Allowing your kids to make mistakes with money

One of the hardest things for me as a parent is to watch my kid make mistakes and suffer the consequences. Now, I do my best to stop her from making any really big mistakes with big consequences — I make sure her seat belt is on, I don’t let her talk to strangers online, and I make her wear a helmet when she is riding a bike. However, when it comes to money, I am committed to letting her make mistakes, suffer the consequences, and hopefully learn. The consequences of money mistakes for a tween feel tragic, but they are still fed and have a roof over their heads. The same mistakes at 21 or 41 can get you in a lot bigger trouble.

For the last two weeks or so, the Child has been earning her own money to buy extras with. That includes snacks (we are no longer buying junk food, but of course, she is welcome to snack on apples for free), and in-app purchases. She gets 5% interest on any money she has left at the end of the day. She can earn $2 per day by doing her schoolwork and chores, but she can get overtime for doing extra chores.

With a 5% daily interest rate, the winning strategy is to accumulate some money, say $100, and then “retire,” making $5 per day just in interest. And because of the magic of compound interest, getting to $100 would take her just 25 days of not spending. In just 66 days of not spending, she can accumulate $1000, generating $50 per day and be completely financially independent! (OK, if she really got close to that, I would reduce her interest rate.)

Despite these amazing possibilities, for now, the Child is behaving like a typical consumer. She is doing a good job, “going to work” every day and earning her $2. So far, she has not elected to work overtime. Almost every day, some shiny in-app purchase tempts her, though, so her account fluctuates around $5. At the end of the month, some of her memberships will expire. I am not sure she will have the money to renew them. She also loudly complains about the lack of junk food in the house. Still, because we only shop about once a week, she has trouble accumulating enough money to buy enough junk food to last her the week (not that I am sad about this. I don’t really want her to buy junk food).

Of course, her behavior is very typical for many young (and not so young) adults. I know plenty of 20-year-olds who spend their weekly paycheck on the newest electronic or at the bar, and at the end of the month, they don’t have enough money to pay rent. Or 30 years-olds who have shiny cars but find it impossible to save for a downpayment on a house. Or 60-years-olds who have pulled out the equity in their home so often that they are still looking at another 25 years of mortgage payments and have no retirement savings to speak of.

At each stage, it becomes harder for a parent to watch their child suffer, and we all know of middle-aged adults whose parents still “help” them financially. I don’t want that for the Child. So, I will listen to her complain about the lack of junk food in the house, and I will let her memberships in her favorite apps expire and hope she learns this lesson early so in 10 years, I don’t have to worry about her becoming homeless because she couldn’t pay her rent.

If you have kids out of the house, now is a good time to stop “helping” them financially. That doesn’t make you a bad parent. They will feel better about themselves if they can figure out how to manage their own finances. If you don’t feel you can stop “helping” abruptly, you should plan with them on how you will gradually decrease how much money you give them and stick with the plan. Being a parent is hard work, but ultimately the goal is that your adult child truly becomes independent from you, and financial independence is a key step in that journey.

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