We all think that school should teach our kids on managing money. In a way, we are outsourcing it, like most of the things in our life.
Teaching kids about money is a two-stage approach.
Stage one is where you gain minimum knowledge about money. Understanding where the money is coming and going and not getting into bad debt.
There is the second stage where you want to make money work for you and get higher returns on the money. Your knowledge about money will move you from a secure to a comfortable lifestyle.
Gone are the days of the Industrial Revolution, where you can stand next to a conveyer belt and make money. To grow in our professions we need to have an entrepreneurial mindset.
We are expected to own a certain part of the business manage it, nurture it and grow it.
Kids who grow up in a financially stable household doesn’t get equipped for a stable financial future automatically.
Of course, parents acting as a role model will lay the foundation for future financial health.
Kids need to be taught the difference between an asset and a liability. They need a sandbox where they can experiment, make mistakes and learn money skills.
I know there is this never-ending debatable question whether to pay or not to pay for allowance. If you want to avoid your kids living from paycheck to paycheck, then give them some money.
The best place for kids to learn how money works and the role it plays in our lives is at home. There are 4 ways you can give money to your kids.
1. Giving allowance to kids as Dole
One way is, where you give money to your kids when they ask for it, it could be to buy a toy or eating out with their friends. Which is also called a dole approach.
The advantage of this is
- You can control the kind of purchases your kids make.
- Control the cash flow based on your income and as you wish.
- You don’t have to give money if you don’t see any needful expense.
While the disadvantages out outweigh over advantages in the long run
- Kids will see you as an ATM to withdraw cash
- They will believe that you have an inexhaustible supply of money to fulfil their needs.
- You might lose track of how much you have given to your children and might be doing out more than required.
- Kids might get better at manipulating you into buying their next shiny object
I come from a culture where Dole was the way of my upbringing. I believe it is part of the reason why India still struggles to create more entrepreneurs.
The education system from the British. Society and social stigma produce more engineers and doctors every year.
This method is simple, children will not learn any money management skills. To its credit, kids will become better at negotiating.
They will be hassling you for the next shiny thing.
If you are following this method. I recommend you to track the amount given to your kids with date, amount and purpose.
2. Kids getting money as Cash Gifts
This method depends on your cultural background. Kids receive money from parents, grandparents on their birthdays, or when they visit native places after a long break.
Income from family and friends is not a regular income for your kids. You could encourage them to treat it as a bonus and either invest or save this amount for future plans.
3. Enabling Kids to earn money
Earning Money can be done either inside or outside of the home. Parents can define tasks that will earn them cash like mowing lawn or dishwashing, depending on their age.
It teaches them the relation between work, skill and money. Chores don’t necessarily mean that they will become better at managing money.
Parents need to be mindful of jobs kids choose. Jobs could be too hard, dangerous or sometimes the money temptation can demotivate them from their career path.
4. Giving fixed recurring allowance to kids
To pay for allowance or not is a never-ending question. Parents ponder on this question so much so that they miss the forest for wood.
They forget to teach children what to do with the money that they receive. Whether they receive an allowance or not doesn’t determine their financial knowledge.
The way they manage the money determines their future financial success.
An allowance is a particular sum of money you agree to pay your children on weekly/monthly basis.
Most importantly you need to ensure that they don’t take it as an entitlement.
The way you communicate with your child is critical here. If you tell them, you will provide a certain amount of money every week/month, because they are old enough, and as they also have expenses.
This will make them believe that they are entitled to the money as they are old.
Building blocks to make the allowance system work is good communication, consistency and guidance.
Why you shouldn’t give allowance to your kid?
Relying on any of these four models to teach your kids financial independence is doom to fail, let me explain.
This is the mindset we were brought up. At least me. This is a fixed mindset aimed at making a better employee.
Giving money to kids as Cash-Gifts, Dole build entitlement mindset. Just like a grown-up adult expecting government grant when they lose a job or economy tanks. Like Job seeker help we have in Australia.
And, giving money to kids as an Earning or Allowance will build their employee mindset. They are trading hours for pay.
These methods of payments are best till a kid is 10 years old. After which you need slowly abandon giving money and creating opportunities.
You need to encourage them to be creative and solve the problems under your protection.
By offering them predefined tasks they will be good task doers.
If you help them too much then they will be dependent on you to solve their financial problems.
We can always be there to help them solve the problems. At first, you want them to exercise their brain in solving the problem.
Entrepreneurship is about solving problems by exploring solutions. In the process, they are helping themselves by helping others.
The only way they will be able to exercise the entrepreneur side of their brain is by learning to identifying the gap, finding solutions, adding value, marketing, negotiating cost etc.
For instance, if your son wants to buy Golf clubs. An employee mindset would teach him to do additional tasks and save money to buy.
Whereas an entrepreneur mindset wouldn’t buy Golf clubs with the saved money. But rather put the saved money (invest) to work so as he can buy Golf clubs from returns.
So stop outsourcing financial education to school. They will get what the best school can provide. Take them to a seminar, books that nurture their creative thinking.
Until next time, this is Praveen.
Thanks for Reading!