Giving kids the skills they need to be financially stable adults
We are born with many skills. Sadly, budgeting and saving are not innate skills. Thankfully these skills can be learned. Most people learn these skills by digging themselves out of debt or with lots of trial and error. Wouldn’t it be great if we learned these skills during childhood? If children can learn to ride a bike, build worlds in Minecraft, and multiply, they can be taught to budget.
Growing up my family didn’t talk much about money. The only conversations I remember having about money revolved around the importance of having a job, tithing, and having a Christmas fund. There were no conversations about credit card interest rates, student loan repayment, or sinking funds. These kinds of conversations were not being had with adults so teaching children how to budget was just never considered.
When my daughter was born, I knew that I wanted to teach her the importance of fiscal responsibility, but I wasn’t sure how to do it. There were not a lot of readily available resources for children, so I created my own system. This system has worked well for us and is simple to implement.
My framework for creating a budgeting system for children is as follows:
- How much to pay: The allowance rate is one dollar per year old (i.e. 4 yrs. = $4/week, 5 yrs. = $5/week, etc.)
- How often: Choose something that will be convenient for you (i.e. weekly, bi-weekly, etc.)
- How to manage: Divide it into Savings, Charity and Spending categories
- Where to store it: Separate piggy banks for each category and a physical bank account
- When to increase base: Annual increase the 1st of the year or on their birthday
- What about extra money: Found money, Birthday money, Bonuses
How this works in real life
When my daughter turned 4 I started paying her an allowance. She received $4 every week for simple tasks like cleaning her room, feeding the cats, and putting her dirty dishes in the dishwasher. We broke down her weekly allowance as follows: $2 spending, $1 savings, $1 donation.
This money was not just for spending though. I explained the concept of dividing her money into categories as soon as she receives it. We discussed the importance of saving, donating to charity as well as spending.
After seeing rescue greyhounds at a local fair, she chose that organization for her charity. Allowing her to pick her own charity gives her a clear goal and reason to save. Her savings money a car or college when she gets older and her spending money can be used any way she wants.
She gets an annual raise on her birthday that also comes with an increase in household responsibility. We have a chore chart that she can use to check off her chores weekly and this keeps her motivated and provides structure.
Growing with them
As she has gotten older her financial wants have increased. She is now almost 9 years old and her spending priorities have evolved. Her financial interests now include purchasing dolls, accessories, and digital coins for Minecraft and Roblox.
As a child of the 21st century maintaining a cash-only allowance has become increasingly challenging. Even before the recent pandemic it was a bit of a challenge for me to remember to keep enough cash on hand for the division of her allowance.
After researching different digital options, I decided to use Greenlight* to disperse her allowance. Greenlight is a debit card for children that allows you to transfer the funds to a debit card that also has a savings and charity function built-in. You can tie the allowance to chores and even pay interest on their savings. You also receive notifications telling you where money has been spent.
The child will have a debit card with their name on it and you gave the ability to limit where they can shop and if they can remove cash from an ATM.
We have been using this system for several months now and it has been a game-changer for us. It eliminates the need to get cash from the bank and automates her savings. We were able to connect her debit card to her tablet, so she can purchase her own coins.
With automated savings instead manually dividing her Savings and Charity are automatically divided weekly. She can watch these categories grow weekly from the app.
The power of autonomy
Equipping children with the tools to manage their own spending and saving, gives them the opportunity to master these skills in a safe environment.
Through Greenlight, my daughter can create as many additional savings goals (sinking funds) as she likes. The additional savings accounts are funded from her spending account. She gets to make informed choices about whether she should spend all her money on gaming coins or add money to her doll savings account.
Giving her the freedom to make these choices on her own has been a fantastic learning experience for her. During this pandemic she has chosen to spend more of her money on coins for her games instead of extra into her savings. The confidence that she has gained from being able to make these decisions herself has been fantastic to watch.
Consistency is key
The only way to ensure that children master the financial principals of saving, charity, and spending is through consistent practice. Whether you choose to use cash, debit card or a combination of both doesn’t matter. Giving them the chance to create their own financial path allows them to plan for current and future spending. With annual increases they will be better equipped to manage larger sums of money.
With these lessons firmly in place, once they enter the workforce as teens, they will be less likely to spend every single dollar that they make. When they get their paychecks, they will be conditioned to pay themselves first through saving. Give to others to help make the world a better place and spend money with what is left afterward. Let’s set our young people up for success by giving them the tools they need to be financially responsible adults.