How to Teach Kids About Money, Saving & Investing: Lesson 6

Teaching Kids Money Management: The Keys to the Kingdom

Lesson 6 Teaching Goals:

• Set up rewards to encourage saving.
• Teach the concept that you don’t get to keep everything that you earn.
• Teaching your kids to be a financial representative of your family.
• Establish income and expense cash flow skills to develop accountability and responsibility.
  
  
  

Becoming a Financial Representative of the Refined Family

You might be surprised to realize just how young kids can start managing money well. I ask a lot of parents how they teach money and what age they introduce financial concepts. What I have found in all of my questioning, is that parents start at about twice the age that kids are capable of learning those respective concepts. The take away is that kids can usually learn much younger than you might think. Just because we were slow to master money does not mean that our kids need to be.

Money Management Skills

Money management, like investing, choirs, sports, or any other developed skill in life is best learned when the stakes are low and mistakes are relatively safe and forgivable. It is to your advantage to start young with a light level of responsibility and an even lighter expectation of excellence. Skills take time to develop. You have to be willing to invest that time and you have to be incredibly patient.

“The long way is the right way. If there was a more effective shortcut it then would be known as the way.”

Practice Makes Proficient

The number one correlation between a top performer in any industry or area is not inherent skill or natural aptitude, it is practice. You might be naturally good at many different things in life but almost never is someone naturally exceptional at something. Excellence takes significant practice and discipline. Michael Jorden’s first words after winning a season title are infamously “See you in the gym tomorrow morning coach.”

For an amazing story of this concept read up on the story of Laszlo Polgar who used his own children to prove this thesis and made 3 Grandmaster National Olympiads in chess out of his young children in the process. Or if you are still looking for a shortcut, simply imagine how good of a basketball player you would be if you played as much ball as arguably the best basketball player of all time LeBron James Michael Jordan. Point is, skills are developed over time, through practice.

The Path of Least Effort

Skills are correlated to practice, not age. When developing new skills in young children, first make your children watch you correct all the things that they do wrong and while you’re correcting it in front of them, you should explain the reasoning why it is wrong and what consequences will occur from the incorrect process. For example, when loading the dishwasher, explain that dishes loaded concave up will collect water and not dry.

As quickly as possible, put the onus of work back on them. In this example, have your kids dry the dishes by hand that were left concave up. That will eventually make them want to stock the dishwasher correctly the right from the beginning (the path of least work.) We know kids, like water will follow the path of least effort. Our job is to align the path of least effort with the correct path to follow until our kids are long-sighted enough to choose it themselves. Isn’t that what eventually made us investors?

“If you are going to take shortcuts let me know when you plan to come back and correct your work.”

Patience

You have to slow down your busy schedule, set down your phone, and explain that when you fold and stack clothes unevenly they can topple over and then delegate to the kid(s) the responsibility of correcting that poor practice and refolding the clothes before they go in the dresser or closet. The correction naturally happens when the accountability of correction or rework falls on the person responsible for that original work. Your goal should be to transition from you reworking and explaining, to your kids’ reworking and explaining to you, why their approach didn’t work.

Pre-Mortem

A cool habit to interject is known as “pre-mortem” or in other words “why will this idea/approach fail?” This is a practice of spending a little time in forethought to the obstacles you might encounter, problems that might result, and reasons the approach might fail before you begin down that path. Studies with weight loss indicate pre-mortem results in a 24% higher success ratio with this approach as sited in the book “Thinking in Bets” by Annie Duke. Practice this with your kids by asking them a few simple questions about what might go wrong before you start.

Developing New Skills

I taught my kids choirs at a very young age. The first year they… well, they sucked at loading the dishwasher. Dishes were too dirty, stacked on the wrong shelf, upside down, you name it. For the first year, I had to correct their work every time the laundry got folded or the dishwasher got loaded. But that’s perfectly OK. That is the learning process. Give them that grace.

The most successful billionaires have a superpower compared to average achievers… they are willing to fail! They are willing to try and fail hundreds of times more than average achievers. How successful could you be if you were willing to try one wild, exciting, and challenging news thing every day with no regard what so ever to the probability of success/failure?

Whether it’s choirs, chess, or money management, skills take practice. The more important concept is the environment in which they learn, grace, and the ability to ask as many questions as they wish.

