Teaching Kids Financial Self-Discipline

The following is a guest post from Dr. Craig R. Everett, the author of Toby Gold and the Secret Fortune, an urban fantasy novel that introduces financial literacy principles to children ages nine and up. I will soon be reading this book with my kids.

Financial independence boils down to two main factors.  First, it requires the ability of the individual to spend less than he or she earns, which requires budgeting.  Second, the individual must be able to invest that regular surplus over a prolonged period of time.

Both of these factors depend on one particular character trait: Self-discipline.

Unfortunately, self-discipline is a trait that appears to be in relative short supply in today’s culture.  Kids want everything “now” and for the most part, they get it.  Parents recognize that this is a problem, yet seem unable to address it.  According to a 2002 report by the non-profit group Public Agenda, only 34% of parents feel that they’ve succeeded in instilling the value of self-discipline in their children.  One has to wonder if even those 34% may be fooling themselves.

For parents who are concerned about teaching their kids financial self-discipline, here are a few ideas to try at home:

• Play games that reward waiting.  For example, here is one that is based on the famous “Marshmallow Test” at Stanford in the 1960’s.  Have your child sit at the table and place their favorite treat in front of them.  The first time, start off easy.  Tell them that they can either eat the treat right now, but if they wait 2 minutes, they can have TWO treats.  Then each week, do the game again, but extend the waiting time.  This reinforces the principle that delayed gratification will be rewarded.  For older kids and teens, a variation of this game would be for you to wait for your child to come to you asking for money for something, let’s say a new game or app.  You give the child a choice.  You tell them that they can have the money for the game right now or, if they wait two weeks, they can get two games instead.  The idea is to use the opportunity of them really wanting something to teach them patience.


• Make their allowance conditional on keeping a budget and expense log.   The expense log is critical – kids need to get in the habit of keeping track of exactly how and when they spend their money.  On allowance day, have them show you how much money they have left from the previous week, plus a list of exactly where each penny was spent.  This habit will make effective budgeting a very easy next step.


• Use the time-honored principle of “matching funds” to encourage saving.  For many adults, the only reason they participate in their employer’s 401k program is because the company matches at least a portion of everything they save.  Do the same thing for your kids.  Every week, make a trip to the bank with your child to deposit the money they’ve saved from their allowance and then match it with your own additional contribution.  This gives them an immediate reward for saving, which will strongly reinforce the habit.

These are just a few suggestions worth giving a try.  The overarching principle is to look for any opportunity to reward your child for exercising patience, particularly when it comes to money.  The rewards do not have to be solely financial.  Sincere praise when a child demonstrates a worthy character trait – such as self-discipline – goes a long way. For many kids this is even better than a cash reward.  As a father of five, I can testify to the fact that some techniques work wonders with some kids but not others – even within the same family.  It’s a matter of trial and error to find the approaches that work best with each of your children.

Comments

[MC]

I think teaching kids is important, but I question whether this type of method is effective or useful at all. Does it just sound good?

I grew up in the 60's and 70's with lower middle class to poor parents and several siblings. I never had an allowance and money was rarely discussed at home, no marshmallow tests or expense accounts or anything. Exactly one matching Opportunity was offered by my parents to each of us: they would pay for 1/2 a ten speed bike when we were 15 years old. I babysat and did odd jobs, got paid jobs when I was 16, saved most of my money for college and spent a little on some cool clothes and the bike, but my parents continues to pay for everything Else I needed with no discussion. Yet myself and all my siblings ended up financially responsible anyway...we are all middle aged now and doing well, own homes, etc.

I am not sure what is the answer to my question, but I am skeptical that treating kids like employees and teaching them accounting is essential to them learning financial responsibility for when they grow up.

For my family, I think the key was a family de-emphasis on material things and money. It simply was not as important as religeon, family, doing the right thing, etc.

I worry that stressing to kids how important their spending is etc might backfire into making them grow up thinking that money is more important than anything else? For my own kids, I'm trying to instill a culture that stresses abundance...ie that we are wealthy in many ways, and therefore we can give back and dont need to hoard money or spend to gain status. .I feel that this is very much needed to counter to our national culture that glorifies spending and consumption.

[FMF]

MC --

That's one of the "joys" of parenthood. You don't know if what you're doing is the right thing or not until 30 years down the road. :)

[08graduate]

My parents used all of these lessons. They also required me to "repay" them from my allowance if I wasted family resources like food or gas. I turned out careful with money, so these seem like good ideas to me. Of course, correlation is not causation, and anecdotes are not data. Dr. Everett, do you have randomized controlled evidence that your ideas work?

[CW]

I really like the games which teaches delayed gratification and matching funds. I will try it with my kids. I'm not sure about keeping a budget log will work. I'm already having a hard time having them to develop a habit of doing homework and cleanup their room. Heck, many adults cannot even maintain a budget log.

This is great timing. My wife and I just started giving them allowance with my 2 kids (9 and 5) this month. The goal is to teach them (1)why they cannot always buy what they want and (2)how to save. We will introduce the concept of “how to give” when we are successful with the first 2.

These are the guidelines we have established:
- We will no longer buy them toys or candies, except on their birthday and Christmas.
- Instead, they will receive a monthly allowance per month. The younger (5) one gets $10 dollars and the older one (9) gets $20. This is enough to let them buy small toys.
- We decided not to tie their allowance on chores as we did not want them to ask money from us each time we ask them to do something.

If the kids want to buy more expensive things, we have suggested the following:
- Don’t buy this month and save it for next month.
- Combine their allowance to buy and share the toy .
- We give them extra chores and they get paid small amount (We don’t know yet what extra chores they can do).
- (This is only for our older child) If she can get extra income on her own (like selling stuff or baby sitting) , we will match her income.

