I’ve written a bunch about why it’s expensive to be poor, why we need better tools for managing money, and how to move from a labor mindset to a capital mindset. A big takeaway for me is that accumulating wealth isn’t just a functional activity, it’s a mindset that needs to be learned, and taught.
It has taken me a long time — generationally speaking — to begin to figure this out. Both of my parents grew up poor. My father grew up especially poor, but managed to break out. In the 1960s he took a computer programming course and learned to code (50 years ahead of his time!), and then just before I was born he started a small business, which my parents run together to this day.
While this business has been transformative for our family (it sent me to college – I’m the first one on my father’s side ever to graduate), I think it’s fair to say that it hasn’t yet finished the job of helping us relate to money in the right way. For example, I don’t think I ever really learned, at a young age (or really into my late thirties), the concept of **investing**. Saving was always a vaguely good idea, but spending was easier, and spending on debt even easier than that. Basically, I think there is this transition, from having no money, to having some money (but spending all of it), to (in some cases) spending more than you have, to (if you’re lucky) learning how to get money to work for you.
Now that I have kids of my own, I’m trying to think about how to teach them about money. I want them to learn about budgeting, about saving, and about investing. I want them to see today’s spending needs/wants as not the whole picture. I want them to learn that if you’re smart about money, not only will you set a solid foundation for yourself, but other good things can happen (e.g., compounding interest).
Here is my v0 approach — no idea yet if this will work. The primary way my kids spend money (of their own choosing) is on-demand videos. We have a Roku TV in our living room, and occasionally they rent or buy TV shows or movies. So, for starters, rather than having them simply ask every time if they can do it, we’re instituting a budget. The budget is $20 per month per kid. (that gets you roughly two movies or ten episodes).
The twist is that, at the end of each month, whatever they don’t spend rolls over into the next month — with 20% interest. So if they spend $10 and save $10, they will roll over $10 + 20% or $2. So next month they’d start out with $32. The 20% monthly interest may seem unrealistic and overly generous, but I’m trying to compensate for both the low dollar amounts (hard to get excited about 1% monthly on $5), and also for converting to “kid time” (a month to them feels like a year to us).
I explained the new plan to them the other day (March is our first month), and my heart skipped a beat when my daughter immediately responded: “I think I’ll save most of it”. :-). We will see what happens. I am hoping that one of them realizes that the 20% will compound pretty quickly, and decides not to spend any at all. By my calculations, if they decided to keep 100% of the allowance, by the end of a year they’d each have $950.
I’m curious to know what approaches others have taken to teaching kids about saving and investing.