Teaching children financial literacy is important, yet it is not the complete solution. The only way children can avoid making mistakes with money is by becoming financially competent, a skill that is not developed in the classroom.
No one can predict the financial future. As parents look at the fallout from the current financial turmoil they see troubled economic times ahead for their children. But when everyone is perplexed as to what to do, how can parents prepare their children for what lies ahead?
In today’s economy, it is even more important for our children to grow up to be financially independent as adults. Children who learn to manage money will be able to survive in an uncertain financial future. Parents who help their children learn financial competency through hands-on practice at home will not need to bail out their adult children, thus protecting the parent’s own savings and retirement funds.
We somehow believe that teaching financial literacy will save our kids from economic pitfalls. Yet, knowing about financial matters will not help our children learn to manage their own money. Literacy is knowledge. Competency is skill. Financial competency requires practice, something that cannot and does not happen in the classroom, simply because schools can’t provide real money in the classroom. Only parents can do that. To become competent in managing money a child has to practice with real money.
I counsel parents to transfer to each child a regular amount of money. Parents can say to their children, “This is your money. You are responsible for certain expenses. And, by the way, if you manage your money well you’ll have more to spend for fun. You are in total control. You will make good and bad decisions and sometimes will wish you had made different choices. As your parents, we can offer advice if you want it but don’t look to us to bail you out. Learning to manage money is important.”
Parents need to bite the bullet and give up control. Remember when you removed the training wheels from your child’s first bike. You expect some falls and scrapes, but with practice you knew your child would succeed. However, when it comes to money, most parents won’t or can’t give up control. Just like learning to ride a bike, your kids will not learn how to manage money as long as you remain in control of money decisions.
Managing money is a combination of knowledge and practice. One without the other is ineffective. The ability to control one’s money provides the power to make choices. When we help our children develop financial competency through hands-on practice, they will be ready to navigate the economic challenges that lie ahead.
Do you know what your children learn in financial literacy classes? That’s the topic of my next blog post.
I admit it. I grew up spending my money for fun and didn’t have a checkbook until I went to college. That’s when I realized that the link between money and responsibility are at the heart of adult money management.
Fast forward to parenthood and allowances
When our kids were pre-schoolers I decided to teach them about money. I paid with pennies so they could learn how to count money.
Then one day I didn’t have enough cash to pay allowances. I grabbed a piece of paper and wrote their allowance as a number. That was in 1977, the beginning of the no-cash allowance.
Setting ground rules for allowances
We set some ground rules. They would get a weekly amount. Their allowance would never be withheld. They would have total control. This was going to be their money. Our mantra was, “It’s your money. You decide.”
Because their money was a number in an account, instead of cash in hand, they had to think. “If I buy that my number will get smaller.” Or “If I want that I need more money.
How the no-cash allowance works
Here’s how it worked. The girls update their accounts. We head off to the mall, do some shopping. I pay for our purchases. They subtract from their account when they get home.
This was like debit card spending, long before debit cards were common. They learned that money can be a number.
Money and responsibility start early
In elementary school we added money obligations by having them pay for their own school supplies. Over the years we added more money and responsibility.
By the time they were in high school they were managing 100s of dollars each semester on their day-to-day spending on clothing, entertainment, education, extra-curricular activities, and phone expenses.
Financial education at no cost to us
Now, where did all this money come from? Us. It was money we would spend on them anyway. We simply gave them control so they could be responsible for the decisions.
When our kids graduated from high school they had 13 and 15 years of hands-on practice with their own money–a financial education that didn’t cost us anything,
Reliable system for kids
Over the years they understood what their money resources were and didn’t ask for handouts. They had opportunities to get more money. They trusted the system. The choices were theirs. There were no arguments about who got paid, for what, or when. The account told all–like a financial diary.
Mistakes became educational
With money it was difficult to avoid telling them about a spending mistake we could see coming. It’s that feeling you have the first time you let go of the bicycle and watch your child ride away. You know there will be bumps along the way.
