Some Thoughts on Raising Children to Make Good Financial Choices

When I first started The Simple Dollar, I had one child, who was a toddler at the time. Since then, we’ve had two more children, and our oldest is now a preteen.

Along the way, I’ve been very into the idea that I need to teach my children good personal finance practices. I want my children to not make the personal finance mistakes that I did along the way.

So, I started mechanically.

We’ve given our kids a very small allowance each week to figure out how to manage themselves – just a couple of dollars per kid. For a long time, we used a “jar” system to teach them the basics of budgeting, where they put some of that allowance in various jars that are intended for various purposes. Some of it is “spend whenever you want” money, while another jar is “saving for a goal” money, and another jar is “help others” money. (Specifically, we’ve used a Money Savvy Pig for this.)

We’ve given our kids a “job board” where they can do extra tasks beyond their normal expected household chores for some extra money that they can do with what they wish. These tasks are things that go beyond the day-to-day things around the house, but are simple enough that they can be handled on their own. This teaches them about the value of working for money.

We’ve also given them seed money for a few entrepreneurial projects. We have “invested” in their lemonade stands and their snow shoveling.

We’ve talked about paying bills and I’ve actually shown them the bills we get. We’ve talked about taxes. We’ve even talked about things like insurance.

The thing is, our children really do understand these things. On the surface, such topics really aren’t hard to understand – even my seven year old can explain what taxes are, why people pay them, and what insurance is. They understand how people budget and how to save money for the future. Mechanically, it’s all pretty easy. They get it.

That’s why, more and more, I’ve come to the conclusion that the most powerful personal finance lessons you can teach your child aren’t centered around the “how,” but the “why.”

Why should you save money for the future? It’s not just the practice of how to do it – you just put some of your money off to the side. The question is why do you do it, and why would you choose to do that instead of buying that fun thing that you want.

You do it because you want to have money in case something unexpected comes along. If you’ve saved up some money, then when a true opportunity comes along, you have the money you need.

You do it because if you don’t, a bad break can cause unfortunate things to happen. When we had problems with our SUV last year, I pointed out to our kids that it would be quite expensive to repair it. However, because we had put money aside just in case, it wasn’t a big problem. It wasn’t scary or anything to worry about. We can handle this, because we put money aside earlier.

It’s not about the how, it’s about the why.

My daughter really, really understands this lesson. She’s ten years old. She has more than a year’s worth of her allowance that she’s put aside, not for a specific goal, but in case of opportunities. Seriously. Not too long ago, she saw a box set of books by her favorite author (Raina Telgemeyer) on a huge discount and she was able to buy it immediately. She recognized that this was an opportunity – if she had spent her money frivolously, she wouldn’t be able to take advantage of it.

My oldest son doesn’t save quite that intensely, but he did have enough money put aside so that recently, when he broke an item, he had the money available to immediately replace it without having to beg or borrow. He was able to just take care of it. He recognized that this was a bad break, and he was prepared for it.

It’s not about the how, it’s about the why.

More and more and more, my financial (and life) lessons for them are bridging more into the philosophical realm. I almost always lead with the “why” of doing things rather than the “how” – often, unless it’s a particularly tricky thing, the “how” is just a simple part on the end.

We talk about the “why.”

We talk about why you should do a good job when someone wants your help. When they do an exceptional job at a task at home, they’re recognized for it and sometimes even receive a special reward, but they don’t get that for ordinary performance. This translates into behavior outside the home – they are learning that if they put in the effort to do a good job at anything, it is rewarded. The real trick? They’re starting to recognize that the reward comes in forms that you don’t always see – quiet respect from others, trust from others, a better community to be a part of. We talk about those things – when they do a great job or a good deed, the reward is always there, but they don’t always see it.

Similarly, a poorly performed task or a misdeed always has a cost, but you often don’t see it, either – a loss of respect in the eyes of others, a loss of trust, a worse community to be a part of.

We talk about why it makes sense to put in extra effort when things are going smoothly, because you will be incredibly glad to have that extra gas in the tank when things aren’t going smoothly. Put aside money in an emergency fund. If possible, put aside some of your work output for a moment when you need a break. Build up goodwill with your coworkers, so they will help you when needed. Be generous with your time and energy when you can, and many of those people will be generous with you when you need it.

We talk about why a person should keep their bills paid. It’s not enough merely to know that you owe money by a certain date and how to pay it, but why. What happens if you don’t pay those bills? Again, it comes down to trust, and trust is often expressed in our society through a credit report – it’s a way to verify trust, like asking a mutual acquaintance if someone is okay.

Why. Why. Why.

Every time I make a financial choice these days, I think about it in terms of why. Why am I doing this? If I can’t come up with a sensible reason that I could explain to my children as a good principle for life, why, then, am I doing it?

Thus, if I keep repeating that simple question in response to all of my choices, my own choices gradually become better. They start to be even more consistently in line with my core principles and values, and my children see it when I act consistently with the values and principles that I share with them.

Why. Why. Why. It keeps coming back to why.

In the end, here’s my recommendation for teaching personal finance lessons to your kids. Start with the how – things like how you spend money, how you save it, and so on. The actual mechanics of doing those things are an important basic life skill.

The thing is, those life skills are pretty simple. The question really is how do you make those life skills stick? How do you help a child transition from knowing how a credit card works to understanding why one should use it sensibly and not frivolously?

It’s because you start talking about the why.

Why is debt a poor idea? Why do people go into debt sometimes regardless of that? Why is it worth the extra effort to do something well? Why is it worth the time to build strong relationships with people? Why is it worthwhile to keep your bills paid?

As your child grows older, the value of personal finance lessons doesn’t come from the “how” – that’s usually easy. It comes from the “why.” You can only really teach the “why” through thoughtful conversation over time and, perhaps more importantly, through your own actions that are in line with the conclusions you come to in your conversations about “why.”

It’s about the key principles, and when your children understand those principles, when they understand “why” you do things, when they see you live by those principles, the “how” becomes very minor and secondary.

Talk to your children about the “whys” of money. More importantly, live by those things yourself. They’ll watch. They’ll learn. It’ll bubble up in more ways than you’ll ever directly see.

Good luck.

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