Money Lessons for Kids (and Parents)

Kids today have a pretty challenging money legacy. From different kinds of student loans to exotic mortgages and default interest rates, the answer to the question “Can I afford this?” has taken a trip down the rabbit hole.

Parents are scrambling to prepare their children for this brave new reality. In an article for the WSJ (subscription required), Jonathan Clements lists four “financial tricks” to try with your children so that they’ll grow up to be money-smart adults:

Favoring Today

Offer your child his regular allowance, or a greater amount if he's willing to wait a week before getting it.

Slowing Spending

Give your child his money in the largest denomination rather than a combination of smaller denominations (a $5 bill instead of five $1 bills, for example).

Making a Wish List

When your child expresses desire for a particular toy or other expenditure, have her write it down on a list. Go back to the list later and ask which items she would like to use her own money to buy or would like to receive as a birthday or holiday gift.

Keeping the Change

See how your child makes purchasing decisions when he is given an amount of money and allowed to keep the change compared to when you ask for the change back.

As a clinician, I appreciate how these four activities really do open up the cognitive and emotional processes we use to make decisions about money.

Favoring Today
The “favoring today” experiment demonstrates your child’s time preference for delayed gratification. All of us have a time preference for delayed gratification**, which is basically the point at which it becomes worth it for us to trade the opportunity of the present for some potential future gain.

Many things influence a person’s particular time preference, age first and foremost. For a very young child the future is still a murky concept, and it’s unreasonable to expect a four-year-old to choose $7 next week over $5 this week even though it’s 40% more. A perfect time to start playing with the favoring today exercise is around age nine or 10, when the child develops the ability to conceptualize the future and to compare present gratification against future gain.

Besides age, the level of perceived deprivation in the child’s environment plays a key role in shaping time preference. Five dollars means more to a person who feels he has very little than it does to a person who feels he has much.

A person’s early experiences with trust also factor in. Children who are exposed to instability in their caregivers or environment are basically taught to devalue the potential over the concrete present. If a child has learned that a promise for $7 next week might go unfulfilled, he will always opt for the $5 today.

Slowing Spending
The “slowing spending” trick employs a person’s “bias for the whole.” In children and adults, bias for the whole refers to the tendency to hold a larger bill in higher regard than the equal amount in smaller bills. It’s easier for us to comprehend the value of $100 when we see a $100 bill. When we see ten $10 bills, we perceive a number of potential values based on combinations of the bills -- $20 here, $50 there – and it’s easier to part with the smaller amounts.

Using a debit or credit card totally circumvents this bias by taking away the perception that we are breaking any “whole” at all. Maybe we adults should play with this exercise a little more often, too!

Making a Wish List
Learning to modify impulses is a cornerstone of maturity. Making a wish list helps children to review their choices outside of the impulse of the moment. When children practice identifying, examining, and re-evaluating their wants it plants the seeds for self-aware purchasing in later life.

What this also does is start to organize wants for comparison with other wants. When working with clients around budgeting, I have found that this can be a revolutionary concept. Consider the difference between these two questions: “Do you want to go out to dinner?” vs. “Do you want to go out to dinner more than you want cable television?” Wants cannot be considered in the abstract, they must always be evaluated in comparison with the other available choices.

Keeping the Change
Some people have an innate preference for saving vs. spending even as children. Giving your child the opportunity to spend or keep the money given to her will show you where your child’s preference is – for that particular moment in time.

It is totally appropriate for children to experiment with decision-making behavior and for their choices to range all over the place. One week your son may blow every last cent you give him and have to borrow a dollar from his friend besides, another week he may be more penny-pinching than Ebenezer Scrooge.

Keeping the change is a great mini-lesson on budgeting. For what is a budget after all but a system of allocating amounts for expenses? Five dollars for souvenirs on a field trip is basically a $5 single-item budget. When sonny decides that he prefers some alternative use for the money, be it savings or a future spending opportunity, you are giving him a safe experience in financial autonomy.

The author of this article expressed it best when he suggested that parents “try these tricks on your kids, talk to them about the lessons to be learned – and then quietly muse about whether you, too, fall prey to these financial traps.” These activities are not lessons in and of themselves. They are a jumping off point for parents to engage their children in developing how money works for them.

** See Shlomo Maital's Money, Minds, and Markets. Ch. 3: From Pleasure to Reality, Learning to Wait Begins in Childhood. Basic Books 1981.

