As the Child is approaching the ripe old age of 12, it is time to teach her to the skills she will need to be able to manage her money as an adult. As every teacher will tell you, to design a good lesson, you need to start with learning objectives. So what should a tween or a young teen know? Most tweens are ready to be introduced to all the complexities of money that they will need as adults. The amount of money they will earn, manage, and spend is, of course, smaller than those an adult would manage. You will also need to “speed things up” so they can see their money grow in a time frame they can follow. Earning 10% interest per year might be a reasonable return on investment for an adult, but a 12-year-old would have difficulty noticing such growth. Here are some basic money management skills you might want to teach and ideas on how to do it.
To make money, you have to do something. Set up a list of “jobs” that your child can do to earn money. We are allowing the Child to make money for doing each of her school subjects as well as doing chores and getting physical activity. She can earn about $1.50 a day for her “work” (we are probably breaking some minimum wage laws here). Each task she has to do is worth 25 cents. She gets a completion bonus of 50 cents if she finishes all her tasks for the day.
Consider overtime pay to give your tween or teen a chance to earn extra money. We pay double rate for additional chores. Also, consider performance bonuses for jobs well done. We pay significant bonuses for exceptional school performance. The Child made $10 this morning by getting an A on her Spanish test.
Some parenting books will tell you that kids should not earn money for chores but should have a set allowance because they should learn to aim for internal motivation. The child shouldn’t strive to get an A on the test to earn a performance bonus but to get the satisfaction of a job well done. While I understand this argument, I don’t think I can expect more from my child than I expect from grown-ups, and we all appreciate getting paid for our work, so I am OK with the Child being motivated by a performance bonus.
Once you have some money, you can get your money to work for you. There are two ways to think about discretionary income: extra money to spend or a tool to help you on your financial independence journey. Here is an example from the adult world. Two families get a $5,000 end-of-year bonus. Family A decides to upgrade their TV and their cell phones. A year later, they are craving an even bigger TV and even newer cell phones. Family B puts their $5,000 in investments. A year later, they have $6,000. We all know how this goes after 20 years. The family with the new TV will have no financial cushion and will fear retirement. The family who invested every year will be sitting on a couple of million dollars and will be in a position to choose if they want to work or take a trip around the world.
Consider paying interest to your child on the money they haven’t yet spent. For a tween, you might consider paying interest every day. As your tween grows up, you can move to weekly or monthly payments. Our 11-year-old will earn 5% each evening on any money she has left at the end of the day. If your child is a natural saver, use lower interest or longer intervals. The power of compound interest is amazing, so be careful not to overcommit.
You can’t buy everything. An essential adult money skill is the ability to prioritize and save for bigger purchases. To give your tween or teen practice, you need to stop buying everything for them. Of course, you shouldn’t stop buying anything they need, but you should cut back on funding their wants. We have stopped buying snacks and online subscriptions. The Child is generating a very long list of things she wants, and I am sure the list will keep growing as she discovers the power of money. Her many wants create the need for her to prioritize. She will also learn (we hope) that if she wants a $10 membership, she can’t spend all of her daily earnings on candy.
Debt is bad. I know some people will disagree, but in my opinion, all debt is bad. Really, really bad. And consumer debt to buy optional items is truly evil. Unfortunately, for most kids, the only way to teach this lesson is to let them get into debt and experience the pain for themselves. And for the pain to be real, you need to charge interest and have consequences if the debt is not paid on time.
One option is to secure the debt. The kid needs to give you something of value, which becomes yours if they don’t pay you back. I know I am not strong enough to stick to this rule, though, so instead, we are doing unsecured debt like on a credit card. The Child is allowed to borrow money at 10% interest per day. Her credit limit is $10. If she exceeds the limit, she will not be able to use screens or spend anything until her balance is under $5. An older child should have the ability to get into more significant debt which will take longer to get out of.
Those are the four main lessons about money that I think every adult should have mastered. What are you teaching your kids about money? How are you teaching it?