that explains the rules to the game, the costs of items and space to do the math. Its not about throwing the child to the lions.

So what do you think (my wife shot it down)?

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Thanks for the insightful suggestions. I do not know what arguments your wife used, but what is sauce for the gosling must also cook the gander and goose.

Who earns what income in what proportion? Based on that, everyone should be charged for everything. It is not fair to "give" the kid $50 and then charge her for water, unless you, too, have to pony up in some way from your earnings in proportion. Do you make less but consume more water because you are larger? Eat more food? If you earn 60% of the household income, then can you be limited to only 50% more food than your wife's share? For years, my wife insisted that her allergies allowed her almond butter, but I could get by with peanut butter. Of course, she earned more than I, but what about the times that I earned more? Could I put the almond butter in the freezer, escrowing it until she could pull her weight again? I do not see that leading anywhere productive...

Long, long ago, in the Libertarian Connection there was a parody of a value-for-value love-making session. It ended with the rental of a towel. (ahem)

For us, it worked out best when our daughter found work outside the home at 11. A friend is a coin dealer and his kids were Young Numismatists. In Michigan, the YNs work the conventions as pages, being paid in tips to run food orders and other errands for the dealers. Inevitably, they spend that money at the show, also, which teaches other lessons. Coin collecting in particular is a good hobby for teaching a kid value. Let them spend a few hours searching coins for errors and such and then sell them to a dealer. They'll catch on soon enough...

There's other things a kid can do, but largely, I think that just earning money outside of the context of the home is best. Allowance for grades is a fair trade, but is mostly an exercise like piano scales versus actually playing a song.

PS: $50 a week for the expenses of raising a child? (Note the Comic Sans font.) Ha! You have no idea… Basically, you will retire with an extra one million dollars for each child you do not have.

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My idea....

[snip]

Thus, instead of giving a child 5-10 dollars a week, give them something more like 50 dollars a week (and I'm talking about 6 -7 year olds) and then charge them for everything. Meals, gas for transportation, water for baths, access to internet, television use, electricity, etc. I haven't worked out the math as to the costs of these things but it would leave them with say 25 dollars after expenses.

[snip]

So what do you think (my wife shot it down)?

Modify it some? Limit the extras to something the child values highly. Pay the amount weekly but charge them monthly to strengthen the need to budget.

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I'd teach savings--deferred consumption vs. consumption--that is, spend some, save some and don't spend what you save. Turn deferred consumption into no consumption. Then I'd go with 1/3 savings, 1/3 investment, 1/3 consumption. After savings reach X they can be diverted into investment or capital accumulation for deferred investment(s). One trick might be giving the option of saving but no take-downs because for every buck saved Dad or Mom matches it, sort of like a 401K.

--Brant

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Who earns what income in what proportion? Based on that, everyone should be charged for everything. It is not fair to "give" the kid $50 and then charge her for water, unless you, too, have to pony up in some way from your earnings in proportion.

Thanks for you contribution

As to the above quote, perhaps I should clarify. It isn't that the child is charged market rates for everything, we wouldn't look at the electric bill and divide responsibility. Instead there would be a set amount say 75 cents per day (with overages if lights are left on) Meals might be 1 dollar a piece unless the child opts to, maybe once or twice a week, eat out in which case its whatever the market price is reinforcing the observation that its cheaper to eat at home and save money for other things.

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Pay the amount weekly but charge them monthly to strengthen the need to budget.

My issue with this (charging monthly) is that the child is unable to decide on a daily basis where to save money. Of course an adult's life is more budgeted on a monthly basis but I see this education training as bridge in between. Again my focus is on training the brain so I would think that while it would absolutely involve long term exercises, mostly we need short term repetition at such an early age.

I see it like playing 5 minute chess games when you are below expert level. You strive for thousands of games, mistakes and all to get a deeper intuitive feel for how the structures work even if a professional chess career will consist of mostly 3 hour slow paced games

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My father was raised on his step dads farm. His step dad said this about children: From birth through seven years old you get a free ride, room and board. Seven through fourteen, you pay your own way (work for your keep), after fourteen through twenty one you pay back the first seven years. Then you're on your own. A simple barter system, work for your keep. You need to get a farm Derek!

