As a CFP and a parent, I’ve often been asked about my approach to teaching children about money. I don’t give my kids regular pocket money. This decision stems from my belief that a truly healthy relationship with money involves three key skills: making it, investing it, and using it wisely.
When we hand out pocket money, we’re often focusing solely on the last of these skills – teaching kids to budget and spend responsibly. While this is important, I believe we’re missing a crucial opportunity to instill a more comprehensive understanding of financial management.
My goal is to raise financially savvy children who aren’t just good at spending money, but who understand the entire cycle of wealth creation and management. By regular pocket money not being part of their life, in which kids feel the need to go and spend, I’ve observed some interesting developments in children’s financial behaviour.
For instance, my kids who wanted to spend money realized they needed to think creatively about how to earn it. We’ve seen them take on dog-walking jobs, babysitting gigs, and even setting up the quintessential lemonade stand using lemons from our garden trees! This entrepreneurial spirit is exactly what I hoped to foster.
There’s a noticeable difference in how they treat money they’ve earned versus money that’s simply given to them. When they spend their hard-earned cash, there’s a deeper appreciation for its value. This, I believe, is an important part of building their financial experiences.
I believe paying children for regular household chores can be counterproductive. It’s important to teach kids that contributing to family life and their living environment is a responsibility, not a job. Everyone in the family should pitch in with basic tasks without expecting payment. This fosters a sense of teamwork and shared responsibility, so this is not where they will earn money.
But earning money is just the first step. I wanted to demystify the often-intimidating world of investing for my children. Too many adults shy away from investing because it seems complex and risky. To combat this, I introduced the concept of the “Bank of Mum” for my younger kids, inspired by David Owen’s book “The First National Bank of Dad”.
This “bank” allows them to “invest” small amounts, with returns loosely based on stock market performance. It’s a safe, controlled environment for them to learn about investment concepts. As they grow older and pass their Bar/Bat Mitzvah, we transition to real investments. They can buy into mutual funds through my investment account, learning the terminology and processes without fear.
The final piece of the puzzle is teaching responsible spending. One of the first lessons I impart is the importance of charity. We allocate 10% of any money they receive (whether earned or gifted) to helping others. This instills the value of generosity and social responsibility from an early age.
I’ve found that kids who learn to earn money, grasp the power of investing, understand the potential of investing, witness good financial habits from their parents, and practice charitable giving tend to develop a natural sense of financial responsibility. As a result, they tend to spend on things they truly value, which might be a pizza with friends.
Now, this doesn’t mean I never give my kids money. As a parent I am happy to give them gifts, occasionally, specially during summer breaks, I might hand them some cash as a gift. The key difference is that this is viewed as a special treat, not an expected regular income.
This three part approach may not work for every family, especially if the parents are very impulsive or are overspenders. In such cases, parents might want to first address their own financial behaviors. The most important thing is to actively engage with your children about money matters in a positive way. By making financial education a regular part of family life, we can raise a generation that’s confident and competent in managing their finances, so they can live a financially smarter life. After all, isn’t that what we all want for our children?
