HOW TO NOT RAISE SPOILED CHILDREN: 7 CRUCIAL MONEY LESSONS
7 lessons in finance for gracious & grateful kids.
When fellow Forbes contributor Vanessa McGrady was checking out at Trader Joe’s, her three-year-old daughter requested jellybeans. Upon hearing the response “No, not today,” the toddler shouted, “But we have enough money!” prompting laughs from the other customers.
Even at that age, children make observations about money, so most parents will recognize these common questions: Are we rich? Are we poor? How much do you make? Why can’t I have X if we can afford it?
A lot of parents demur in answering these kinds of questions. “There’s this concern that too much money talk with lead to money-grubbing children or kids who want too much or focus too much on it,” says Ron Lieber, New York Times money columnist and author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money.
After hearing from many parents that the worst word that anyone could call their children is “spoiled,” Lieber realized that it is precisely by teaching kids about money that parents can raise children who are not.
He writes that upon creating a word cloud of traits that are the opposite of spoiled, “I realized that every last one of those attributes — from generosity and curiosity to patience and perseverance — could be taught using money.”
Lieber says these lessons are more important than ever before because of new influences such as social media — in particular, he calls Instagram “more pernicious than any form of commercial television.” Aside from peer pressure, children today will face ever greater financial pressures as adults: They will likely be asked to bear the burden of saving for their retirement and paying for their own health insurance.
But their first great financial decision comes when they decide where to go to college. Noting that a flagship state university costs around $100,000 and a private university a quarter of a million, Lieber says, “The fact that we have teenagers leading the charge on [the college] decision, albeit with some help from grownups, at least sometimes, is insane. If you haven’t been making real financial decisions in the previous decade, starting with two-digit decisions and then three-digit decisions and then four-digit decisions leading up to the big one, it’s very difficult to get all this right.”
As described in his astute book filled with interesting anecdotes and wise lessons, here are seven ways you can use money to raise children who are financially smart and the opposite of spoiled.
1. Use an allowance as a teaching tool.
According to a 2012 study by the American Institute of CPAs, among the 61% of parents who pay their children an allowance, 89% of them require the completion of at least an hour’s worth of chores to earn it. (The average was 6.2 hours of chores a week.)
Lieber is in the minority here. He advocates supplying an allowance independent of chores because, he writes, children “ought to do [chores] for the same reason we do — because the chores need to be done.”
He considers an allowance a teaching tool, like art supplies or musical instruments. “In the same way we don’t take them away when kids don’t do their chores or don’t do them well, we shouldn’t take money away either,” he says, adding that parents should leverage whatever the child likes more than his or her allowance. For instance, you could change the wifi password or ban him or her from a soccer practice.
In the book, Lieber also describes one innovative way to create a hybrid allowance: One boy earns no money for basic chores, but his parents promised him a bonus if he found and solved other household problems. It got his entrepreneurial juices flowing and after washing his grandparents’ car for extra money, he began doing the same with other people’s vehicles.
2. Have them split their allowance into three jars: give, save and spend.
Lieber says these jars mimic a grown-up budget. Financially healthy adults will spend about 80% of what they earn, save 15%-20%, and give the remainder — and each jar serves as a stand-in for the values and virtues that are the opposite of spoiled.
“Spending is about modesty, thrift and prudence, and having the prudent decision-making skills that allow you to spend or splurge on the things that make you happiest while avoiding the mindless wallet dives that we engage in as adults. Saving is about patience — the patience that kids will need to deploy as adults to put money away or leave it alone afford down payments or retirement or college for their own kids. The give jar is about about generosity, and ultimately about gratitude too,” he says.
Studies show that patience is associated with good financial outcomes as an adult. Adults who exhibited self-control as children were more likely to save, have a retirement account and own homes. To encourage this behavior, you can pay interest on your kids’ save and give jars, set up “tax” incentives — charging high taxes on spend money but no or lower taxes on save money — or concoct matching schemes.
3. Let your children make their own spending decisions.
If you want your kids to make smart financial choices, they need autonomy. “They’ll inevitably make mistakes or spend money on trinkets and regret it later when they don’t have money for things they truly want,” says Lieber. “So letting them make mistakes — spectacular ones even — is a great way to go, because then they learn, and they’re not making mistakes when they’re 24 and it could screw up their credit score.”
