Personal Finance for Children and Pre-Teens

When I graduated from high school, I didn’t know anything about personal finance, except how to balance a checkbook. I’ve learned a lot through the school of hard knocks, and I’m grateful for what I’ve learned, but I wish I would have known more before I headed out to college on my own. One of my goals as a parent is to make sure my children are financially prepared to survive in the real world.

Madison at My Dollar Plan and PaidTwice at I’ve Paid For This Twice Already have covered the pre-grade school years, and today I’m going to cover ages 6-12. I’m going to break this post into two parts, because I change the way I do things with my children at age 10. My technique for teaching my children how to manage their money is taken largely from Debt-Proof Your Kids by Mary Hunt.

Age 6-9

By the time children hit first grade, they are generally starting to learn about money in school. They begin to learn that a quarter is more than two dimes, and that dollars are worth even more. They are also old enough to grasp the concepts of savings and giving.

When our children are between 5 and 6 years old, we move from the responsibility chart I told you about recently to a regular allowance. To make it easy and fair, we give 50 cents for each year of age. Right now our 9 year old is receiving $4.50 a week and our 5 year old will be receiving $2.50 a week when he starts getting an allowance next month.

There are two schools of thought when it comes to tying allowances to chores. The first is that children are paid for their chores, and if chores aren’t done, the child doesn’t get his allowance. The second idea is that children are part of the family, and because they’re part of the family they do chores, and they also receive the benefit of an allowance just for being part of the family.

I don’t really feel strongly either way, but we’ve chosen to not tie allowances to the chores. Our primary reason is that our daughter is not at all motivated by money, and she’d just as soon skip the chores and not get paid. The second reason is that I believe in easy systems, and keeping track of what chores are done and how much money to dock a child is just too complicated for me.

In the grade school years, our children are required to tithe 10% of their allowance. They split the remainder in thirds. One third goes to long term savings (for college or a car), one third goes to short term savings (for a toy they might want), and one third is blow money. This system works pretty well for my daughter, who usually ends up saving everything, and I think it will work well for my son, who would probably spend everything right away if we didn’t make him save some.

Teaching children the importance of giving and saving at a young age is really important. I don’t want my children to get into the habit of spending everything they bring in. That’s a really hard habit to break. I know, because it’s a habit I had to break!

Age 10-12

When our daughter turns 10 next month, my husband and I are planning on moving her from an allowance to a salary. Liz’s salary will be loosely tied to chores, and she will be responsible for budgeting (with lots of help) for certain expenses. She will be paid once a month, so she can begin to get a feel for what it’s like to have to make a “paycheck” stretch for a longer period of time.

We’re going to start her out slow and have her be responsible for birthday and Christmas gifts for friends and family, toys she wants to buy, and extra activities, like movies with a friend or other activities that don’t involve the family. My husband and I will sit down in the next couple of weeks and figure out how much we spend on these things for her over the course of a year, divide that by 12, and that will be her salary.

We’ll help her look at the coming year and make note of birthdays and other events she knows she’ll need money for. We’ll also encourage her to save some extra money for last minute invitations to activities. But in the end, she’ll be responsible for deciding what to do. If she spends her whole salary in the first week, and then gets invited to a birthday party, she’ll have to decide whether she wants to make a gift out of things she has or skip the party. As a mom, I’m sure the mistakes will be hard for me to watch, but I’d rather have her make mistakes now when I can guide her, than later when the stakes are higher.

As far as chores go, she will still have her responsibilities, and she can choose to do them, or she can hire someone else to do them for her. Her room will have to stay clean, but if she doesn’t want to clean it, she can pay me or her younger brother to clean it for her. I’m sure it won’t take her long to figure out that cleaning her own room is better than having to dish out money to her younger brother.

As each year passes, we will increase our daughter’s salary and responsibilities, so that by the time she graduates from high school, she will be used to budgeting for almost all of her expenses, and will be well versed in giving and saving part of her “paycheck” and living on less than she earns.

For learning more about this system, I highly recommend Mary Hunt’s Debt-Proof Your Kids. This book focuses mostly on teaching finances to children ages 10-18, but it does have good tips for the younger crowd as well.

What’s your system for teaching financial matters to children? Do you have a plan? Are you winging it? Please share your tips in the comments.

Money Matters for All Ages Series

Make sure you check out the rest of the Money Matters for All Ages series. I will be adding new links as they go live, so check back frequently. Here is the schedule of posts: