Friday, December 7, 2007

Frugal Friday - Teaching Kids To Be Money-Wise

Crystal is hosting a Frugal Friday/Making Your Home a "Frugal Fridays" post is about teaching children to save money, and about the concept of interest.

For the past 2 or 3 years we have been giving our 2 children a small allowance. It’s based on a flat figure plus their age – so the older child receives a bit more than the younger.

The allowance is not given as “payment” or reward for doing chores – we want them to realize that the chores are just something they do based on the fact that they are part of the family and that we all work together.

We came up with the purpose of the allowance interest plan first – to teach the benefits of saving and growing money. And in order to teach them about money, we had to first provide them with some money.

This is what we do. Each month the children receive their allowance. The money is given to them in cash. Then they have the option of depositing the cash into “The Dad Bank” (DB) aka “Fridge Money”. Any money that remains in the DB at the end of the month, we gives them an additional 5% interest on that amount. The kids can either take the interest in cash or deposit it back into the DB, thereby increasing their interest the next month.

If they receive any additional money throughout the month it is also deposited into the DB.

When we are out shopping and the kids want a treat (a toy or book or ice-cream etc) they know it comes out of their DB account – and if that money decreases, there will be less interest that month. If they want to buy presents for the rest of the family on birthdays, or Christmas – this is where there money comes from. Most of the time physical money is not exchanging hands – but is all kept track of in a spread sheet.

Each month the children are informed of their savings total in the bank, their allowance and their interest for that month.

Not only does this method teach the children about interest, but also to be responsible for some money and to have to be the one to decide whether or not it's a "wise decision" to take out some money from their DB and spend it. There have been numerous times when one or the other child has asked me whether I thought it was a "wise decision" for them to buy something and if I answered "no" they would put it back. Sometimes they will put it in the cart, think about it for awhile and then decide for themselves that it wasn't a "wise decision".

The amount of the allowance and the amount of the interest doesn't matter - you can choose whatever amounts you are comfortable with. But also remember that in order to learn about money, children need to have some that is considered their own. You can't expect a 16 year old with their first job to automatically know how to handle money - they need practice.


Sasha @ Cherished Moments said...

What a great system! I firmly believe that kids need to see cause and effect in a way that actually relates and effects them.