In previous articles I laid the ground work to prepping your child for this step. This article speaks directly to working with your child and building a spending plan together. In future articles I will cover, in depth, what comes next. The focus of this article is on creating a spending plan both you and your child can live with and learn from.
My previous articles covered these topics: "Start as Early as Possible", "Change the Way They View Money", "Get Rid of Allowances", and "How Much is Enough". This article covers the importance of and some ideas on how to "Establish a Spending Plan".
Skipping this step, "Building a Spending Plan", in your child's training is like going on a long trip without a map. You might get there eventually but the number of unintended detours, backtracking, and wrong turns along the way will cost you in time and money. There's also the frustration and insecurity of not knowing if you are in a safe place or even if you are traveling in the right direction. A well designed spending plan, like a good map, will make the journey go a lot smoother.
Having a spending plan teaches your child the value of saving for "big ticket" items, - that special toy they really want, a gift for a family member, sports fees or summer camp for example - while at the same time managing the "day to day" expenses - a candy bar at the checkout line, a soda and hot dog at the game or MP3 player download. It reinforces and helps them to learn priority setting. There are few things in life that reflect a person's priorities more than how they spend their money. To paraphrase what I once heard someone say, "Let me see how you spend your money and take a look at what you throw away and I can tell a lot about what is important to you." A spending plan forces us to realize what's important to us.
For younger kids, help them set up a very basic spending plan. Have one fund to save for those big ticket items like the bicycle they really want. Have another fund for general spending; the day to day items like the candy bar at the check out counter or a small toy. Have them set up a third fund for charitable giving. If you have a special charity you support, let them pitch in. We supported a World Vision child in China. Involving our son in this made it more real for him. It is important that our children understand that life exists beyond ourselves and sometimes we can be a part of helping someone else in their time of need.
If you are starting this with a younger child, one thing that works well is to get a three part bank that is labeled for spending, savings, and charity. When pay day comes around, teach them to put at least 10% in the savings bank, 10% in the charity bank, and the remainder in the spending bank. If you are going to have them make the purchases for birthday gifts for friends or family members, have them put more than 10% in the savings portion. Having them buy the gifts is a good idea because it gives them a feeling of pride and self-confidence if they are directly involved in the giving.
Regardless of where the money comes from, whether it is income from you, a gift from a grandparent or they find it lying on the ground, teach them to divide it into the three categories. This will keep them from seeing money as anything other than the tool that it is. If it is given to them for a specific purchase - grandma gave them the money as a birthday gift toward the purchase of a new bike - then all of it would be placed in the bank associated with that purchase. In this example it would all go into the savings bank.
As your child approaches high school the categories will be more complex. When our son reached high school, we worked with him on a spending plan that included setting aside enough to buy a car by the time he reached sixteen.
His spending plan comprised these categories:
- Clothing - all personal clothes and sports equipment (Remember the soccer shoe story from my earlier article? He was now responsible for buying them.)
- Entertainment and Recreation - eating out with his friends, movies, dates, DVD / CD purchases, and video game purchases
- Charitable Giving - different families will have different priorities
- Gifts - for friends and relatives
- Savings - for long term goals (car)
- Auto - with the car he added this account for gas, oil, insurance, and maintenance
- College Fund - this could be in the savings section, but we wanted to ensure it didn't get lost in the mix so we made it separate
- School Expenses - lunches, activity fees, sports fees, books, and school supplies.
We did not include things like food for when he was at home, plane fare or hotels while on family vacations or things that would normally fall under our responsibility. The objective is to allow your child to learn to manage a limited resource of income to meet their everyday and long range needs and goals. You are preparing them for real life as an adult.
Cell phones weren't a commodity for kids when our son was growing up in the nineties. If cell phones are part of your family dynamic, you will want to make that cost part of their responsibility and create a separate category called "Phone". Depending on the phone plan they choose texting, tweeting, and other popular applications are one area that can really bring the reality of impulse spending to light. Often teens don't realize how quickly those five cent text messages can add up. When the bill arrives they may suddenly realize they need to sacrifice some of their entertainment because they exceeded the phone expenses category.
Many have asked about having a "Miscellaneous" category. I recommend you avoid it. What we have seen happen is a lot of things get dumped here when they belong somewhere more specific. If you feel you must have this category, teach your children to use it sparingly and watch it closely.
With older children do a realistic evaluation of the cost of everything you and your child can think of to meet their basic needs and long term goals. Include everything you would probably be paying for anyway. Depending on their previous involvement it is quite likely that your two lists won't match exactly. Don't worry about it, start with everything you both can think of and work backwards.
Once you have compiled the list, review it in relation to your child's age and ability to grasp the concepts. Decide what they are ready to take on and what you should keep. Don't be afraid to stretch a little, this is how they grow. Because we want to maintain control, most parents do not give their children sufficient responsibility. Resist this urge.
Remember, this should be a "zero sum" event for you. You should not be giving them any more than what you would have spent on them in the first place. The only real difference is how it gets managed and by whom. Be prepared for a surprise. You will likely discover you are buying a lot more than you think.
In the beginning keep a close eye on how your child is doing. This is a critical point in the process and establishes the foundation for their future success. As your child demonstrates an ability to manage and make right decisions you can give over more control. If you began at an early age, by the time they are ready for high school you will have a pretty good idea of how they will do. Although we didn't start this until he was eleven, by the time he was ready for high school our son was ready to take on most all of these responsibilities.
As your child matures it will be necessary to make adjustments; to alter the amount given, the categories, and responsibilities along the way. It is all part of your child learning how responsibility is related to privilege. Strictly from a parenting position, it is easier to increase the money than decrease it and it is easier to reduce the responsibilities than increase them. Do not let ease and personal comfort over shadow the growing opportunity this experience provides your child.
If you read my earlier article on "How Much is Enough" you may remember the catalyst for us doing this was the purchasing of soccer cleats varying in price from $70 to $120 for shoes that would only last one season. Our son wasn't able to tell us why the more expensive pair was better nor could we figure it out beyond the brand name. It was then point we realized he really didn't have an understanding of making an informed purchase. We were on our journey.
By the time he was in high school he had the responsibility of picking out his own cleats and funding it from his spending plan. We are very pleased to say he was making informed decisions and managing his spending plan quite successfully.
We reviewed and made adjustments along the way. Sometimes we got it right, sometimes we didn't. At a minimum, you should review and make adjustments once a year. We made minor corrections throughout the year. We did a more complete review at the end of each school year, adjusting his income and spending plan over the summer to prepare for the coming school year.
Of all of the steps, this one is the most important. If your child enters adulthood understanding how to manage what they have, it won't matter as much about their income. Why? They will know how to be successful with whatever they have. Teach your kids how to build their own map to a more successful money management plan. When they become adults, they will be far better prepared to meet the challenges that defeat many families every day.
Future Articles that will build on this one and give you additional detail are: "Let Them Manage It", "You Must Be Able to Say, "No"", "Savings Will Save Them from Disaster", "Giving it Away Will Help Them Grow", "It is OK to Talk About Money", "Tell Them About Your Choices", "Teach Them About Compounded Interest", and "Don't Give Up - Don't Give In".