A Note of Caution

Before we jump into the deep end, it should be noted that I am single-handedly raising two kids, and as a single forester father many other children as well, that have come through my home over the years. I have had a chance to learn and practice a lot of parenting, and often on some of the most challenging children. Believe me, I got stories.

However, I have never been married so what I say becomes law in the Refined household. The buck stops with me. I realize that if I don’t teach my kids these concepts it is likely that no one will. Chances are you’re married if you are reading this. Obviously, I don’t know anything about marriage but I imagine that you will want to discuss these concepts with your husband or wife. Two minds together are much more powerful that one or even two alone. Make sure your spouse is part of this process and helping contribute to the ideas and decisions.

Making a Financial Representative of the Refined Family

As my son grew to around the age of 6-years-old, I noticed he was handling his earned allowance income wisely. He was demonstrating the ability to save some for a larger purchase later on. I wanted to teach my kids the concept of frugality and that if they save on regular expenses they can keep the difference, just like really life. I knew I needed to incentivize saving by giving my kids an immediate and tangible reward for doing so.

“You show me the incentive and I will tell you the outcome.”  – Charlie Munger

What I needed was a small stream of cash flow and a few regular expenses for my kids to manage. I brainstormed a list of expenses that I was paying for. I considered channeling that money directly to my children for them to pay these reoccurring expenses. I wanted to give them a few things just to start out. Not too much that would overwhelm them but just enough to really make them feel like a financial member of the Refined family. They’d have to manage several times the amount of money they previously received through allowance. I wanted them to feel empowered and accountable to pay for themselves but also recognize the responsibility. 

The list I came up with is as follows:

• The tithe
• Toothpaste
• Toothbrush
• Shoes
• School lunches
• Tithe
• Weekly lunch room ice cream treat – only if the kids had good grades that week.
• Soap/Bodywash
• Shampoo
• Hair cuts
  
  
  

Considerations for Expenses

I thought a little while on each one of these expenses because I wanted it to be something that the kids could go without for a little while and be OK going without. Yet I wanted items that had a felt impact if they did go without. For example, lunch money is an expense they encounter every school day. My kids get a good breakfast before school and are fed a hearty dinner. Before you go calling the childcare authorities, realize that they will be fine if they choose to go without lunch. In the worst case, they may cause some discomfort until the next meal. This is called an incentive. Without it, kids will not act. More likely the worst part would be FOMO to not eat while all their classmates eat around them. If there is no risk of loss, there can be no lesson.

I wanted the purchase frequency to be often enough for them to learn a lesson quickly. At such a young age, I knew something that they only have to buy twice a year is not going to make a profound impact very quickly. I paired down the list as I thought about some of these attributes I was going for. I wanted to make it simple enough for them to start with a good probability of success. I wanted this to be a confidence-building exercise and I knew that I could add additional responsibilities as they prove themselves more responsible.

Admittedly, I started with a relatively long list for my six-year-old son but he is mature for his age so I fell he was ready to handle this level of responsibility. I would recommend starting with much less if you have younger kids or kids that are not leading the maturity curve.

Building the Financial Representative System

Next, I looked up reasonable prices in my area (at the time) for these items. I added those prices behind the list of items. Then I listed the likely frequency each item needed to be purchased. I broke it out per year, per month, and then per week because I wanted to make the payments relatively frequent. The more frequent the payments the more opportunities for teachable moments, and the less time between potential failures. I chose a payment frequency of once a week. That has the advantage of being the same day every week… to help this ol’ man to remember that it is payday and provide the consistency that kids thrive on.

I used a spreadsheet to make the organization and math easier (and because spreadsheets are my jam as a financial nerd.) The cost came out to be $13.66 per week. If you remember from the last article Lesson5: The Investment Bank of Dad. I want my kids to grow up automatically saving half of everything they earn from their very first dollar. So I doubled the weekly amount I gave my son to bring us to $27.33 per week.

Now we are a giving family and a family of faith so I also added in the tithe of $2.73. This brought the total to $30.06. Close enough to $30 so that is the number I used. Each week going forward I would my son a raise from $2 to $30 a week, a raise of 1500%. 

Sweet, Sweet Cash

Sounds sweet huh, it did to my son too. Trust me he was on board with this plan. There was incentive. And I leveraged that incentive to warn him that with great financial power comes great responsibility (thanks Stan Lee). I warned them that when they needed an item on the list they had better have the money or they would stand to lose this privilege. As a financial representative of the Refined family he would be representing our family name. I made that a clear, proud, and celebrated point.

