Help Your Kids Develop their Money Skills with some Advanced Training.
Being able to manage personal finances is one of the best things we can teach our kids. Last week, we discussed some basics. This week, let's take our training up a notch with some additional lessons you can teach your kids who are older or who have already mastered the basics.
Using the Save, Spend, Give method, we'll offer some additional discussions, broken down into intermediate (Green Belt) and advanced (Black Belt) levels to help continue the training.
First, let's recap what Save, Spend, Give is: have your kids label their funds as money to save, money to spend or money to donate. It doesn't matter how you physically do it, as long as it's separated and identified. You can create labeled jars or you could have 3 savings accounts (sub-accounts work great for this and can be nicknamed). We love this tool because it's simple and makes your kids select a "job" for their money. This encourages them think about their money's best possible use.
Once your kids have been introduced to the idea, we can start adding in some extra moves and kicks to really make the most of Save, Spend, Give. A lot of it comes from some basic economic principles that will help them understand the bigger world they live in and how communities are connected through money. Don't worry Coach, we'll make sure you have all the wisdom you need to pass on some useful knowledge.
The Save Jar
Having a "Save" jar means you have to have money to save in the first place. This gives you the opportunity to talk to your kids about where money comes from and how it is earned.
What is money? Start by defining currency. Currency is just stored value, an easy way for us to work and then get things without needing to directly trade goods or services we produce for the things we want. So, if we want an apple and our job is in home repair, we don't have to find a farmer who needs a new roof to get some apples.
What is it take to earn a dollar? When dollars are in lumps - in a bank account or on a price tag - it can be easy to forget exactly what it took to earn an individual dollar. As we add in tools like a debit or credit card, we become even more removed from our money, which can make it easier to spend and more confusing to kids. The next time your child wants something, ask them to calculate how many hours of work - babysitting, mowing lawns, at a part-time job, etc - it takes to earn that item. When you put it in those terms, it's easier for your child to understand.
What is an interest rate? An interest rate is what you're charged for borrowing money or what you earn for saving money. When you deposit money at the credit union, it's lent to other members who need it for something like a car or home. That person is paying interest and you get to earn interest because you've made your money available to be put to work as the loan.
How are interest rates set? This is a great time to talk about how interest rates are determined in the US marketplace because the Federal Reserve has started to change them more frequently. Without getting too complicated, as the Fed increases the rate, banks and credit unions will charge more for loans and give more for deposits. This encourages people to save. The opposite is true when the Fed lowers rates.
What is compound interest? It's worth chatting about interest rates because it gets us to the fun topic of compound interest! Fun? Oh yes, we said fun - even Einstein agrees. Because compound interest is playing the long game and kids who save money early are doing their future-selves a giant favor. When you put your money into an account that earns interest, you'll start earning interest on your original balance PLUS the interest you've already earned. If you're plotting this on a graph, your savings balance over time is now a curve in your favor rather than just a straight line.
Try this activity with your kids: pretend you're saving $1000 today in an account that gives you an annual return of 7% (the market average). See what the balance would be after year 1, then year 10, then year 20. Here's a handy calculator to help with the math. Young grasshoppers can agree, that's pretty fun.
The Spend Jar
Once we have earned some money, we can talk about what to buy with it.
Is it a need or a want? It's hard to talk about spending without talking about the difference between wants and needs. A need is something that we have to have in order to survive: food, water, and shelter all come to mind. A want is everything else. But there's a pretty big spectrum between things that are true needs and the extravagant side of wants.
For example, you could live in a tent, an apartment, a house or a mansion and they would all count as shelter. Additionally, there are things we may need to have to be able to provide for ourselves and families: a car, bike or transit card to get to work; a phone or internet to communicate.
When considering how to spend money, we can ask ourselves what we're trying to accomplish to help us identify all the available options. Then, we can prioritize and decide which things are worth investing more or less in as our money is available.
What are the costs and benefits of a purchase? Tying back to the value of the dollar, it's a great exercise to calculate how long it takes to earn enough money to buy something. Say your child is saving up for a game and it takes 4 nights of babysitting to buy it. If they're going to get hours of enjoyment from playing it, they may decide it's worth it. However, your child may feel differently about a $5/day smoothie habit when put in those terms.
Another question you can ask when considering the cost of things is whether or not you can sell it after you're done. A movie ticket doesn't have any resale value, but that game might, changing the calculation.
What is the opportunity cost? It's always good to ask the question "what else could I do with my money?" Remember, that means what else could I spend it on OR how else could I save/invest it? Especially after doing the compound interest calculator, your child might decide they'd rather save their money than purchase a ticket for a music festival.
Pro tip: opportunity cost is different than sunk costs. If you've already spent money on something and it's non-refundable, it's a sunk cost and you shouldn't take it into consideration moving forward. So, if your child did purchase that concert ticket at an outdoor venue and it's storming, they should only think about the additional options, potential enjoyment and money they'll spend (transportation to get there, food or beverages, poster or t-shirt) if they're now getting soggy feet.
The Give Jar
Green and Black Belt
The best thing your child can take away from the Give jar is that value doesn't just come from saving or spending. When you give money to something you care about, you are getting something of value that isn't tangible.
There are some different ways you could measure or label this, if you wanted to. For example, if you care a lot about the environment, you could donate to an organization that protects coral reefs. Even if you never see a reef in your lifetime, you may value knowing they exist so donating to their future makes you happy. Or, maybe someone you know is affected by an illness and you donate to fund research for a cure. Just knowing that you're contributing to a world without that disease can bring you happiness.
That happiness we get, which may just be warm and fuzzy feelings, is a good enough reason to give.