Saturday, January 30, 2010

Teaching children financial responsibility

This article is in response to Jenny's email about how to introduce personal finance principles to children

From birth children are dependent on their parents. Gradually from fulfilling all their needs we teach them to take care of themselves, to eat sensibly, to exercise, we provide them with an education yet seldom do we teach them how to be financially responsible.

When I was a child I was often told to clean my room and yet it took me a while to realise that although given the instruction, I was not told how to clean it and what tools to use. Subsequently I would be proud of my efforts in a 'clean room' to be told that actually it did not conform to my parents idea of ' clean room'. Thus I learnt that people's expectations are different and levels of comfort are different. So how can we expect our children to be financially responsible in the future if we do not give them the tools and provide opportunities to learn the necessary skills within a safe environment.

Money is a tool, it is a major component in our society, it is complicated to comprehend only because it has been made invisible.

As a family we gradually prepare our children from childhood to look at what money does, how you get some, how you spend it, save it and work with it and how you get by without any.

Most children in today's society have a lesson on coins at school as part of the mathematics curriculum but do not have any practice in using real money to purchase items with. Most families would shop at supermarkets, take what they want from shelves, put a card in the reader and voila, shopping done. This reinforces children's knowledge that yes everything you want is provided for by parents and food and other items can be obtained by putting a card in the reader. Easy as pie.If that is their only exposure to finance and money then it would follow that when they leave home at 18 their expectation will be that a) parents will provide everything you want and b) that a card in the reader does pay for everything. Add to that credit cards, student loans and the relationship with money is easily lost.

There are pitfalls as parents in letting go of some of the control by giving your child money to spend but if handled in a progressive way, children do learn from their mistakes and learn to find solutions that work for them. It can be an empowering  learning path for everyone involved.

Our basic progression is as follows :( not really age related but progress when stage satisfactory negotiated)
age 5 to 10 - give your child opportunities to buy items with real money and opportunities to earn pocket money, save for special items and donate small amounts to charity. In the shop we encourage our young shoppers by helping them make a connection between the coins in their hand and the items they can purchase. Its mostly sweets and treats at this age but it is an important step.
age 7 to 10 - we set up a savings account in the child's name with a book in which each transaction is recorded. This provides ownership of money as a tool and the opportunity to save, withdraw and spend money as they wish. Money is still used for items they mainly want at this age and can give an insight into your child's priorities.
age 11- the savings book is changed to a card account and the child has some autonomy over the transactions. A small amount is paid into this account to finance personal spending.  At the same time, we withdraw money from our account by card as a budget when planning purchases such as clothes and give the child opportunities to choose and buy within the money they have to hand. If they find a cheaper item they get to keep the rest. This encourages them to shop for best value and rewards careful consuming.( best value does not always mean lowest price) Our children soon figured that if you did a bit of research your basics could be provided for and then you had extra for all those treats you wanted.
age 12 - We make a list of all clothing requirements to ensure that the child starts off with all its needs catered for. After this shopping experience we discuss an allowance which is to provide funds for clothes, shoes, entertainment, gifts, hair cuts i.e all the items shopped with previously in cash as part of their budget. We ask the children based on their experience what they need and if we believe it is not sufficient we give them more, if too much is asked for we ask them to justify their budget. This helps them negotiate. In our experience they underestimate what they need and quote a ridiculous low figure. We agree the boundaries of the allowance( i.e. we pay for educational expenses), interest rates for loans and opportunities to ' earn' money and agree that we will pay a certain amount into their account monthly and they agree that they will manage their money as they see fit and come and speak when they experience difficulties. Loan rates are offered so they know they can borrow money too. We as 'parent bank', are quite flexible and agree not to criticise their buying decisions, merely be available to help them find solutions should they have difficulty. This crucial period provides them with complete control over their finances without in fact lacking in anything.

As a parent this is the most interesting time. It is hard to see your child spending money on what they perceive as their necessities and the firm boundary needs to remain in place.( often I deliberately stay silent on my opinions but listen as they tell me about their exciting purchase)  So if for instance there is no money to go on that cinema trip with your friend because you have spent it all on comics, well then maybe that acts as a lesson to leave some money aside for going to the cinema. It is hard on parents. Its hard on children but a useful step towards independence.

