Money lessons

What do I really want to teach my children about money?

In the day-to-day tasks of teaching young children about money — the values of the coins, adding them together, the basics of saving and spending — it is sometimes easy to lose track of the bigger picture. What lessons and attitudes about money and finances do I hope my boys internalize by the time they reach adulthood? After all, they will eventually learn to add their coins up and make change — these are the easy aspects of handling money. But larger lessons are more elusive, require more forethought and planning, and can be more emotional. 

Ultimately, I want to give my children the knowledge and the tools they need to make smart choices about money that fit the life they want to lead, all the while without dictating to them how to live their lives. That means getting them to understand the ways in which money can open choices to them rather than imposing my own particular ways of dealing with money and finances. This is in part because I recognize that there is an emotional element to money; not everyone will react to it and think about it in the same way, and not everyone has the same life goals and aspirations. And in part it is because I believe that children listen more and learn better when presented with strategies to think rather than rules to follow. 

And so, for today: 

Nine big ideas about money and finances I want my children to understand before leaving home

1. Money can't buy happiness, but it can buy choice. 

Money can give you the choice to leave an uninteresting job or a bad relationship; it can give you the choice to re-locate to a place you really want to live; to take a year off or to retire super early; to pursue your hobbies and dreams; to stay home with your children when they are young; to try things without worrying too much about failure. All of these are very difficult if you are living paycheque-to-paycheque; they become easier if you have an ample emergency fund; and they become simple as pie if you are financially independent. (To me, financial independence means having enough savings/investments to be able to live on for the long term without regular income from a job.)

2. Compound interest and the power of saving. 

We all know that money doesn’t grow on trees. But, properly handled, money does grow: it grows via compound interest. And the longer it has to grow, the more of it you will have. We’ve all seen some variation of the calculation: 

Consider Mads, who puts 100$ a month into an investment account from age 25 to age 60, and Keld, who starts saving his 100$ a month at age 35 — just 10 years after Mads. Assume both earn a 3% rate of return. At age 60, Mads will have contributed 42,000$ and Keld will have contributed 30,000$ — but, with the compound interest, Mads will have 74,000$ whilst Keld will only have 44,000$. Mads contributed 40% more than Keld, but ended up with 70% more.

Those are powerful numbers. I want my boys to internalize the power of money and time combined.

3. Consumerism and material culture. 

I want to impress upon my boys that buying things is not a healthy way of making yourself happy. Yes, we all love new toys. But we can all also find ways to be happy that don’t involve buying things: going on a hike, swimming in the river or hopping on your bike, heading to the library, playing with friends in the park. Just because we live in an incredibly materialistic culture doesn’t mean we have to buy into it.

4. Lifestyle inflation. 

The more you inflate your lifestyle, the less money you’ll have left over for saving and growing. I want my boys to understand the psychological motivations behind lifestyle inflation and to know how to calculate the long-term costs of lifestyle purchases. 

5. The finances behind short, medium and long term life goals. 

I want my boys to think not just about today, tomorrow and the month ahead, but years into the future: what goals to they have, and how can they get there? How do they need their money to work for them to achieve their goals? Big ideas here include postgraduate education, career choices, place of living, house rental/purchase, commuting options, family, car ownership, and retirement. Yes, these are huge questions, and no, I don’t expect them to have it all figured out by age 18. But I expect them to have the tools necessary to think about these ideas in a rational manner.

6. Investing. 

How does money grow? Not by keeping it in a savings account. I want to teach my boys about the stock market and other investment options, and have them both open discount brokerage accounts as soon as it is viable.

7. Savings vehicles. 

Here in Canada, there are a number of savings vehicles it is critical to understand and use to your advantage: namely, RRSPs (for retirement), TFSAs (tax-free savings accounts, for investing), and RESPs (education savings plans for children). I want my boys to have a firm understanding of all of these — how they work, their withdrawal rules and tax implications — as well as concrete plans for starting them as soon as possible.

