Most parents agree that they give their kids pocket-money to prepare them for later life. Everyone will need to learn how to handle money once they start work. However from what I’ve experienced myself and read about on other blogs the methods used rarely go further than teaching kids the basic rule that work equals money. e.g. If they complete their chores they get some cash.
The problem with that is that it is too simplistic. Finance in the real world has a lot more to it and its a truly massive topic. If your kids start work in their teenage years and that’s all they know about money they are going to be fighting an uphill battle to increase how much they earn and save/invest much of it for the future.
To combat this I’ve come up with two techniques most parents can add to their current pocket-money regime to help teach their kids more money concepts.
Savings and Investments:
Children don’t have access to savings accounts or business opportunities like adults do. If all they can do with their pocket-money is spend it on sweets then that’s what will happen. A way to demonstrate investing to them would be to set up a ‘bank of mum and dad’. If they want to they are allowed to deposit their pocket money with the bank and are not allowed to withdraw it for a week. In return they gain 10% interest. 3650% interest a year may seem like crazy talk to us adults, but kids have shorter attention spans and this will be enough to keep them interested and also not create too much financial burden on the bank.
This will work especially well if you have two or more kids. A kid who doesn’t save his pocket-money will soon start seeing the benefits of investment income if their sibling is saving theirs and after a period of time starts getting double the weekly income.
This method also helps train the life skill of delayed gratification, being able to postpone a luxury now in order to get something bigger later. People who don’t have this skill tend to be the ones struggling with living pay cheque to pay cheque and not having any money put away for a rainy day.
Loans / Credit
A lot of people end up with debt at some stage in their life. It’s not always a bad thing but its worth teaching youngsters that using debt for frivolous spending is never good. Instead of treating it like a loan with interest that has to be paid back it will be better to offer them the chance of getting an extra weeks pocket-money when they want, but the catch is that they wont receive another payment for two weeks.
It might sound like a harsh tactic but it serves two purposes. Firstly its going to teach the kid that getting into debt usually means you stay in debt for a long time (two weeks can seem like eternity when you’re young.)
Secondly it avoids the need for a child to get into a negative bank balance if they make some bad decisions. It might be too tempting for a child to give up trying to learn lessons if their balance at the bank goes negative and they feel they will never have money again.
Obviously each kid is different and some might not have any inclination to learn about finance regardless of how it’s presented to them. However I’m sure most children are smart enough that if they were presented with the above choices they would soon learn the benefits of saving money and avoiding debt.