My son is only 14 months old. His biggest worry these days is how he’s going to fit the star-shaped block through the square hole (it’s gonna happen damnit!). He’s a long way off from even having the ability to learn about handling money, let alone having the interest. Still, instilling good financial habits is important to me, so I spend time thinking about how to help him learn some basic money skills.
A lot of smart, thoughtful people have already written on this topic, with some good recent examples here and here. There are many aspects to money management and I honestly don’t know all of the different tools I will use with my son. But there are three specific things I have in mind that I think will help him build some very basic but important skills from an early age.
Giving an allowance
My son will likely get a regular allowance that isn’t tied to the performance of any chores or other responsibilities. While I believe in teaching the value of working to earn money, I want helping within the household to just be a part of family life and not something that’s done for money. And I want to be able to teach money management skills from an early age, long before having a job is reasonable. So a consistent, regular allowance feels like the right approach.
This allowance will be his to do with as he pleases. We will certainly talk about the value of saving for long-term goals and the opportunities to give money to those less fortunate and I will give him the tools to be able to do so. But those won’t be required actions. If he wants to immediately spend it all on candy, toys or whatever, that’s his choice.
I believe that people need to learn from experience. If I require him to save money, he’ll do it because of the requirement, not because he’s learned from experience that it’s a good thing to do. I want him to have the choice so he can learn for himself the consequences of his actions and make his own decisions about how he manages his money.
Simulate investment experience early on
When he’s old enough, he can open an IRA or brokerage account and get some real investing experience. But I’d like him to start learning some of the basic principles earlier than that.
My idea is very simple. Some of his money can go into an “investment” account, which will really just be some kind of either imaginary segregated bucket or actual savings account where I have some discretion. At first he’ll only be able to pick a simple allocation between stocks and bonds. On a regular basis, I will credit or debit his account with his “return” for that period, based on the movement of some total market indices. So if the stock market index we’re using returns 10% over a period, his stock allocation will suddenly have 10% more money. But if the market falls, he’ll lose money. These credits and debits will take place in the form of transfers between his account and one I manage.
My hope is that he’ll get experience with market volatility at an age where his reaction to the ups and downs won’t really hurt him. He’ll see how different asset allocation strategies affect his returns and he can get a sense of his risk tolerance. He can even experiment with market timing if he’d like.
Over time, I may give him some more investment options, but I think just this simple experience with investing from an early age could be invaluable.
Allow him to take on debt
If he wants to buy something that costs more than his allowance, he’ll have two options: save or buy on credit.
Within reason, we’ll give him the opportunity to borrow money from us. We’ll charge interest and there will be minimum regular payments, which will be taken out of his future allowance. He’ll have the option to make extra payments, or to pay it all off if he has the money. In other words, it will work almost exactly like it does in real life.
As we do this, we’ll keep track of his total debt levels, the amount he’s paid compared to what he would have paid without debt, and the time it’s taken to pay off his debts. We’ll talk about this regularly so he can understand debt’s impact on his overall financial situation.
If at some point his debt grows to the point that he can’t pay it off in any reasonable time frame, we’ll probably have something like the ability to declare bankruptcy. At the least, this would likely involve a period of time during which his allowance would cease. While this isn’t exactly the same as what happens in real life (your income doesn’t disappear in bankruptcy), it would hopefully simulate the potential for extreme negative consequences from getting in too deep.
I want him to be familiar with the concept of debt and understand how it works before it has a chance to really hurt him. Debt is very real and very accessible and I want him to experience it first in a supportive environment conducive to learning.
The goal with all of these strategies is simply to give my son an opportunity to learn basic financial skills before they start to have a big impact on his life. By giving him opportunities to think about money, to try new things and to make and learn from mistakes, my hope is that he’ll be more prepared when he gets out into the real world.