8. Relationships. 

Money and finances are complicated enough for one person — but they can become even more complicated in a relationship. I want to encourage my boys to think about how they will handle this aspect of any serious relationship they might enter into. Luckily I have a long time before we need to talk about this, because, having married someone with a very similar financial outlook to my own, I haven’t had to deal with the potentially messier or harder aspects of managing money as a couple.

9. Alternative paths. 

The basic frame that defined the lives of many in my parents’ generation — jobs with steady advancement until age 65, then retirement with a defined benefit pension plan — is quickly disappearing. Today, the personal finance blog world is full of ideas of FIRE (Financial Independence - Early Retirement), of 30-somethings having saved enough to retire on their terms. And in between these two extremes there are myriad ways of planning and organizing careers and lifestyles. I want my boys to be aware of the many paths open to them, and to think about how the choices they make about money and their relationship with it will allow them to choose between these paths.

Whew. That’s overwhelming to think about — thankfully we have years and years to think about and work on these questions.

How about you? What big money and finance lessons do you hope to teach your children?

Saving, spending and compound interest

What exactly does a five year old need money for?

Now that we've definitely tentatively decided to give Lasse an allowance, my husband and I turned to the next logical question: what exactly does a five year old need money for? After all, we pay for his food and clothes and swimming lessons and etcetera. Whilst an older child might certainly be expected to buy certain items themselves, from toys to books to movie tickets, we are not at the stage of expecting Lasse to afford his own “wants”.

After an interrupted conversation in which I was half hanging out a downstairs window, painting the frame, and my husband was calming the baby, we came to conclude that we want Lasse to have a bit of money in order to start to learn in a real way the power of saving. We want him to see with his own eyes, and through his own coins, that saving money is a way of building opportunities and choices for yourself. After all, this is perhaps one of the most critical ideas about money there is. 

Money doesn't buy happiness, it buys choice. 

I want him to see that if he spends one dollar this week, and one dollar the next week, he will never be able to buy the big Lego kit he has his eye on — but if he saves those dollars, he will eventually be able to afford the kit.

That said, I don't want all his early interactions with money to be about buying. (In fact, Lasse has very few opportunities to spend money at all, as he rarely goes with us to stores. The exceptions are the grocery store and the hardware store, but still he doesn't go often.) The point that I am coming to realize is that, deep down, I do not want to encourage Lasse to look for happiness through the act of buying, or of accumulating material things. I do not want him to constantly be thinking that he needs another toy, that another toy will make him happy or happier. He is happy. He is one of the happiest people I know. And he is happy because he finds joy in playing outside, in visiting the library, in building with his Legos, in helping make bread, in swimming, and in mundane days at home.

Right now, Lasse doesn’t care much about buying things. Oh, yes, once in a while he’ll point to a picture of a toy — usually from the back pages of his marble run booklet — and ask if he can have it. But on a day-to-day basis, buying things isn’t on his radar. And I don’t want to add it just yet. 

There is a fine line here: on one hand, I want Lasse to learn about money in a real way (read: by making his own choices and mistakes) at a young age so that when he is older and has more money, he will already have internalized some key lessons. On the other hand, I wince at the thought of him making any mistakes with money at all. But he has to have the chance to try. After all, the views he takes on money as a older child and, eventually, as an adult, might well be different from mine — and I need to accept that there is nothing inherently wrong with that. 

And so: if the point is to show Lasse the power of saving money, rather than overly encourage spending and buying, how are we going to do that?

Savings accounts, compound interest and the Bank of Mom & Dad

We could take a traditional route and open a savings account for him. But given the amount of money he now has (about 12$), the going interest rates on savings accounts (practically nothing), and his age (he’s five), opening a savings account for Lasse through a bricks-and-mortar bank or an online bank is not greatly appealing to me right now. What does appeal to me, though, is the basic premise (or, at least, what used to be the basic premise) behind a savings account: watching your money grow. If we want to teach Lasse about the power of saving money, then that money needs the opportunity to grow. It may be too early for the stock market, but it isn’t too early for compound interest. 

