Years ago when going through a divorce, I read a couple of books by financial author David Bach, including Automatic Millionaire and Smart Women Finish Rich. During that period of significant life change, I felt it was a valuable moment to regroup and look ahead financially. While I found a lot of the information in David Bach’s books useful, I also found myself with a recurring question: why didn’t I learn any of this when I was younger?
There are a lot of things we are taught in school, other things we learn from our parents and yet many more we pick up on our own. In my case, learning about money and investing came by way of the latter. This isn’t to say I had bad parents, because I didn’t. My parents did a phenomenal job with so many things, including stretching a dollar about as far as is possible. The two critical components I believe I missed out on however, were developing a true understanding of the value of money and the many reasons to save, rather than spend. My parents were very generous and that generosity insulated me from gaining a real understanding of both. While I watched my parents struggle from rags to riches, throughout it all, I never wanted for anything. They found ways to take care of me and make my childhood fun filled even when struggling to pay the most basic of bills. My mother was something of a money magician, clever and capable of making it appear seemingly out of nowhere.
As a parent now, I want to be sure my daughter has a different experience. While I’m equally generous with her, I don’t insulate her as much. I let her know about the limits of a paycheck and the many choices a person needs to make when supporting herself. While she is only 10, I’ve already instilled a very important lesson:
We spend first on the things we need, then we can spend of the things we want.
I’ve reinforced to her that each time we spend, we are making active choices and reducing the availability of money for the next experience; I let her participate in the choices that directly impact her. For example, recently she wanted weekend music and swimming lessons. While I was more than happy to encourage these experiences, the money I’d spend on them each Saturday matched what I’d typically spend on the same day’s family fun. She needed to realize this and understand we’d have to cut back on other things. While of course she felt the pinch, she also seemed to appreciate the experiences a little bit more than she might have otherwise. She recognized two things: first, that these activities had a real value and second, that she had the ability to assess whether the value was greater or less than something else she wanted. In the end, she decided to re-up one of the lessons and forgo the other in favor of something else.
Recognizing her ability to make smart decisions with the money we spent together, I decided she was ready for a weekly allowance. Though, rather than requiring my daughter do chores to earn it, I gave her another simple requirement:
Just be responsible.
I let my daughter know that responsibility is something we all must actively take charge of as we grow. I defined what I felt it meant to be a responsible 10 year old. It included things such as making her bed, brushing her teeth, brushing her hair, flushing the toilet after use, picking up her clothes and toys, and clearing her dishes, etc. These weren’t chores I explained, she didn’t have to do anything for anyone else; she only had to do very typical everyday things to take care of herself. As long as she was prepared to take that responsibility seriously, she should also have the opportunity to make her own choices with some money. So, she earns a small amount each week for this and I only rarely have to remind her of these things. It has been a joy to see the great sense of pride and independence she feels every time I hand over her allowance.
Taking this even a step further, right after initiating the allowance I introduced my daughter to the concept of saving by opening a bank account for her, with an initial $20 deposit. I got her an old-fashioned, traditional passbook account, which lets her quickly see the balance grow with each subsequent deposit. She loved it. But, she did some quick math in her head and didn’t see the point of sticking her money in the bank, rather than in her wallet. Good point, I realized! After all, it isn’t as if there are enticing interest rates or significant incentives for a child to save for a rainy day. So, I developed an incentive. I created what I call the mommy match, which is akin to an employer’s 401k match.
I told my daughter I would match whatever she put in her bank account, dollar for dollar, for the first year she has the account. The only requirement I gave her was that she needs to leave the money in there. I explained this would be her long-term savings account and that such savings are for more significant events. I told her that adults save for emergencies, retirement or to buy a home and I reminded her that I went through a period of unemployment but was able to continue supporting us because I had my own long-term savings account. I let her know that as a child she doesn’t have to worry about these things but, one day she might want to buy something very expensive, or to take a special trip. A light bulb went off and this made sense to her. She was up for it and every week she makes an active choice whether she will deposit her allowance for long term, or keep it in her wallet. Sometimes she surprises me and hands me several weeks’ worth of allowances for her long-term savings. Or, she makes a rule for herself that anytime she gets a $20 bill it will automatically go into her bank account.
Whether all of this will have a lasting impact on my daughters understanding of and value of money remains to be seen. As they say, time will tell. For now however, I like to think I’ve given her the initial building blocks to a strong financial foundation.