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I'd teach savings--deferred consumption vs. consumption--that is, spend some, save some and don't spend what you save. Turn deferred consumption into no consumption. Then I'd go with 1/3 savings, 1/3 investment, 1/3 consumption. After savings reach X they can be diverted into investment or capital accumulation for deferred investment(s). One trick might be giving the option of saving but no take-downs because for every buck saved Dad or Mom matches it, sort of like a 401K.

--Brant

The savings thing is what my opening post described as the standard child financial education but I don't think it fully connects with most children. If you are being told/ordered to save just because mom says its good for me (you'll thank me later) all you have is a frustrated child or one that simply ignores the money saved and never understands that the saved money has an effect when you actually do use it.

In my plan the child will be guided to save in order to make large purchases. That is more visceral. The child sees the money, puts some away and then experiences the ability to buy those shoes, that game system, that cell phone, that camera which they can plainly see that they would never have been able to get if they hadn't saved.

When I say guided, I mean that it would be my responsibility to get the goal in the child's mind, constantly reminding them of what they are seeking and to defer immediate satisfaction. In the standard plan the child is told but it never actually happens for them (I'm talking with an allowance, not with their first job) because saving a dollar out of your four dollar allowance never adds up to anything substantial. They could save their whole childhood and by the time they get their first job their first paycheck makes that entire saved amount look like a waste of time. "Great, now that I've saved for 10 years I can thank my parents that I can pay one month of car insurance."

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You need to get a farm Derek!

If only we could all live on farms!

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I'd teach savings--deferred consumption vs. consumption--that is, spend some, save some and don't spend what you save. Turn deferred consumption into no consumption. Then I'd go with 1/3 savings, 1/3 investment, 1/3 consumption. After savings reach X they can be diverted into investment or capital accumulation for deferred investment(s). One trick might be giving the option of saving but no take-downs because for every buck saved Dad or Mom matches it, sort of like a 401K.

--Brant

The savings thing is what my opening post described as the standard child financial education but I don't think it fully connects with most children. If you are being told/ordered to save just because mom says its good for me (you'll thank me later) all you have is a frustrated child or one that simply ignores the money saved and never understands that the saved money has an effect when you actually do use it.

In my plan the child will be guided to save in order to make large purchases. That is more visceral. The child sees the money, puts some away and then experiences the ability to buy those shoes, that game system, that cell phone, that camera which they can plainly see that they would never have been able to get if they hadn't saved.

When I say guided, I mean that it would be my responsibility to get the goal in the child's mind, constantly reminding them of what they are seeking and to defer immediate satisfaction. In the standard plan the child is told but it never actually happens for them (I'm talking with an allowance, not with their first job) because saving a dollar out of your four dollar allowance never adds up to anything substantial. They could save their whole childhood and by the time they get their first job their first paycheck makes that entire saved amount look like a waste of time. "Great, now that I've saved for 10 years I can thank my parents that I can pay one month of car insurance."

Oh, nuts. I'm just gonna take out my paddle.

--I (Who) Was Never Here

cut to the chase!

https://youtu.be/-fPtmRZQVHo

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You need to get a farm Derek!

If only we could all live on farms!

I will grant that a child's place in the economic production activities is clearer on a farm. Kids have chores, simple enough to understand, important enough to need doing.

In the city, it is a bit more complicated, and to that end, getting good grades in school is, indeed, the child's job. In my day, the paper route was a standard activity, but those are gone. The fact remains that kids could do other activities if you want to extend their range beyond school. After working those MSNS shows for a few years, my daughter had no problem getting hired underage and off the books at a pizza parlor. City life is just more complex. The essentials of good living still apply.

… and just to say, if we all lived on farms, progress would stop. Tractors were not built on farms because the internal combustion engine was not invented on a farm.

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Derek, I'm interested to know your wife's reasons for shooting down your idea. Rather, I'm wondering if her reasons align with mine. hahaha Your plan requires a good bit of time and energy to implement, both of which are hard to come by in a busy home.