What if, at the end of every month, the Bank of Mom & Dad pays interest on the balance in Lasse’s piggy bank? And what if that interest rate were enough to be meaningful — say, 5% or even 10% (at least for now)? And we could chart the growth with Lasse, using graph paper and simple bar charts. Oh, I get giddy just thinking about it. 

First, I think, we’ll have to try to explain percentages to Lasse, so that he understands what is going on. But the premise of the idea strikes me as a terrific teaching tool going forwards: not only will it show our boys firsthand the power of saving money (after all, money that is spent won’t earn interest), it will also teach them about compound interest and the ways in which money can grow over time. 

What about you? What do your children use money for, and how does it grow?

Where can I get more coins? Work, gifts and allowances

Walking home from the park yesterday evening, I asked Lasse about the money in his piggy bank — he now has somewhere around 12$. As we rounded a corner, the deep smell of lilacs almost overwhelming, dogs barking all around, I reminded him of the concepts of saving and spending we've been talking about on a regular basis. What, I asked, was he thinking about doing with his money? After all, summer is here and the world feels wide open. Lasse, his hair wet from running through the splash pad, replied that he didn't want to spend any of his money soon; rather, he wanted to save it and have it grow until he had enough to buy a big Lego kit. From his words, it was clear that he had understood some of what we’ve been discussing.

But this leads to another question: if he now has 12$ and a "big Lego kit" costs anywhere from 35$ (plus tax) and up, just how is he going to get the missing funds? He had thought of this problem, too, and brought it up as we strolled along one of the lanes in our neighbourhood, where puddles dot the pavement and summer hostas and tall lilies lean over and brush your legs as you walk. Where can I get more coins, he asked?

Lasse's 12$ is the accumulation of the coins we have given to him to help him learn, as well as a few coins slipped to him by his granny. We don’t have an organised or formal way for him to gain money. How do children get money? Typically, from work, gifts or an allowance. I see all three of these options, however, with some trepidation. 

Work

Whilst work is a good option for older children to gain money (and experience, and responsibility, and a feeling for what it means to work), it does not strike us as viable for Lasse at age five. Despite his desire to work at daddy’s office, it won’t happen anytime soon (what exactly his fascination with the office is, I am not sure — I think it's the row of flags flapping in the wind outside). And we do not want to pay him to work around the house — for example, to wash the car or set the table or clean his room — since, in our view, we are all contributing members of a family and we ought to work together to keep our house and our things in good order, to clean, and to make meals. These are, to us, actions we take because we are part of a family that cares for what it has, and should not be compensated with money.

Gifts

My main concern about gift money is that it is sporadic and unpredictable, and hence has less meaning when it comes to saving, growth and goals. Money received at birthdays and the Christmas holidays does not help build a sense of regularity or regular growth. And, for us, since Lasse does not receive money as a gift (either from us or from relatives), it is moot altogether. (Grandparents do give us much appreciated contributions for his RESP education fund, but that is a separate story.)

Allowance

And so we come to the allowance. Allowances avoid most of the problems outlined above, and, as such, are currently my preferred choice. That said, there are a few issues that make me pause. The first is whether an allowance should be accountable or not. Many families tie allowances to behaviour or chores, which, again, I would like to avoid. The second is the age-old question of how much. In essence, I want Lasse to be able to save a reasonable amount in a reasonable period of time so that it is meaningful (i.e., big enough for him to be able to buy something if he so chooses), but not too big. I am, apparently, the Goldilocks of allowances: not too big and not too small. 

We are leaning towards starting an allowance for Lasse this summer, but first we need to think more about the next logical question: if he is getting money regularly, even two dollars a week, what exactly is it that we want him to do with it and to learn from it? Stay tuned!

