Spending Smart: Teaching Children The Value Of A Dollar

By Gregory Karp
Chicago Tribune.

Among a parent’s worst fears is that their child will grow up to be spoiled, probably because it reflects on the quality of parenting, as all children are presumably born unspoiled.

The fear strikes at the heart of one of the most challenging and baffling parental topics to teach: money.

From weekly allowance to tooth-fairy booty, money is the very tool that can teach lessons to avoid spoiling children, said Ron Lieber, author of “The Opposite of Spoiled: Raising Kids Who are Grounded, Generous and Smart about Money.”

How do you answer a child’s questions, “Are we rich or poor?” or “How much money do you earn?” Should parents tie allowance to chores? How should mom or dad dole out cash for pricey video games and skinny jeans?

Even as a personal finance columnist for the New York Times, Lieber, the father of a 9-year-old girl, was plagued by the same money questions that haunt all parents.

“Rather than dodge all these money conversations, I thought, ‘what if we actually embrace them? What would happen then?'” he said. “What happens then is you have a 15-yearlong conversation with your child before you send the kid off into the world, about what you spend and what you save and what you give.”

More than a parenting issue or a financial literacy issue, teaching kids about money is, at root, a values issue, Lieber said. It’s less about coupons and bank accounts and more about teaching priorities and a proper way to live.

“I’m trying hard to convince people that this is a foundational part of parenting,” Lieber said. “It’s like teaching them to read.”
Here are ideas on teaching your own children, or grandchildren, the value of a dollar.

Allowance. Start as soon as kids understand basic adding and subtracting. Give 50 cents or $1 for each year old they are and more as they age. The idea is to provide enough to actually buy something, but not so much that they can avoid tough spending choices.

Provide see-through money containers labeled spending, saving and giving, plastic food containers work fine. Teens might use junior bank accounts or prepaid cards, such as the American Express Bluebird card, which is highly rated. Allowance Manager, FamZoo and ThreeJars are among the many online tools that can help.

If you don’t like any of those methods, make your own. Just build a consistent system, and have a lot of single dollar bills on hand.

Do not tie allowance to chores. This is among the most controversial pieces of advice, considering the vast majority of parents, well over 80 percent, surveys show, pay allowance for chores.

The thinking is that kids should certainly do chores. But they should do them for free, just as mom and dad do, because they are contributing members of a household, not because they were hired. An allowance system breaks down the first time the child decides she would rather skip cleaning her room and forgo the allowance.

Instead, allowance is a way to teach about spending money wisely. “I’d like us to think of money as a teaching tool, the same way we think of books or art supplies,” Lieber said.

It’s critical that kids make mistakes with the money and feel regret, comparison shop and make trade-off choices. Lessons are better learned with $50 at the video game store than during a $300,000 mortgage foreclosure.

“If they screw up, do not bail them out. Let them live with the consequences,” Lieber said. “We want them to fail early, often and spectacularly.”

Work ethic. Lessons about earning money, developing a work ethic and fostering an entrepreneurial spirit, are important too, but they’re different lessons. They can be taught with not only real jobs during teenage years, but work-for-hire household tasks that are beyond chores, such as washing the car, cleaning the garage or staining the back deck.

Land’s End rule. Teaching about needs versus wants is fundamental, but can get confusing when buying clothing, for example. Clothing is a necessity, but $200 sweaters are not.

Where do you draw the line?

One answer is the Land’s End rule, Lieber suggests. Land’s End is known for quality products but not wildly pricey high fashion. If a child wants a pair of expensive jeans from a high-end retailer, parents will pay whatever Land’s End charges for jeans, and the child must use their own money to fund the difference. Again, parents can choose to draw the line at prices from Target or Nordstrom. The idea is to set a standard.

“I think your kids are entitled to an explanation,” Lieber said. “They don’t have to like it.”

Fun ratio. This is a return-on-investment, or ROI, concept for “want” purchases. How much fun per dollar will a child reap from a purchase?

Results can be surprising. A $60 video game played for dozens of hours can provide a fabulous return, as can an often-used $8-per-month Netflix subscription or a 99-cent song download played over and over. Likely the best ROI? A deck of cards, Lieber says in his book.

Pricey toys quickly discarded are wildly expensive, based on their investment return.

Dewey rule. Delayed gratification is a key money concept to teach, especially in an era when immediacy is the norm _ think on-demand movies and instant Kindle downloads of books.

One tool is the Dewey rule, named after the family who suggested it to Lieber. It says that parents arrange it so their children end up in the 30th percentile of stuff. If 10 kids are getting a smartphone, yours should be the seventh to get one. The idea is to make kids wait for things, maybe even feel a little envious without feeling deprived, Lieber said.

Again, it’s a rough rule of thumb; adjust accordingly. “Thirty percent is an interesting number because it means your child is going to have to wait, and wait more than most people,” Lieber said.

Tell them how much you earn. Another controversial suggestion Lieber advocates is telling kids, eventually, your household income. But it should be done in context and only at the appropriate time, he said.

“I think it takes a decade for a child to learn enough and demonstrate enough maturity to access this very adult information,” he said. “But I think it’s important for them to have.”

It gives them a benchmark for the lifestyle, yours, that a certain level of income provides. “You tell them, ‘This is really a test of your discretion and your maturity,'” he said.

Tough question trick. When a young child asks tough questions such as, “Are we poor?” or “Are we rich?” a good response is often, “Why do you ask?”

True, it’s a stalling and diversion tactic, but it might get the to heart of why the child is asking and might not require a direct answer to the initial question, Lieber said.

“I don’t think we should lie,” he said. “There’s almost always some way of telling an age-appropriate truth.”

Ultimately, if you want to teach great lessons about money, and make sure your kids are not spoiled, model good financial habits yourself.

With children, as the saying goes, “More is caught than taught.”
Gregory Karp, the author of “Living Rich by Spending Smart,” writes for the Chicago Tribune

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