I talked in Letters to my daughter: Build your “f*ck off” fund article about the importance of financial education from an early age.
In this article, I will present our strategy to teach our four and a half-year-old daughter how to manage her money responsibly. Most of this strategy is based on The First National Bank of Dad: The Best Way to Teach Kids About Money book written by David Owen. He introduced this strategy to his children, aged six and ten at the time.
Once a child can recognize numbers and make basic calculations, they are ready for their financial education.
What we implemented so far
We started by giving our daughter two euro every time we went together on a shopping trip. Because of pandemic rules, we paid by card for her items too, and she gave us what was due back home. So far, this step helped her with mathematics, as she learnt how to read the price of an item, mostly bigger numbers, how to compare numbers, add or subtract using her fingers.
There will be tantrums, of course, but consistency is vital. Our daughter understands how to handle her frustrations as we are consistent in applying these rules.
If something is more expensive than what she has, she knows she will get it once she has more money. Shopping trips are much quieter now that she knows how much money she has and how much a thing costs.
Recently, we increased her allowance to five euro per week, given each Friday, no questions asked. We had to explain that she cannot cut, glue, draw on banknotes as they will lose their value.
Should chores or school grades be paid?
No, children should not be paid for regular chores or school grades. Doing the chores around the house is not a job rewarded with money. This is another family obligation, and every non-incapacitated member should do their part. Our daughter tidies her bedroom, picks up after herself, cleans her eating area, folds her clothes, because she never had any other alternatives.
However, we would pay our daughter for household jobs that are either seasonal or fall outside the category of ordinary jobs (e.g., helping with family’s projects, cleaning the car, mowing the grass, etc.).
Then, there is the possibility that David Owen described in his book:
Linking a chore to an allowance turns the chore into a job, which creates the possibility that the worker might decide someday to retire. ‘I decided to stop cleaning up after myself, so why don’t you keep the next 4-5 allowances for yourself?’
David Owen – The First National Bank of Dad
Paying for school grades has the same issues, an extrinsic reward that can stop at any time.
The last thing in the world you should do is to create the possibility that your child might decide one morning that she is going to stop listening carefully to English this semester because she no longer needs the cash.
David Owen – The First National Bank of Dad
So, then…
How do kids get money?
- Child’s allowance, either the one provided by the national state or by the family. For example, in Ireland, the monthly child allowance is 140 euro.
- Money gifts from family and friends. As we did not see our family in a long time, granny started to give tiny amounts of money to our daughter. Win-win for both parties, our daughter gets to choose if she wants to save or spend on something she wants, and granny is happy to make a small gift.
- Older children can choose to donate or resell their stuff online or offline, supervised by an adult.
- Like I mentioned in the previous section, seasonal or non-regular household chores.
What about mandatory saving or charity donations?
Some financial strategies for children recommend 50% spending, 30% saving, 20% donations.
On a closer look, when we require mandatory saving or mandatory donations from our children, who makes the saving or donations? The parents or the child?
Yes, instil charity or teaching children how to save money is commendable, but mandatory savings or donations are meaningless.
As our daughter grows, I ask her periodically what she wants to donate from her clothes, books, or toys (“Keep it or give it?”). If something is too small for her and she is not ready to donate it, we put that item in her memory treasure chest.
One of the best way to teach children is by example. If we, the parents, or the caregivers, regularly donate money, items, or time, children will imitate us.
How big should the allowance be?
If the allowance is too low so that parents prevent children from overspending, we give no reason to our children to think long-term. What is the point of saving money if the income is insignificant?
They will spend it immediately, making their parents think: “See, I knew I shouldn’t give them too much money at once.”
In our case, five euro per week (taken from our daughter’s child benefit) seems to be working fine. As we talk about small children, it is better to give our daughter money weekly instead of monthly as for her a month can take ages to pass. Once she is older and knows the addition and subtraction of hundreds, we will provide her child benefit in full.
Spending rules
If we are lucky enough to have a first salary that covers our immediate needs, most of us will feel the urge to (over)spend on clothes, games, accessories, experiences.
I do not remember what I bought with my salary in my first years of employment. I remember that I finally had my own money to spend on whatever I wanted, no questions asked.
To become responsible savers, we might need to first spend irresponsibly, with no credit cards involved, of course. We need these opportunities to make mindful and mindless decisions. We might need to make these decisions quite often, so we understand the difference between smart shopping and foolish spending.
Even a child as young as four or five can learn about spending now or savings. And all at the expenses of a few euro from their allowance, not hundreds or thousands of euro from their future salary as it happened in my case.