Rite of Passage

I recommend adding a bit of pomp and circumstance to this even plan a big dinner. Talk over every aspect of becoming a financial representative over dinner. What it means, the responsibility. Make it a rite of passage and a point of pride for your kids. Let them know their younger siblings will look up to them, but the young ones will have to wait until they are older to be entrusted with what you have been entrusted with. They will love the attention and trust you surround this with. And more build up with prime your younger kids appetite for this as well.

If your kids are too young now for this exercise begin dropping hints to prepare them. Say “one day you will be a financial representative of the [insert your family name] and you’ll be entrusted with the management of a lot of money and the responsibility to buy and provide for this family.” Our job as parents is to slowly and safely prepare our kids for the road ahead. That includes the skills to survive and thrive through the struggles ahead.

Cash Flow

Think your child count handle a 1500% raise? Let take a closer look at how that money flow and where it all goes. We are a pay God and yourself first family so the first 10% ($2.73) is given to the tithe each week at church. Then 50% of what remains ($13.66) is paid to his freedom fund in the Investment Bank of Dad. Now he is left with $13.66.

The Envelope System

I paid my son in lots of small change so he would be able to allocate properly. I made several envelopes one for each expense, shoes, school lunch, etc. I asked him to put a little money in each envelope so it would be there when he needed to purchase that item. He always took what was left and stuffed it in his pocket. My son is a very autonomous kid so I didn’t need to micro-manage this. My daughter is pretty much the opposite story. You’re a parent you will do what is right for your kids.

Life is a Bumpy Road

Along the path, there were a few times where he needed an item and didn’t have enough in his envelope. I remember that happening with shoes. His were worn out and I planned to shop for a new pair over the coming weekend. He was short on the money needed to buy a new pair. So I gave him a few options.

1. He could do additional choirs that week so he could earn enough to buy them when we went shopping.
2. I would take him to a thrift store and pick out a used pair that he could afford.
3. He could lose his status as a financial representative of the Refined family and I would cut off that sweet cash flow that he had become accustomed to.
   
   

I told him to think about it for a while and let me know what he decided. He reasoned that he didn’t want to do more chores because they were not fun and he wanted to play football in the evenings with the neighbor boys. And he certainly didn’t want to lose his cash flow so he chose option #2.

We went to the thrift store and he picked out a used pair that fit. A while later I asked him if he liked his shoes and was happy with his decision. He said his shoes we find he didn’t really care and was happy to have the money for other stuff he wanted to buy. Mostly candy and toys but I was not going to judge. There was a more important lesson at stake. It was his as long as he could cover his needs.

Value-Based Spending

He made his first value-based spending decision and he didn’t even know it. He realized that shoes at this age were not important and that he was happier with additional spending cash. I fully expect that will change in his teenage years but for now, it made him and me happy.

One day while I was packing a lunch my son asked me what I was doing and I responded “packing a lunch.” He said, “Oh, too bad your work does not have a cafeteria.” I responded that my office actually does but I chose to pack my own lunches because I saved $420 per month ($5,040 per year) on food cost when I brought my own.

His little gears began turning so fast that I almost had to stop and oil his brain to keep the smoke from billowing out of his ears. I knew what was coming next and sure as the sun rises he asked, “Dad can you teach me how to pack my own lunch?” I wish I had that moment on film. I must have been smiling from ear to ear. My son was learning value base frugality.  Since then, we started packing our lunches together each school night, side by side, father, and son. Well, at least each school night that the neighborhood boys don’t beg him to play football until sunset.

Keep the FIRE burning my friends.

Action Take-Aways

1. Try  a pre-mortem
2. Correct, explain then transition the corrective work as quickly as possible, let you kids ask questions
3. How successful could you be if you were willing to try one wild, exciting, and challenging news thing every day with no regard what so ever to the probability of failure?
4. Consider making your own kids financial representative of your family.
5. Enjoyed today’s article? Dive a little deeper with related reading. Here are a couple of additional resources:
6. https://www.mrmoneymustache.com/2015/05/20/what-im-teaching-my-son-about-money/
7. Chief Mom Officer wrote a good review of Raising Financially Confident Kids by Mary Hunt where I got this concept. BTW Chief Mom Officer has a pretty entertaining twitter account if you would like to check it out @LizOfficer