Have you ever been in a toy store or supermarket and heard some kid whining and throwing a tantrum in order to get their parents to buy them something? Maybe you’ve been on the receiving end of this kind of juvenile tactic yourself?
My heart always goes out to those parents because I feel so badly for them and know that raising kids can be tough. But I also know that fixing this particular problem can be so easy.
Do you want to know the single phrase that immediately fixes this situation? Then read on, it’s an easier problem to fix than you might think, in fact, it’s as easy as one, two, three!
A Plan to Teach Kids the Value of Money
If you are trying to be net worthy yourself, then you definitely should be raising responsible little monsters that will be good stewards of their own money and lead financially responsible lives as well.
If you want to teach kids the value of money, meaning the principle of spending conservatively and saving as much as you can, you need to do three things. First, you need to create a source of revenue for them. They can’t save money if they don’t have any, right? Second, you need to teach them how to allocate a portion of their revenue to savings, as well as some other areas which we’ll discuss shortly. Third, you need to create a reason for them to spend their money.
Why do you want to get your kids to spend money when you are trying to teach them to save? Because that’s how you teach them NOT to spend their savings and to save up for things they really want. Here’s the simple plan that we followed in order to raise children that, so far at least, seem to have taken our financial lessons to heart. Let’s get started.
1. Revenue for Kids
I recommend you start teaching your kids about money as early as possible. How early is too early? Well, I think it depends on the kids, but with mine, I started them when they were in pre-kindergarten and 1st grade. They are two years apart and it was just easier to start them at the same time.
How do you create revenue for little munchkins? You give them an allowance. I started them off at $1 each per week. I didn’t tie the allowance to any chores, but many people will want to do that. I think that either way works fine. In discussing it with my wife, though, we decided that no chores were necessary for us to give them the allowance. They still had chores, but they just weren’t paid for it.
We wanted the chores to be something they were simply expected to do in order to teach them the importance of “pulling their own weight”. We did not want the chores to become something that they could decide to forgo if they did not feel like they needed the money that week.
After giving them revenue, the next step is to teach them an allocation methodology.
2. How to Allocate Money
There are two parts to this next step. First is the allocation methodology and second is the physical location where they will put their money. Funnily enough, the location is key to the learning.
But first, let’s discuss the allocation plan. The allocation methodology we used was the 10/10/10/70 plan and it is really straightforward. The idea is that whenever your kids get any money, be it an allowance or birthday money from a relative, they split their loot into four parts and each part has a purpose: either save, invest, donate or spend.
The first part is 10% and it should be allocated to saving. The second part is also 10% and should be allocated to investing, the third part is another 10% which should be allocated for donating and the last part, everything that’s left, is 70% and this money should be spent on something they really want.
The order is important. I always started the kids with setting aside money for saving and investing first since that is the most important aspect in building financial security. It’s also the area where the vast majority of adult Americans fall short. Then they would set aside a portion of their money to donate and finally, they could spend the rest on things they would enjoy.
Now, you don’t have to use the 10%/10%/10%/70% breakdown if you don’t want to, but I found that it was pretty common when I was researching this for my kids years ago. The technique works regardless of what percentages you use. Perhaps your family is not big into charity, and you could use 15%/15%/70% instead for example. Feel free to modify it according to what you feel comfortable with.
So, where do the kids actually put their money? This part is really important. If they throw it all into one piggy bank or jar, they will forget what is what. The money allocated to donations will get mixed with the spending money, which will mix with the savings, etc…
Here’s what we did. We saved up a bunch of empty plastic Crystal Light canisters (we used to drink a ton of it back then!) and I sat down with the kids to help them make their own personalized save, invest, donate and spend containers.
We made it a fun arts & crafts project and they each decorated their own containers so that they would feel a sense of ownership about the whole thing. We probably took a full half-day to do this so that it would be a big deal to them and they would really put their best effort into it.
We used everything in our art drawers, stickers, markers, construction paper … the whole nine yards. At the end, they carefully labeled each container. One each as either save, invest, donate or spend and they also each decorated a small shoe box to keep their four containers together.
Want a tip? Young children can’t do percentages. Remember that at first, I gave them a $1 a week in allowance? That was intentional because I wanted to pay them in dimes. It is very important to have the right amount of change if you want the system to work. In fact, having the right change on hand is the toughest part of the whole thing!
With a $1 allowance and dimes, it was very easy for them to put one dime in their “save” container, one in “invest”, one in “donate” and the remaining seven dimes in “spend.” Cool, right? I suppose it also taught them a little math – bonus!
Regardless of the percentages, this technique teaches kids three important lessons. First, that money should not be kept in one big pot for spending. Second, that every time you get any money, you need to earmark portions of it for different purposes. Third, it teaches them that the first thing you should do is save and invest. Great lessons, right?
There’s a lot more I’d like to say about the specifics of each allocation bucket, but I’ll save that for my next post so that we can stay on task and move to step 3.
3. Spending Their Money
Now that they have revenue coming in and have started to allocate it, they need something to do with their “spend” money. This is when it gets good, this is when you get to use the single phrase that fixes the situation. Next time you are at the store and they want you to buy them something, you simply say, “Sure, you can get that, you can use your spend money if you’d like. Do you have enough?”
That will stop them dead in their tracks, you’ll see the wheels slowly grinding away in their heads as they try to figure out what just happened. Whenever I offered that solution to my kids, 99% of the time they would respond in disgust, “I’m not spending MY money to buy THAT!” I would respond, “Well, if you think it’s such a good idea to buy it, then you should be willing to spend your own money on it.” They rarely did.
If your luck is anything like ours, it will spawn some wonderful conversations about wants versus needs. You can ask them how much money they have saved up in their “spend” container. Talk about how long it will take them to save up that much “spend” money if they need to. The opportunities are limitless.
How It Worked For Us
This system has been a wonderful educational tool for us. Over time, the kids’ allowances grew. We always made sure that we made them pay for their own “extras” when we were out shopping. Surprisingly, they did very little of it and usually preferred to save it for later. To this day, they are excellent savers and both kids regularly save over 50% of any money they make or receive through allowance, jobs or gifts.
Be sure to read my future post “Teaching Kids What to Do with Their Money” for some practical guidance on following through with the 10/10/10/70 allocation.
If you have kids, have you ever tried the 10/10/10/70 system? What other techniques have you used to teach your children about saving and money management?