I have a somewhat simpler version of this in place with my son who just turned 11. It started when he opened his first savings account with his piggy bank money. He has a few sources of income - gifts, spare change from pockets, odd jobs he acquires around home for me and our neighbor, and the pay he earns for his regular contributions to our household. He gets paid every other week $30 by direct deposit (he recently negotiated a $5 per pay period increase, and I was so proud). He checks his balance about once a month, but more often when he is saving for something. About twice a year, we review his account and typically move 1/2 to his mutual fund. His pay is earned by meeting my expectations for schoolwork, extra curricular activities, and household chores. His chores are expanded as he gets older. Currently he has a wide variety of duties including things like being totally responsible for getting himself ready to leave the house for the day, taking care of the family pet, setting and clearing the table, keeping his toys neat and organized, sorting and putting away laundry, taking out trash, cleaning his bathroom etc. This summer he has been learning how to wash and dry laundry as well as to cook simple meals.

I don't charge him for everything as you have described, but I do ask him to pay for certain things. For instance, when he wanted a cell phone, he agreed to pay $12 per month towards the bill. Yeah, that was actually a fun negotiation, too, and we had a few onlookers in the middle of Best Buy! He is also not above offering to pay me to do his chores for him when he doesn't want to. Sometimes I agree, and we work out a price, and sometimes I tell him to suck it up and do his own work. Or he decides he'd rather do it himself if my price is too high for him. Over the summer there was a java programming camp he wanted to attend that was super pricey, and while he was willing to foot the bill himself, I split it with him. And then there are times when I impose economic sanctions against him for poor behavior. Bad manners can be as little as $2, but talking back is $10 per incident.

Oh, and I ain't too proud to admit that there are times when I go to my little man for a loan! Is it any wonder I haven't taught him about interest rates yet? hahaha

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Dragged kicking and screaming, however, I have to agree with MEM on this one.

That is exquisite parenting. Teaching him to cook simple meals is so important for a boy to learn to do.

Sewing a button and ironing, particularly a business shirt will serve him well in the future.

Bravisima Deanna...

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Over the summer there was a java programming camp he wanted to attend that was super pricey, and while he was willing to foot the bill himself, I split it with him.

JavaScript or the OOP language? Either one, I'm impressed for an 11-year old. :excl:

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Mike and Adam, thank you so much. I wouldn't go that far, but it is wonderful to hear such kind praise from people I respect.

Merlin, I couldn't tell ya! The camp was offered by idTech, and was titled Java Programming for Minecraft. I know he learned how to create textures for 3D objects, how to mod the actions of objects, and to create "recipes" for new objects, among many other things. All within the Minecraft framework, a very popular PC-based game. He also learned how to manage .jar files, and how to use other apps like Photoshop and Powerpoint. idTech offers tech related camps at college campuses all over the country, both day and sleep-away. I can't say enough good things about their program. Pricey, but well worth the money. If you have a youngster in your life who is interested in STEM, check them out!

Derek, what are your thoughts on teaching property rights to children? Money and property go hand-in-hand, but my experience has been that property rights seems to come first and is easier.

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Deanna,

I watched the short video on this page about the Java Programming for Minecraft course. It briefly shows some Java (the language) source code, but it's hard to tell from that how much Java was used in a week long class.

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Derek, I'm interested to know your wife's reasons for shooting down your idea. Rather, I'm wondering if her reasons align with mine. hahaha Your plan requires a good bit of time and energy to implement, both of which are hard to come by in a busy home.

I have a somewhat simpler version of this in place with my son who just turned 11. It started when he opened his first savings account with his piggy bank money. He has a few sources of income - gifts, spare change from pockets, odd jobs he acquires around home for me and our neighbor, and the pay he earns for his regular contributions to our household. He gets paid every other week $30 by direct deposit (he recently negotiated a $5 per pay period increase, and I was so proud). He checks his balance about once a month, but more often when he is saving for something. About twice a year, we review his account and typically move 1/2 to his mutual fund. His pay is earned by meeting my expectations for schoolwork, extra curricular activities, and household chores. His chores are expanded as he gets older. Currently he has a wide variety of duties including things like being totally responsible for getting himself ready to leave the house for the day, taking care of the family pet, setting and clearing the table, keeping his toys neat and organized, sorting and putting away laundry, taking out trash, cleaning his bathroom etc. This summer he has been learning how to wash and dry laundry as well as to cook simple meals.

