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Teaching kids about money

Most everything I learned about money I learned by making mistakes:

I'd say that my parents did a typical job teaching me about money - I had an allowance, and chores, and could do odd jobs to make money. I even had part-time jobs in high school. But other than that first mistake, I didn't make those others until college, when it was very painful.

So I set out to do better with my kids.

Years ago I devised a system that I've been very happy with, so I'm sharing it here. Here's the short version:

  1. Give the kids an interest rate, on any saved money, of approximately 2% weekly.
  2. Don't pay them to do chores.
  3. Pay for their necessities, but nothing optional/elective.
  4. Let them spend their money however they want.
  5. Stick to these rules!

Then just let the consequences of these rules play out! I.e. let them experiment, and make mistakes, and learn from those mistakes - when they're still young and the mistakes are "cheap"!

My biggest goal was for the kids to learn the value of having a big pile of money, and what it takes to really get to such a pile of money. I can't say that this system has succeeded at teaching exactly that lesson... but it has taught a bunch of great lessons! (And they're certainly aware of that lesson, too.)

The system, in detail

Chores

When I describe this system to people, the usual first question is about chores, so I'll address that first. We don't pay for chores, and the kids don't have an allowance. Chores are just required work that everybody has to do (including us parents!) to keep our household running smoothly.

Thankfully, our modern life has gifted us a lever to motivate our kids to do their chores: restricting screen time! So chores are just "required" and the incentive is screen time.

(While we're on the subject: our goal with chores is to teach our kids to be self-sufficient by the time they're 18. So each year, we re-shuffle the chores between our kids, and each year they get more chores than they had the prior year. At this point (15yo and 13yo), they do most of the household chores!)

Earning money

So then how do they earn money? Same as anybody: they do jobs! Or maybe they get money as gifts, for birthdays or holidays.

I offer a standard rate of $15/hour for any labor they provide, whether that's a non-chore job like raking leaves, or helping me with a project, or doing one of my chores for me.

Sometimes if I really don't want to do a job myself, and they don't want to do it for the usual rate, I'll pay more! (What a great lesson, right?)

They are also free to get money from other people, e.g. family, neighbors, selling stuff, etc., at whatever rate they can get for it.

One thing that makes some people uncomfortable: I pay them for most "expected" work. For example, we went to my mom's house to do projects for her, and I paid my kids for their time. Usually in a family you'd just say "that's expected" and there'd be no monetary reward, so this is a little weird. FWIW I did tell my kids that they had no choice but to do the work; it was just going to be "paid" or "unpaid", their choice. They chose the not-stupid option 😜

And now that they're old enough to do some more-sophisticated jobs on their own, I've started offering extra pay if they really do work totally unsupervised (including learning how to do the work!) and offer a guarantee on the results. My older kid patched a chip in the sidewalk, the other day, under these incentives!

The interest rate

There are four key ideas around the interest rate:

  1. It compounds weekly
  2. It's high
  3. It gets lower as they get older (and goes to zero at age 18)
  4. There's a (high!) cap on how much interest they can earn, each week

These ideas were derived from a few goals:

  1. Make it so the kids would quickly "feel" the effect of saving money, especially when they were younger.
  2. Make it possible for them to see major consequences of saving money over time.
  3. Make it clear that this gets harder/worse over time, so saving earlier is always better.
  4. Avoid (my) bankruptcy!

The interest rate is defined by this rule: they earn a quarter ($0.25), each week, for every $AGE dollars they have in the bank at the end of the week.

So every year, on their birthday, their interest rate goes down! (That, combined with getting new chores each year... they've learned to appreciate how nice it is to be young!)

So an 8 year old with $32 in the bank earns $1 interest that week. (A 3.125% weekly interest rate.) But a 16 year old with that same $32 only earns $0.50. (A 1.563% weekly interest rate.)

Then because of the power of weekly compounding, the effective annual rates are extraordinarily high. For the 8 year old, it's about 400%! (That $32 would be about $158 at the end of the year!) For the 16 year old, it's about 125%!

So there's a very strong incentive to save the money!

But over even longer terms, the growth is insane. And that's why rule 4 is in place - if they actually took full advantage of these interest rates, it would literally bankrupt us.

For example, an 8 year old, saving $10 a week and taking nothing out, would have $237,162.43 in the bank on their 13th birthday (having only contributed $2,600!), and would be earning weekly interest of $4,560!

I don't know about you, but I can't afford to pay that interest rate! Thankfully (or not?) this has just been a theoretical problem, so far. Neither of my kids has never quite been motivated to try to push the system to its limits... stupidly, in my opinion 😜.

What we pay for

We pay for all the usual stuff - clothes, food, housing, school, extracurriculars, etc. We pay for gifts for Christmas and birthdays (i.e. the gifts they give to other people), but we've been slowly cutting that off as they get older. We don't pay for anything else - Pokemon cards, books, video games, pet fish, cell phones (and service), spending money for fairs, dinners out with friends, etc.

So then they have to make choices about whether they want to spend the money for those things. And sometimes we have to hold our tongues when they make choices to spend money on things that seem totally frivolous! But either way, the goal is the same - the things they want have a real cost, i.e. they have to earn the money and decide whether to spend it... but the easy way to earn the money is to just have a big pile of money, earning interest.