Actually, You Are a Beautiful and Unique Snowflake

I have a secret for you. This secret is going to change your life. Here is the big news:

Everyone in the world has more or less money than you.

That’s right. There is no sameness. No comforting lie that in America “we’re all middle class.”

I read a great post last week on Getting Green titled Why I Keep Quiet About My Salary. In it, the poster writes about why he does not disclose how much money he makes on his blog (or to anyone but the most intimate people in his life). While I fully support his personal choice, I read with great interest his rationale for privacy:

If I made substantially more than my roommate or other friends, they would probably become jealous of my salary. They might be well-intentioned, good people, but over time they would more than likely become jealous and… resentful. They’re not bad people, but money just has a way of effecting [sic] people.

If I made substantially less than any of my friends, they would probably naturally feel superior to me. If I made less than them, they would figure that they are worth a lot more than me and work a lot harder than me. If this were to happen I would have the privilege of dealing with a superiority complex.

I find this position really interesting. First of all, the writer chooses to speak only about how he believes others will feel if they find out he makes more or less money than them. Instead of stating his own feelings (he never says, “I feel inferior when others earn more than me”), his primary concern is to avoid others' judgment. In describing what is “natural” to feel in response to this information, he is perhaps revealing something that is true for himself but that he may not be comfortable owning. Comparison judgment can be very disruptive, and this writer has a strong desire to avoid it.

Money is a sensitive topic, especially when it impacts our social selves. One of the reasons people are so anxious about money is because it is often a basis for comparison. While I don’t deny that people rampantly compare, it's unfortunate, because I think money is about the most invalid form of comparative measurement available.

If one person has $20,000 in the bank and another has zero, then is the one with $20,000 that amount… “better” at “money?” If one person earns $50,000 a year and another earns $75,000, is that person getting it 50% more “right” than the first guy?

Of course this example seems ridiculous because it’s not just about the dollars – maybe one person received an inheritance and the other did not, or one is a school teacher and the other works in marketing. With so many ready contextualizers, money immediately proves itself to be a poor standard of personal comparison or worth.

Even if two people both earn exactly the same income they can have widely varying financial lives. Inevitably they have different housing or transportation costs. Maybe one pays a student loan. One may support a family. I will guarantee you that they will have differing values about what they prefer to spend on food, clothing, entertainment, etc.

At the end of the day, money is a resource that empowers a person’s choices. But different responsibilities, liabilities, and opportunities affect the amount of “choice” a certain income is likely to afford. And while there may be similarities or trends, the delicate combination of resources, liabilities, and choices is unique for each individual.

If I may wax rhapsodic for just a moment, it is this uniqueness that makes me love what I do. When I read a person’s budget and talk to them about the role of money in their lives, I get such a strong sense of who they are as a person that I sometimes joke that I can “psychoanalyze a budget.” Where does the person treat himself? Deny himself? What are the boundary issues in this person’s life? What was provided in his early years or what did he have to overcome? It’s all there in black and white if you explore the meaning behind the numbers.

I think most people find this concept of financial uniqueness surprising and terrifying. Surprising, because most of the popular wisdom about money involves certain universal truisms: save a portion of each paycheck, don’t buy a new car, pay off your debt. How can we be unique if we’re all supposed to be doing the same things?

And it’s terrifying, because if there is an area of our lives where we’d appreciate the comfort of the crowd, it’s in our finances. Making choices about money can be anxiety-producing. We would all like our choices to be validated -- or forgiven-- and since we tend to keep our personal information private we measure ourselves against those universal truisms to see how we’re doing.

When I say to clients, “Everyone in the world has more or less money than you,” my words are usually met with a surprised laugh and then a sigh of relief. Inherent in this phrase is permission to be an individual, to have limitations, and to still be okay.

Certainly there are economic realities that must be acknowledged. It is beneficial to spend less than you earn, and it is prudent to save for the future. But it is not a sign of one’s moral superiority to be in a favorable financial position. Nor should it be shameful to have less. (Or, conversely, to feel guilty for having more, or virtuous for having less.)

I feel strongly that it’s important to diffuse some of the isolation that we feel around money, and to not be so emotionally constricted on the topic. When our financial decisions are grounded in personal meaning, there is such freedom to own the whole spectrum of who we are. It doesn’t matter who has more or less, because we are all beautiful and unique snowflakes.