I don't charge him for everything as you have described, but I do ask him to pay for certain things. For instance, when he wanted a cell phone, he agreed to pay $12 per month towards the bill. Yeah, that was actually a fun negotiation, too, and we had a few onlookers in the middle of Best Buy! He is also not above offering to pay me to do his chores for him when he doesn't want to. Sometimes I agree, and we work out a price, and sometimes I tell him to suck it up and do his own work. Or he decides he'd rather do it himself if my price is too high for him. Over the summer there was a java programming camp he wanted to attend that was super pricey, and while he was willing to foot the bill himself, I split it with him. And then there are times when I impose economic sanctions against him for poor behavior. Bad manners can be as little as $2, but talking back is $10 per incident.

Oh, and I ain't too proud to admit that there are times when I go to my little man for a loan! Is it any wonder I haven't taught him about interest rates yet? hahaha

Sounds good to me. Hope you can share how you plan to handle the transition phase- when he turns 16 and gets a "real" job. What will be his financial responsibilities? Anything new, will he pay rent? The car insurance?

How will you handle (as a parent) when the credit card offers roll in at 18? Will you intervene at all or will you suppose that he will be educated enough by then to make his own decisions?

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Merlin, my son and I both had a positive experience with all aspects of the camp, he achieved his goals for the week, and he had fun. He learned lots of things he didn't know before, some that he wants to pursue and some that he most definitely knows he never wants to do again (texturing is not his cup of tea apparently). That's enough for us.

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Derek, what are your thoughts on teaching property rights to children? Money and property go hand-in-hand, but my experience has been that property rights seems to come first and is easier.

I would say that property rights seem much more inherent in humans than money. My daughter uses the things she owns as tools to infuriate her half brother or her cousins whenever they stay over. And I don't mean that she has lots of things. I mean she waits for someone to pick up something from out of her room, only then suddenly becoming interested in that item as well, telling them to hand it over- it's hers!

I almost don't think it needs to be taught since the brain is already molded. The nuances will need to be explained though, but I had no concrete plans on it

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Derek, I'm interested to know your wife's reasons for shooting down your idea. Rather, I'm wondering if her reasons align with mine. hahaha Your plan requires a good bit of time and energy to implement, both of which are hard to come by in a busy home.

I have a somewhat simpler version of this in place with my son who just turned 11. It started when he opened his first savings account with his piggy bank money. He has a few sources of income - gifts, spare change from pockets, odd jobs he acquires around home for me and our neighbor, and the pay he earns for his regular contributions to our household. He gets paid every other week $30 by direct deposit (he recently negotiated a $5 per pay period increase, and I was so proud). He checks his balance about once a month, but more often when he is saving for something. About twice a year, we review his account and typically move 1/2 to his mutual fund. His pay is earned by meeting my expectations for schoolwork, extra curricular activities, and household chores. His chores are expanded as he gets older. Currently he has a wide variety of duties including things like being totally responsible for getting himself ready to leave the house for the day, taking care of the family pet, setting and clearing the table, keeping his toys neat and organized, sorting and putting away laundry, taking out trash, cleaning his bathroom etc. This summer he has been learning how to wash and dry laundry as well as to cook simple meals.

I don't charge him for everything as you have described, but I do ask him to pay for certain things. For instance, when he wanted a cell phone, he agreed to pay $12 per month towards the bill. Yeah, that was actually a fun negotiation, too, and we had a few onlookers in the middle of Best Buy! He is also not above offering to pay me to do his chores for him when he doesn't want to. Sometimes I agree, and we work out a price, and sometimes I tell him to suck it up and do his own work. Or he decides he'd rather do it himself if my price is too high for him. Over the summer there was a java programming camp he wanted to attend that was super pricey, and while he was willing to foot the bill himself, I split it with him. And then there are times when I impose economic sanctions against him for poor behavior. Bad manners can be as little as $2, but talking back is $10 per incident.

Oh, and I ain't too proud to admit that there are times when I go to my little man for a loan! Is it any wonder I haven't taught him about interest rates yet? hahaha

Sounds good to me. Hope you can share how you plan to handle the transition phase- when he turns 16 and gets a "real" job. What will be his financial responsibilities? Anything new, will he pay rent? The car insurance?