As the years go by, the children establish their areas of budget and some for instance spend more on image and others more on gadgets it depends entirely on what their expectations and interests are as well as the effects of advertising and peer pressure. When the money does not stretch they have to find ways to for instance, delay,borrow, buy secondhand, do without, barter or find opportunities to earn more just like adults. It provides useful discussions as to why the amounts suddenly do not meet their needs. They create their  own ideas, purchase their own stuff and are asked to deal with their own stuff and its consequences. ( i.e. new game station = more expensive games)

At age 16, we do not clean nor tidy rooms, we do not wash clothes and watch the children as they gradually gain confidence ( and do not buy red tshirts that they wash with white ones). We discuss the allowance each year and check that it meets their needs ( not always their wants) and so on. We discuss safety of internet banking and personal safety. Be prepared to deal with anxious children who lose their card and enable them to make the call and answer all security questions.Stand by if help is needed. By paying money into their account you should have at least the account number available as odds are they have no idea. Once a hurdle has been overcome they learn how to deal with mistakes and difficulties. Teenagers rarely have any money in their account to worry about....

At age 17 and 18 we listen to their plans for the future and offer ideas on costs involved. We introduce the idea of real living expenses, transport, taxation. etc.  ( we levy a tax on their earnings of 10% which is to be paid into the family account and discuss taxi fees). Expect as a parent to be challenged on this issue and show evidence of electricity use, phone bills, transport costs etc.

As an adult we will ask our young adult to contribute a proportionate cost of earnings to living at home at a fair percentage of overall costs.

This would be an ideal progression and there are likely to be unique challenges with your unique child. We try to keep calm, encourage them to come and see us if they have a difficulty and offer possible solutions : the actions that they need to take to solve the problem need to be taken by them and is their decision. So delaying telling the bank that you have lost your card for 3 months means you cannot access any money. 

As they reach adulthood and earn money, the allowance is reduced as they gradually earn their own money. Should you be faced with a child that refuses to work, an allowance can easily be reduced until it is stopped. Nothing focusses the mind of a young adult without money.

One of our children has reached adulthood and found it a worthwhile experience( we think), maybe a unique way to be taught about money but is and has been for many years financially independent. ( leave a comment if you want, well done, you graduated!)

So far we have an 11 year old who has his first bank card and it has proven to be a real temptation to use it, a 14 year old who finds that the way he spends in fact does not actually make him happy and he is without certain items and a 16 year old who compromises on clothing to upgrade his gadgets. Each has their own way of managing their money, some better than others but they work together to find solutions. So far only 1 child has asked to borrow from the parent bank and did not take out the loan as apparently the interest rate was too high and saving for 3 months would cost less. ( at that point you smile inwardly!)

Simply because we as parents chose a frugal life following the principles of voluntary simplicity does not in fact guarantee that our children will follow the same path. It does however provide opportunities for discussion, mutual respect and personal development all around.

The above plan encapsulates the three basics of life,food ( as well as treats), warmth ( clothing) and shelter( living costs).

It is a journey with pitfalls, mistakes, joys and scary rides for parents but we know that they have the opportunity to make mistakes with the ' parent bank' and that when it comes to negotiating their money as a tool, they should in principle be money wise.

As parents you gain boundaries on your children's budget, you learn from them and will be able to see some who spend, some who save ,some who live above their means, and some who are minimalist, in fact a cross representation of every adult.


City girl said...

The graduate's perspective...

As the guinea pig for the system I think it worked well and taught me many valuable lessons in a safe way -- it wasn't that I didn't make mistakes (I did!) but that I had an opportunity to learn them in a supportive environment -- a bit like financial training wheels. I have noticed that I have a different relationship with money to many of my peers, in particular around debt. I also think that the method taught me a work ethic -- I was given the opportunity to earn extra if I worked hard at school, and so came to realise the link between effort and reward. My current goals are around saving more (target = 10% of income) and translating ideas about personal finance into managing my budget at work. I am very grateful to have had the opportunity to learn this way, and I don't think I realised how unique it was until I graduated to the real world :-)

Anne said...

I love the way you try and implement the principles at work although I imagine it would be hard to put that across.

Financial independence is a gift and I am glad you enjoy its rewards.
Thanks for your comment citygirl.