What do you guys think? We just started this and I’m sure the plan will evolve in the coming months.

CW

[Veronica @ Pelican on Money]

Dr. Everett, thank you - your ideas are fantastic! My parents never did anything like this for me, and I would have never thought of teaching my kids financial discipline by playing games and matching their "401k" so to speak. If this post is any indication of the type of content you have in your book, it's worth every penny.

[Jonathan]

CW - I don't have kids, but thinking logically about you matching your older child's income, that seems like a dangerous road to travel. It doesn't correlate to anything in the real world, and while I like that it incentivizes being creative with earning money, you may want to consider establishing a deadline on that deal upfront. I.e., up through age 15 (assuming at 16 she can find a real job).

[Jonathan]

For what it's worth, my parents never did anything like what's suggested in the article and I am very self-disciplined (financially anyway). They did give me a weekly allowance starting at a fairly young age, which was never tied to chores or housework, and did not oversee how it was spent. I rarely had much saved up. I got a job at 16 and for the first time was able to spend when I wanted. I didn't start buying things, but would spend on movies or outings with friends. I always had enough money to do this (from my job - my allowance stopped with the job), but never really saved.

It wasn't until I graduated from college that my true financial breakthrough began. At this point my one goal was to save as much as possible before I got married. I started tracking all my spending in quicken and basically developed a "frugal but not cheap" mindset which I have to this day. I don't spend needlessly, but don't scrimp either. As a result, my wife and I now save about half of our income. We track income, savings, and net worth, but not expenses. We both have a frugal mindset and channel all of our savings into cash-flow-producing investments.

[Pam@thesavingsblog]

Good point! When i'll have my children soon, i'll definitely train them to be financial responsible.

[Christa]

I can't imagine my daughter enjoying the marshmallow game, but she's a little young for it yet. Maybe when she's older the game will seem more fun to me. The other games could definitely come in handy, though!

[Jamie]

Rewarding patience is very big. More importantly, you should encourage your kids to be patient with anything, and not just for a reward. Patience has its own rewards in that those who are patient get what they want, and generally live less stressful lives.

[Jennifer]

We have recently started a new program to teach our kids about responsiblities and money management. The program is www.activeallowance.com, and FMF I would love your input on the program (if you have time, I can only imagine how busy you are). I did not like the idea of chores for allowance or just receiving an allowance without doing anything specific. Within this program I have been able to create "responsibility charts" that cover more than just chores - I have added catagories for manners, school work, personal space and hygenine (I have boys :)) to name a few. How it works is all tasks within a catagory must be complete in order to receive a point; i.e. last night my son completed his homework before dinner, brought me his folder to sign off, wrote and verbally spelled all his spelling words, and read for 20 mintues and had me sign his paper BUT he forgot his lunch box at school and one of the tasks within the school section is to bring everything home, therefore he did not receive that point last night. After the chart is made there is a total of points that can be earned - in our case 47 points within a week - at the end of the week you enter the earned points into the program and it factors the allowance earned from the total possible allowance; i.e, last week my son earned 29 out of 47 points earning him $3.08 out of the possible $5. The program also has a budgeting function that I find similar to the envelope budgeting system that I use (www.mvelopes.com) where each boy has 5 catagories their money goes into - University Savings, Charity, Gifts, Big Ticket Item Savings, and Fun Account. Their allowance is distributed from the bottom up - they must first fill the University Savings before moving onto Charity and so on. So out of the $3.08 he earned last week he had deposited into each fund:
1). University Savings - $1.25
2). Charity - $.25
3). Gifts - $.50
4). Big Ticket Savings - $.75
5). Fun Account - $.33 (possible here is $2.25)
I know these do not sound like large amounts but my boys are 6 & 8. Also to empower them to earn more I have set up some bonus points for going above and beyond - giving them the opportunity to earn more than the $5/wk.

There is a portal/username that the child can have set up to look at the amounts they are earning. The makers of the program suggest for older children to shift the amount you would normally spend on clothing or other items into the allowance so the child is spending their own money on items you would normally just purchase for them.

We are only into this a few weeks but so far I have found this very useful. Instead of getting frustrated because really how many times do I have to remind a child to brush their teeth - now they go and do it on their own so they can get their peronsal hygenine check mark and their ready for school by 8 without me nagging check mark. :) And last night they both begged to assist with dinner and dishes. :)

[FMF]

Jennifer --

I will check it out!

[Craig Everett]

Great comments everyone! I'll try to respond to each:

MC: I sure hope that we're not giving our kids the idea that money is the most important thing. If that's the impression my article gave, then I apologize. I do believe, however, that patience and delayed gratification are important virtues that apply to more in life than just money.

FMF: You are absolutely right. My oldest is 18, so time will tell the long term benefits of any of this! -)

08graduate: LOL! No, my evidence on this stuff is purely anecdotal with my own five kids. My scientific research is all related to "grown-up" finance. I'm just sharing what has worked for me personally with my own children.

CW, Veronica & Jonathan: Thanks and just to be clear, what I am suggesting is matching SAVINGS, not income. Matching of savings is very common in corporate defined contribution plans. My book, Toby Gold and the Secret Fortune, has a heavy emphasis on saving and investing. Oh and Jonathan, you'll like this: the book makes a point that if you only live on half your income, you can completely live off your investments within 10-15 years. Sounds like you're already doing that, so congrats! It requires a monk-like commitment to live far below your means.

Christa: The marshmallow game is most effective for ages 4-7.

Jamie: I love your insights about patience. So true!

Jennifer: Thanks for sharing that money management plan. Sounds great!

Craig R. Everett, PhD
Pepperdine University
Author of financial literacy thriller "Toby Gold and the Secret Fortune"