Our daughter needs to learn to control her money, and if that involves buying stuff that will fall apart in two days… Well, then, it is her money, not mine, so she will be more careful and remember what happened last time. A child can learn and recognize the perceived value of an item with a gentle nudge from us: are you getting back your money’s worth?
If our daughter wants to buy a piece of decor for her room, she does not have to convince me (“How can I talk mum into paying for this?”). She has to convince herself (“Do I really want it?”).
We will buy her things, no matter the size of her money account: clothes, shoes, books, board games or family games (LEGO, puzzles, card games, etc.) or other things she needs for school.
Our spending rule about buying sweets or other treats is just one. I need to check the ingredients, and if they are not that nice, we can’t buy them. I usually find a recipe online, and we will make it together. Of course, there are exceptions, like a lollipop now and then.
Your spending rules might vary, you do you!
What about secretly saving for the child?
When I was pregnant, I thought about depositing our daughter’s allowance in a saving account and giving her access to this account on her 18th or 20th birthday. The more I thought about it, the more I felt like this idea and the strategy that allows a child to spend her money as she wishes are not necessarily exclusive.
Let her spend her allowance and have a financial education, and for her 20th birthday, we will give her a money gift from our savings.
The National Bank of Parents saving strategy
Dissatisfied with the banks’ interests in children saving accounts, David Owen describes in his book how he opened his bank with only two deponents, his children. He called it “The National Bank of Dad”. He paid his children an allowance, and using Quicken, a personal finance tool, he kept track of his children’s deposits.
He started with a 5% per month (yes, five per cent per month) interest rate for his children’s savings. The annual rate of running such savings accounts is more than 70 per cent.
I needed to offer them a rate of return that would seem exciting to them and would make them decide voluntarily that saving was a good idea. It would definitely have to be higher than any bank’s regular rate.
A rate that would have to be high enough to provide a child with indisputable evidence of real growth in just one month, the maximum realistic long-term horizon for a six-year-old, so I opened a bank of my own, an interest rate of 5 per cent per month.
David Owen – The First National Bank of Dad
Children would earn interest on the whole amount of money, and they could deposit or withdraw cash at any time. They soon learned that the more you save, and the longer you hold it, the more you can spend if so you wish.
This bank operated on the honour system. Children would ask for money, and parents would give them if the balance were sufficient to cover the withdrawal, note the amount and update the transactions in Quicken. Some balance adjustments were necessary, considering the age of the deponents and the purpose of the bank, but all in all, it was all done fairly.
After a successful run of two years, Owen dropped the rate to 3%, when each of his children had about 400 dollars. He still recommends 5% as a reasonable teaser rate for the first year or two, as money has to grow fast enough for children to notice the compounding effect of saving and interest.
After a few years, Owen’s kids decided to have their saving accounts at an official bank. They opened debit cards, not credit cards, and the children agreed that parents hold the right to inspect their bank statement.
The benefits Owen remarked on his children’s behaviour were tremendous.
First, whenever his children went to the mall with their friends, they were the ones who spent the least, as they knew that money would come from their pocket. He described tantrum scenes of other children that would emotionally blackmail their parents into buying what those children wanted.
Second, after a few years, his children started to show entrepreneurial inclinations by noticing the hype around some toys, selling dozens of them on eBay and then deposit the profits on their saving accounts.
Lastly, and the essential part, as his children adventured into teenage and adulthood years, they kept their spending and saving habits they acquired as children.
In our case, clearly, we are not yet at the stage of opening “The National Bank of Parents”. When we reach that stage, we will keep most of the plan previously detailed. What we will change is that we will use Google Spreadsheets for keeping track of the saving account.
I already use the annual budget planner Google Spreadsheet, which has formulas for income, interest income, dividends, gifts, refunds, etc. We can share the spreadsheet between the three of us. Also, Google Spreadsheets keep tracks of who added or modified what. No chance of sneakily adjusting the balance of the saving account!
Once our daughteris ready to leave the National Bank of Parents behind, we will see what other financial instruments are available: Revolut, index funds, P2P, etc.
Is this system too much of a hassle or tedious? Like we accommodate the needs of young children, with smaller chairs, smaller cutlery, bicycles with training wheels, we can also adapt their spending and saving habits. In fairness, we can’t expect children to start like virtuous savers.
We want to teach our daughter how to see money in a detached, confident manner. To teach her how to increase her frustration threshold by delayed gratification. To know that her money belongs to her. To learn that freedom might mean not working for money, but money working for you.
Above all, to know that unfortunately, especially for a woman, money provides freedom to handle sexual harassment at work or abusive relationships, freedom to manage economic recessions, freedom to buy a house, freedom to quit a job when feeling burnt out, freedom to grow roots to stay and wings to fly.