With money we know our kids needed to make mistakes so they gain wisdom about money choices. A $10 mistake by a kid would be a gentle lesson compared to a maxed out credit card as a young adult that ould be lingering nightmare.
Kids manage money and responsibility
We live in Wisconsin. It gets cold in the winter. One daughter tried to convince us that fashion boots qualified as winter wear. We said, no, we pay for regular boots. You can save you own money.
She did and then announced, “Now that I’ve saved enough, I don’t want to spend MY money on those boots.” She made the decision with her own money. We thought that was a good lesson.
One mom told me her son saved enough to buy an Xbox, quite an accomplishment. When it was time to go to the store she said, “Oh, I don’t want you to spend your money on that, I’ll pay for it instead.” She completely devalued his effort. What lesson do you think he learned?
Our grandson was standing in front of the Star Wars toy display making a big decision. Darth Vader or Luke Skywalker? This is a really big choice for a kid with his own money.
Another time he went to mall with his dad, looked around and realized there wasn’t anything he could afford. He was nearly in tears as he said, “Let’s go home. I don’t have enough money.” He didn’t ask his dad to buy him anything. He knew what his money resources were.
Now would you be surprised to know my grandson was only 7 at the time. He’d been managing his own money for less than two years.
Parents retain overall authority
Even though we gave them control of their money we retained our overall parental authority.
To remind them to do things they often forgot I created Helping Hands, and posted my fees on the refrigerator. I could deduct from their account when they forgot to do something. Easy because we were a no cash system.
When they realized they were losing money because they weren’t doing things they were supposed to, Helping Hands quietly went away.
Learning experiences for parents
There are learning experiences for parents too. Our daughter recently had her own. While on vacation her son bought a toy spaceship after agreeing he would give her the money at home.
When they got home he changed his mind and didn’t want to pay for the toy. In one of those parent moments she gave him an ultimatum. “Either pay for the toy or give it to me.” Much to her surprise he gave her the toy.
She could have said, “Hey buddy, you can’t get away with that.” But she realized she had changed the rules. She gave him the choice and he took advantage. What lesson do you think she learned?
Talking money with kids gets easier
Our kids learned to talk about money issues with us. They might say, “Hey mom you’re paying us too little (or too much) for these jobs.” Yes, they really did tell us to pay them less for some chores. They even negotiated to pay a share of cable costs so they could have a TV upstairs.
Money drives decision-making
Money management is all about making decisions. We often found ourselves repeating our mantra over and over. “It’s your money. You decide.”
Transition to adulthood
College brought a new level of responsibility. We deposited our contribution to their school accounts. They managed it all on their own. When talking with other parents we realized “Hey our daughters never once called home to ask for money.”
That’s when we knew our allowance experience was a success. Our kids could manage money and were ready for the adult world of financial responsibility. That’s also when I decided to finish writing my book, The No-Cash Allowance
Process and principles
In the end we understood that money management has two parts, process and principles. Our children needed to know how to manage money as well as why.
Our no-cash allowance provided a reliable, consistent process. They were in control of their money, not us.
We gave them principles to guide them. We taught them to have a moral sense to pay obligations on time. They learned to be accountable for their decisions.
We were actually happy when one daughter told us she hated us because “we made her want to pay her bills.” She was joking of course but the lesson was real one for her.
Our other daughter described money management saying, “It’s like fitting together the pieces of a puzzle. Paying bills doesn’t stress me at all.”
Beyond dollars and cents
As a mom, I set out to teach my kids about money. What they learned reached far beyond dollars and cents. My children learned essential life skills like confidence, decision-making and responsibility.
I believe any family can be as successful as we were. In the end, this mom learned that it wasn’t about the money at all.
Kids can do this if we as parents let them
The bottom line is that this approach shapes behavior through positive reinforcement by empowering children to make real decisions. Learning that money and responsibility go hand-in-hand in preparing today’s kids for adulthood.
Helping parents teach their kids how to manage money as a number.