Kids and Money

I thought I’d take a break from Photography for a few minutes to talk about money. Specifically, about kids and money.

A study done (sorry, I can’t find the reference) in the USA showed that wealthy families are far more likely than middle-class or low-income families to teach their children about managing money. If you want your kids to be financially stable, or even outright successful, then we as parents need to teach them from a young age.

How? Start by giving them an allowance; $1 per year of age per week is a good starting point and it needs to be divided into categories such as “spending”, “savings”, “investment”, and “charity”. For proportions, 10% for the latter two is a good number and then divide the remainder equally between the first two. Round it nicely. (e.g. $8 => $3, $3, $1, $1) spending=”anything”; savings=”important things”; investment=”for retirement”; charity=”given to those less fortunate”

When? A child should start learning about money as soon as they are able to understand than a dime, though smaller, is worth more than a nickel. Physical spending money should come as soon as they can make change. My personal experience says that 7 years old seems the right time. 6 was a bit young.

Why? Because it’s our responsibility as a parents to teach our kids and that’s what we’re doing here. I don’t personally believe in paying an allowance in exchange for chores around the house — in our family, doing chores is how you contribute back to the family; the kids don’t get paid for their chores any more than I get payed for cooking or doing dishes. I give an allowance for the same reasons I give them food a shelter: It’s a necessity of life and I want them to learn about it when the mistakes will be small and harmless.

Once the child has money of their own, they need to be taught how to spend it wisely. They can divert “spending” into any of the other three categories or “savings” into “investment” but there’s no going the other way. If they want something for themselves, let them buy it, even if you think it’s wrong. Explain what something costs in terms of what else they could have instead (the “opportunity cost”) but in the end, abide by their decisions. It’s their money and they need to be allowed to make mistakes.

Encourage them to buy their own gifts for others on Christmas or birthdays rather than ride on the gifts from parents. I contribute 1/2 the cost when they’re buying for others. (…though gifts made by hand are still better, in my opinion.)

Make them pay if they break or lose something that then has to be replaced, like a windbreaker or winter gloves. I pay 1/2 of that, too, simply because it’s not practical for a $8 allowance, of which only $3 is available for reimbursement, to pay the full replacement cost.

If they’re short, be willing to loan them some money but set a strict repayment schedule and charge interest. 0.5%/month (6%/year) is an easy amount. That’s how the real world works so they might as well get used to it.

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I believe it’s a good thing to teach kids about investing from a young age. While I don’t expect a young child to grasp all the nuances of return-on-investment, present-value calculations, and price-earnings ratios, I do think they can start to pick up the basics ideas of investing and that the value of things bought can go up over the long term.

Investing for the future can be difficult which is why it’s so important for it to become a habit from the very beginning. If you take 10% of your gross income and invest it wisely (an S&P500 “index fund” outperforms most mutual funds largely because it has no “overhead” costs) then you should be able to retire and continue the same lifestyle you had at retirement. The earlier you start this, the earlier you can retire.

My parents told me this 10% rule but it was always in the context of when I got a real job after finishing university. Better would be from the first time I had any income at all — i.e. an allowance.

Also essential is that this 10% be moved from paycheck to investment account automatically. If you never see it, you’ll never miss it. If you look to invest from what is left over at the end of the month, then you’ll never have anything to invest. In doling out my son’s allowance, I divide it for him and tell him how much is going into each piggy bank (he has three of them) but the portion for investment I just mention and say I’ll hold it for him.

In the spirit of investing in what you know, I told my 7-year old son to talk to all his friends at school and find out what they were asking for as gifts at Christmas. There were a number of different items but Beyblades seemed a favorite so we found out the company that sells them (Hasbro) and bought one share in that company for $34.24. It’s in my name, of course, and I payed the brokerage fee but I’ve set it up a portfolio under Google Finance in his name so he can watch it. The first time we checked he’d lost 6 cents but now it’s up quite considerably. Losing a little at the front gave me reason to reinforce that investments are made for years, not months or days.