Around ages 10-12, you can have your children try working with a budget for the school year, by giving them one lump sum calculated on reasonable prices for their needs in those nine months. So, for instance, you might say the child will likely need eight pairs of underwear, and that you’re willing to give them an amount equivalent to what underwear costs at Target or the Gap, and that since your family enjoys hiking and skiing, you’ll budget $150 for an LL Bean jacket. Add everything up and hand over the entire amount.
“They may decide to buy their underwear at Victoria’s Secret and a puffer coat at Goodwill to make that tradeoff,” says Lieber, but the most important rule to enforce is “No bailouts. If they screw up or outgrow everything — or if they only bought one pair of jeans at $200 instead of the three at $60 that you budgeted, and if those jeans get soiled or broken beyond repair — then they have to earn more money to fix it.”
You can also set up guidelines to help them evaluate spending choices. One family uses the hours-of-fun-per-dollar test, which teaches the concept of return on investment. For instance, an inexpensive Fisher-Price cash register ranked high at 185.5 hours of fun per dollar, while a talking stuffed animal yielded only 0.08 hour of fun per dollar. The rule continued to prove useful in their teens, when the family was making decisions around, say, their vacation itinerary.
4. Explain how you distinguish between wants vs. needs.
Every family will have its own threshold for this, but even more important than how you define a want vs. a need is that you communicate why you set the line there.
Lieber suggests creating a Want/Need continuum on paper using horizontal lines with Needs on the left and Wants on the right. For instance, he says, rain boots might be a need, but “the rubber doesn’t get better when the price quadruples.” So, he puts the $25 boots under needs, but the $100+ boots under wants. Then, for each one, draw a vertical line along that continuum. To the left of that line is what you’re willing to pay for a child’s need, and to the right is what you’re not willing to pay.
In his family, Lieber is advocating for what he calls a “Lands’ End Line,” based on what he thinks the mid-priced but quality merchant would charge for an item. If his daughter wanted anything priced higher than the equivalent at Land’s End, that would be a want, and she’d have to pay for the difference out of her own money.
“It’s not that there are right answers for where anything ought to be,” he says, “but what is definitely wrong is not to be narrating along and explaining to your kids, ‘We don’t really spend more than this amount on X, because we’d much rather spend on Y.”
5. Involve them in your giving decisions.
When you allocate your charity budget, get your children’s input. With his own daughter, Lieber and his wife put 100 beans on their dining room table to represent their donations for the year (because she was 8, they didn’t get into the dollar amounts) and then set aside beans for various charities based on where they had previously donated, solicitations they had received and their own interests and priorities.
One family took up this challenge wholeheartedly when their daughter looked out their car window one day and observed that if the rich person with the Mercedes gave up his car, then the homeless person on the sidewalk could eat. In ensuing discussions around charity, the parents finally asked their daughter what she wanted them to do about these injustices — move into a smaller house and donate the leftover? The answer was yes — and the family did just that and wrote about it in The Power of Half.
6. Have your kids work.
For his book, Lieber spent a lot of time with farm families, to remind himself of what life is like when it’s assumed kids will work from the earliest possible age. “They can shoot guns and drive tractors at the age of 5. So they’re capable of making us dinner at the age of 10, as MasterChef Junior has proven,” he says.
For parents worried that time spent working is time spent not racking up achievements that can be touted on a college resume, Lieber writes, “Part-time jobs are correlated with high college expectations and good grade point averages so long as a teenager doesn’t work for more than 15 hours or so each week.”
Among the many things kids can do to earn money are: collect cans and bottles for deposit, babysit, shovel snow, mow grass, or even do work for you that you would hire someone else to do — such as help out the family business.
7. Practice gratitude.
Though saying grace has gone out of fashion, Lieber says every family should say it. “People think it’s hokey or it feels a little odd, but if it doesn’t feel right to you, that means you are doing it wrong and you need a new ritual,” he says.
His family does it in the form of a toast at the beginning of every meal — to any person or thing or institution that has made you happy. Kids love it because it’s a grown-up thing and they love the visceral fun of clinking glasses. But more importantly, “it helps kids focus on the things they have. If you do that enough, it can lead to not wanting quite as many things as you don’t have,” he says.
In one Spanish-speaking family, the tradition is as simple as holding hands around the table, closing their eyes, bowing their heads and saying “Gracias.”
A number of studies have found high correlations between gratitude and higher grades, life satisfaction and social integration. So even this small, daily moment of appreciation can lead to more things about which to be grateful.
Laura Shin is the author of the Forbes eBook, The Millennial Game Plan: Career And Money Secrets For Today’s World. Available for Apple iBooks, Amazon Kindle, Nook and Vook.