Child approved living quarters.

“Daddy, lets buy a big house with lots of rooms!”
“Nah, that sounds pretty expensive.”
“Aww, so? Just get some more money!”

And so began my fear that my children would never understand where money comes from. Granted, at 6 and 8 years old I still have some time. They still think they’re super-rich when they find coins on the ground, and they say things like, “Wow, that car must cost a hundred million!” I don’t ask whether they mean 100 million US dollars or old Zimbabwe dollars.

In search of the right way to teach my kids about money, I asked how to do it in a Mr Money Mustache (MMM) Facebook group. Besides the link to a MMM article there was a suggestion for the book Smart Money, Smart Kids by Dave Ramsey and his daughter Rachel Cruze. There’s a wealth of information in there – here are some of the main points from the book.

Work

Kids should work for money – at home when they’re young and out of the house when they’re older. Of course, there are still required non-paid chores at any age – that’s part of family responsibility after all. There is no allowance “just because.” Younger kids get a chart with age appropriate chores and dollar amounts next to them. Older kids will be working for others, babysitting, raking leaves, shoveling, mowing lawns, etc. (for example).

I agree with all of this advice.

Envelopes

Each kiddo 6 to 13 years old gets three fancy envelopes titled Save, Give, and Spend. Young kids are then forced to save a certain amount (it was 40% for the Ramseys) and give a certain amount (10% was the example given). The rest they can happily blow on parent-approved lollipops and Elsa paraphernalia.

This is all well and good, but why force the kids to split their money between these three envelopes? If they don’t save any then they won’t be able to afford larger purchases. If they’re disappointed when that happens, then have a talk about how to save some of it. Maybe this is my view because my kids naturally want to save their money. Even if yours want to spend every penny though, I don’t think forced saving is a good idea. Saving should happen because there’s a personal motivation behind it, otherwise the lesson will not be learned. Forced savings means the money is managed for the child instead of them managing it themselves. At 6 my son is ready for this. At 3 years old, not so much.

Preparing for College

Data is from the National Center for Education Statistics.

At 14 years old they graduate to getting their own real checking account, add services and donated time to their giving, fund a $500 emergency fund, and start their own business. They also start saving for college and a car.

This sounds like pretty good advice to me. I like Dave and Rachel’s aversion to debt.

When it’s time, take the amount spent on your teen for clothes, club and sports fees, lunch money, car insurance, etc. Give that money to him and then let him pay for each of those things out of his own checking account.

You then also teach them how to budget, doing it with them at first and then slowly weaning them off of your help. There’s also a fair amount of discussion about avoiding student loans, getting scholarships, and choosing an affordable school.

Other Advice

The authors are obviously religious folks and since I’m not, it was unfortunate for me whenever this came up, because I can’t relate at all to what they’re saying. It was repeated multiple times that “the money is not ours, it’s God’s money.” Which I assume is a fine way to teach humility and an unselfish view of one’s money, if you’re religious.

In the last few chapters the authors also go on to give advice beyond the scope of personal finance, and into the scope of direction and vision for family life. In my opinion this was a bit much and wasn’t handled delicately enough. (Don’t tell me how to raise my kids!!) But I’m the one that decided to read the book, so that’s what I get. Besides, it’s always a good idea to work at putting your personal biases aside and practice trying to understand other points of view.

Oops, Weddings

Mixed in with the other brilliant advice on saving for a car and college, budgeting, and starting a business, was a bunch of advice about weddings.

Never spend more than half a year’s income on a wedding because this is average.

Half a year’s salary on a wedding is way, way too much! If you make $50,000 a year you’ll be spending $25,000 on one day. Dave says never spend more than that – advice that’s way too relaxed in my book.

One study showed that there’s a correlation between how much money is spent on a wedding and the likelihood of divorce. That is, the more you spend, the more likely the marriage will end in divorce. (See the study, read this related article, or this, or this, or this.)  Besides that, expensive “traditions” at weddings are there specifically to rip you off. Granted, the divorce statistics are based on only one study, which is highly suspect, but the idea makes sense. Financial issues are a leading cause of relationship problems and spending more means more financial strain on the relationship. All in all, getting the $2,000 chairs instead of the cheap $200 option has a pretty low return on investment.

Missing Advice

Ah, I can picture it now. My two grown kids, 20 and 22 years old. Each with little to no debt, being financially responsible and on their way to becoming millionaires before I know it! That’s what I hope will happen anyway. In fact, I hope they learn to invest and become financially independent early in life. The book doesn’t really deal with investing though.

If you appreciate other Ramsey products then you’ll probably appreciate this one – it basically takes the “get debt free and stay debt free” mantra and translates it into good parenting. On the other hand, investing is just skimmed over briefly.

When a younger child wants to buy something that’s out of reach for them because of the price, the authors suggest matching half of the child’s payment for the item if you can (like with a 401K employer match). That’s okay, I guess. What would be better though, is an interest earning account at the bank of mom and dad (an idea from MMM). This means the child deposits money into the “bank” and every month interest is earned. So when they’re saving for something big they would automatically earn more money. In this way they learn about investing early on, they’re naturally encouraged to do extra chores, and they’re naturally encouraged to save their money instead of spending it. Investing was mentioned very little in the book and there were no details – saving is not the same thing. There was not one mention of the phrase “when you invest, your money works for you.” A bit of an oversight I think.

Buy It or Skip It?

Buy it. There’s a ton of information I didn’t include here that you’ll have to discover yourself. The advice is good, and more importantly, the stories make the whole thing enjoyable to listen to.

Will you implement any of this advice for your kids?