How will you handle (as a parent) when the credit card offers roll in at 18? Will you intervene at all or will you suppose that he will be educated enough by then to make his own decisions?

I don't know that having a "real" job changes much except that it adds an additional source of income. As far as a plan, again I'm not too proud to admit that I don't have one that far out. It's difficult for teenagers to get jobs in my area. Also, we have some of the highest insurance premiums in the country, so even working kids can't easily manage that. My initial thoughts however, are that if he's in school and meeting my expectations there, then he shouldn't pay rent, and if he has a car, he should pay the insurance as well as provide his own gas and maintenance. I do think it's fair to consider, however, that a kid with a car takes some burden off the parent simply by being able to get himself to and from where he needs to be as well as take on other chores like errand-running. There's value in that.

Regarding credit card offers at 18, it depends on where he is, I suppose. If he's living in my home, and I have oversight, then hopefully I'll still have enough influence with him that he seeks out and accepts my counsel. I'm not going to assume that will be the case, though. That would be the extent of my intervention - counsel. At least that's what I think right now, but we'll see.

You didn't say... what were your wife's arguments against your plan?

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DL,

When I first brought this plan up a year and a half ago when Empress was 5, my wife explicitly stated that she didn't want her daughter to have the same connection/feelings toward money as she has observed in me. Her observations in this regard have always tinted badly.

She assumes that because I haven't been as free as she is with her money, or that when she brings up things for us to do/buy and I say that I don't have the money to do it, it means that money runs my life. This is not the case as I've stated to her, through my book and on this forum that if I had a magic wand (needed to correct the disaster of impracticality that would follow) I would rid the world of money all together or at least the need for money.

While I'd choose not to play the game, I recognize that these are the rules to the game so I have to play it as best as I can. I've seen the calamity that befalls those who are ignorant of the rules and I wouldn't want Empress to go through that.

But... when I brought this plan back up a week ago with another couple present, my wife seemed to have other reasons to be against it. Because I don't remember them fully, I'd prefer to get her on here to present them herself. Hopefully that will be soon

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I liked the ideas in this two-year-old post.  The way I see it, as parents we are responsible for providing for our kids the things they cannot provide themselves, at roughly the same lifestyle we maintain.  So when they're babies, we were responsible for providing their formula and diapers.  As they got to be toddlers, they still needed everything provided, but sometimes they could go beyond their developmental stage and do something for themselves.  At that age it might be putting clothes down the chute or quietly entertaining without an electronic device while we did something else.  If they didn't step up and do it, we would have to do it ourselves or pay someone $10 per hour.  So we would pay them $10 and hour.  Now that they're 7 and 9, they no longer get paid for basic things like putting away stuff they got out.  But if they step up and do something like vacuuming, cleaning out the car, shoveling the walk, they get their $10/hr.  We try to be easy about finding paid assignments for them around the house.  Then whenever they want something beyond what we consider the basics, e.g. a new video game, they can just use their money.  We let them blow their money if they want.  We encourage them save some in the bank and give some to humanitarian causes.  

Someone posted that this will be disheartening to them because they cannot save significant money.  We pay $10 and hour and will pay more.  That's not much more than some older kids make.  And it's theirs to do with as they please.  To that commenter's point, their money is insignificant to the money we're saving in 529 and wealth we hope to bequeath to them hopefully far in the future.  But this is trying to teach them the value of money: They want a toy, and someone took time away from his kids to work in the factory that made it in exchange for money.  They have to take some time out of what they want to do working to earn the money to buy it.  When they beg for some $5 item in the store, "Can we get  it? Can we get it!?"  Of course they can get anything they want.  That item costs 30 minutes of work.  Maybe they can find it cheaper elsewhere.  Or maybe they want that thing more than they want 30 minutes of rest from working, and in that case they should have it.  I've told them there's really no limit to what they can have, as long as they can find new ways to get other people things they want.  If they ever invent something like Amazon, they could have 90 billion dollars, a staggering amount.  Or they can take it easy, earn a normal amount, and still have a life better than kings in ancient times.

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