So what have they learned?

This system has worked really well! But it hasn't worked out exactly like I imagined it would.

Experimenting?

When we first started this, and they were much younger, they didn't really grasp how it all worked - as expected. But they caught on quickly, and went through a few rounds of accumulating money, and spending it down, and doing jobs, and accumulating money again, and so on.

And gift money kept them afloat for a few years; their need to spend money was so small, that just the interest from the occasional birthday cash was enough to satisfy their needs.

But over time, as they wanted to have more money to spend, they saw the value in accumulating more in the bank account, and not just spending the account on frivolous stuff.

(Win!)

Get rich?

Neither kid has bothered to do the work to get outrageously rich (within our limits), i.e. by just earning $10 a week more than they spend. I have been totally surprised by this - I really expected them to eventually figure out how powerful the interest rate was, and exploit it. But they just haven't done so. They've always basically done just enough to satisfy their current desires, and then stop.

So maybe there will be one final lesson, someday, when they look back and realize the missed opportunity! Or maybe this is actually just a totally healthy way to live?

Save money?

The two kids have used the system very differently.

The 15yo has enough money in the bank that he just lives off the interest. He doesn't buy big things, he doesn't have a cell phone, and he's very conservative about what he does spend money on. But he spends all his interest each week on books and video games. So his (high!) balance just stays high, funding his weekly desires. But it doesn't really grow.

In essence, he's done the healthy thing! He worked until he had a big pile of money that covers his needs, and now he lives modestly within his income, having to do no real work, while preserving the principal balance!

Perfect!

Except I wish he could see that he's going to need so much more money in the future, and plan ahead for that. But still, overall, I can't complain.

On the other hand, the 13yo hasn't internalized that lesson yet. He still spends his money down to zero, sometimes. But he's also very happy with how he spends it - he chooses carefully what to spend it on, and he generally does get joy out of what he buys. And when he needs more money, he just does odd jobs until he has what he needs.

Here again, that's not what I wish he was doing... but it works really well for him, and he's happy with it. So I'm happy with it.

Spend wisely?

And both kids have really learned to make serious choices about what to spend their money on, and mostly they don't spend it frivolously.

Neither kid has a cell phone, because I've insisted that we not pay for it for them, and neither has felt that it would be worth it to spend the money on one.

But both do spend their money, on things that bring them joy - and often things that I would have told them "no" about, if we paid for things like most parents do.

All of these outcomes feel "right", to me.

(Win!)

Negotiate rates?

They've also learned to negotiate pay rates, really well. With me, with each other, and with other people.

For example, they both hate doing the dishwasher... so the going rate for hiring the other person to do that chore is $20 - for a 20-minute job! And yet sometimes it's worth it to one of them to pay the other to do it! They've found the balance point where the price is good for both parties, and it isn't just based on a standard hourly wage for labor.

(Win!)

And they both will turn down a job they don't want to do, because they understand that they don't have to work (if they have money in the bank!) to get what they want.

(Win!)

Financial engineering?

There was also one very interesting episode of financial engineering. My 13yo realized that it was a good idea to buy something on a "pay it off over 12 months" plan - because the interest rate charged by that plan (24%!) was still way lower than the interest rate he could earn from saving his money!

But it turns out that the website wouldn't let him do that, presumably because he's not an adult. So I provided the loan to him, on the same terms, on the condition that if he failed to make a payment, the entire remaining balance would immediately become due, and continued failure to pay would accumulate the interest at his special rate!

And this happened! He let his bank account get too low, and he couldn't cover one of the monthly payments, about half way through the year. He's still working to pay off the debt, and it's costing him quite a bit in interest! It's been quite the lesson, in many ways!

(Win!)

There's one other case of financial engineering that's been "threatened" but never carried out. My father-in-law ("Papa") brought up an idea a few times:

  1. He'll give the boys enough money to hit the cap on their interest rate.
  2. He'll split the excess interest that they thereby earn with them.

It would be a win for both parties - Papa would get a much better interest rate than he could get from a bank, and the kids would make money.

I think the only thing stopping them is that Papa would feel like he was taking advantage of me. But practically I think the lesson(s) would be worth it:

  1. Financial engineering!
  2. The risks of doing money things with family!
  3. The work required to make something like this happen! (For example, I wouldn't allow Papa to give me the money directly.)

Tools / resources

We started this whole adventure with a spreadsheet, and it was a pain in the ass.

Then a number of years ago I found FamZoo and they handle it all for me. (FYI that's a referral link, with perks for both of us.) The kids have debit cards (that they use, regularly!). I have a bank account that I transfer money into and FamZoo automatically pays the interest each week. There are also tools for repaying balances, and having separate savings accounts, and so on. The kids now how to check their own balances and get alerts for various events.

It's easy and takes almost no effort on my part, now that it's all set up.

I know there are other services like FamZoo, but FamZoo has been great for us, and I really like that their mission really is to do exactly what we're trying to do: teach our kids good money habits, while it's still cheap for them to make mistakes!

OK, I think that's everything! If you have any questions or comments, I'd be happy to encourage you to try this! Please just reach out on Mastodon!