Money Jars: Saving, Spending, Giving

The standard advice parents of young children hear regarding pocket money is the "three jar system" -- one for spending, one for saving, and one for sharing (or giving). Whether the child's money comes from an allowance, from doing chores, or from birthdays, we are encouraged to have our children divide their coins and bills between the three jars in a predefined way: some suggest an equal three-part split; others suggest 10% to sharing and the rest divided evenly between saving and spending; and yet others suggest leaving it up to the child. Pinterest, of course, gives dozens of ideas for making and decorating beautiful money jars.

But just what do money jars mean to a young child, and how well do they work?

I first tried money jars with Lasse when he turned four years old. We carefully divided a small shoebox into three sections. He loved watching me cut slots into the lid and glue in dividers, and he enthusiastically decorated the box with a metallic gold pen. He listened as I explained the three sections. And he carefully named each of his small handful of coins as he put them, one by one, into the slots. Nickel, dime, dime, quarter, nickel. So far, so good. But almost immediately afterwards, it started to unravel: he wanted to take the lid off, take out his coins, and start over -- naming the coins, turning them over in his palms, and then listening to the clink-plonk they made as the fell into the box. That clink-plonk followed me through the house for days. 

I quickly realised he was too young for money jars as they are usually thought of: there was no rational decision-making behind which coins went in which slot, no desire to leave the coins in their compartments, and he treated the entire contraption more as an activity than as a moneybox. What had gone wrong? In a nutshell, Lasse was simply too young to grasp the abstract concepts behind the box. Since then, I've thought more about money jars and what they represent to young children.

Saving. 

Lasse loves to save -- you might even call it hoarding -- piles of small things: rocks, shells, marbles, paperclips, and, yes, coins. They are his treasures and he keeps them in all sorts of containers in his bedroom. You can’t walk through his room without risking impaling your foot on one of his treasures, but he has them all memorized, so moving them creates difficulties too. Nonetheless — my challenge is to get him to understand that coins are somehow different than his other treasures: coins cannot be freely picked up outside like rocks or shells, and nor are they toys like his marbles. 

I began by introducing three ideas which he is now beginning to understand: first, that money has to be made (that is, earned or made through investments); second, that money has the power to be turned into almost anything else (through the act of saving and purchasing); and, third, that money can grow (through investments). But here's the rub, as I soon discovered: saving and/or investing money, with or without a specific goal in mind, requires a grasp of an even trickier concept — time. Talking to Lasse about time is a bit like conversing with the Chesire Cat. Today, yesterday and tomorrow are (usually) firm in his mind, and he is beginning to grasp the concepts of weeks and months and years, but it is all very loose. 

Spending. 

Whilst spending is certainly the easiest of the three "jars" to grasp, still it is ridden with tricky concepts: to understand spending requires not only some ability in coin and number recognition and arithmetic, it also requires a more subtle understanding of value. I have been working with Lasse by pointing out items in the grocery flyer and talking about how much they cost, and by looking at Lego sets with him, and again talking about cost. He counts his coins and tells me whether he could buy a specific item or not, and, if so, how many of that item he could afford. Four dollars in the palm of his hand? It's enough for a big bag of apples or several pounds of bananas, but not for even the smallest Lego kit. I also try to talk to him about value: would he get more pleasure from buying a small Lego kit now or waiting until he has more money and then buying a bigger kit? Whilst we are making some progress, it is all too abstract. Plus, I am uneasy with encouraging him to spend money (a point for another post…).

Giving. 

Here, I am stumped. Giving to a good cause, by definition, requires selecting a good cause. And Lasse’s idea of good causes is… not fully formed. Or, perhaps more fairly, different from mine — and whilst that it not necessarily a bad thing, it does give me pause to wonder if I haven’t explained the ideas behind giving money very well. I think I’ll leave this for another post, in part because I need to think more on it myself. 

It has been a year since we tried our money jars. Now that Lasse is five, a year older and with a better understanding of money, I have wondered if we ought to try again. But before we do, I need to put more thought into the questions outlined above.

What about you? Have money jars worked for your children?