Incidentally, I don’t expect my kids to remember what I tell them. I expect to have to tell them many times in many different ways over many years before they fully understand. Typically though, I’m surprised at how much they pick up and right away. I’m also surprised by how much I learn while teaching.

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My son, being 7 years old, gets $7/week (or $1/day) as an allowance. There are parts of the world where the majority of the people live on less than this amount.

How much should you put aside for charity? I set the bar at 10% with my kids. I read in Rockerfeller’s contract that he set the bar at 20% for his son. You can look at it as “investing” if you wish; you’re just investing in someone else’s future instead of your own. Or you could be like Warren Buffett who is notoriously thrifty despite being one of the richest men in the world but plans to leave the vast majority of his fortune to charity when he dies. He feels that the charities would rather have a lot more money tomorrow than some money today and, given his investing record, he’s probably correct.

Anyway… Today we dumped out my son’s “charity” piggy bank (which receives $1/week), counted it up, did various currency exchanges, and worked out that he had equivalent of about USD$55. We took $50 of it and transferred it to Kiva(.org) where he would be able to lend it out to people for causes he deemed worthwhile.

I chose Kiva for several reasons:

  1.  It’s interactive: You get to choose exactly where your donations go. Also, small donations like $25 or $50 have a measurable impact.
  2.  It’s personal: You get to see photos of and read profiles about the people requesting money. I can point directly at people and say, “That person makes less than you do and has to buy food, clothing, housing, and everything else with it.”
  3.  It’s a loan: This means he’ll get the money repaid and can lend it out again. This allows him to act more frequently and doubles as an education about lending money.

So my son is now a philanthropist and we’ll periodically check in to watch the loans get repaid and get status reports on how each recipient is doing. He’s really got a pretty opulent life and maybe one day he’ll even realize that.

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I’ve never been poor. The reason for this is not due to an abundance of money but rather always having the safety net of my parents. I always knew that if I hit rock-bottom, I could pick up a phone, call collect if necessary, say “I need help”, and help would be there.

I have, however, spent some months of my life with absolutely zero money. Those investments I had made? I cashed them in to fund a business I wanted to start with some friends. After a year or so, we hadn’t finished our product but were scraping by with some consulting work. It payed the office rent but not any salaries.

Not only did I have no money in the bank, I had recently called Visa to ask for an increase in my limit… so I could take a cash advance to pay my rent. It was December in Canada and I was driving to work on tires so bald you could see the steel belts in places. My budget for Christmas was a whopping $25 of which $14 went to a box of cards. My most common gift was a bookmark and a note saying, “Sorry I can’t buy you a book.”

A couple memories stick out. I remember an ad on the radio for some fancy necklace that was only “one ninety-nine”; I figured if it were $1.99 then I might be able to afford it. I also remember getting a $50 parking ticket while I was buying those bookmarks. I wasn’t going to be able to pay it for months.

But despite all this, I kept on with the plan because we were in the process of having the company bought to add our in-the-works product to the line-up of another company and we had to hold on just a few more months and there would be a reasonable pay-out. Not enough to make anyone rich, or probably even make up for the year’s salary we had done without, but enough to make us as individuals solvent again. Plus we’d get back to working on what we wanted.

This time of my life was an invaluable lesson. Money is a source of huge concern but also of huge pride to those who do not have it. Though I borrowed money that I would eventually pay back with interest, I wouldn’t accept a dime in the form of a gift (though I did, reluctantly, accept new tires from my parents as a Christmas present).

Really, having nothing is an experience everyone should have. It teaches you things that you can learn no other way. It makes you appreciate when you do have things. One of the problems I see with teaching my kids how to save & invest from a young age is that they may never gain this experience and I don’t know what could possibly serve as a substitute.

But even with this experience, I can only guess what it’s like to be poor.

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