People don’t learn to handle money without practice. In our society, being able to handle money is a life skill. There is an ongoing debate about whether or not money skills should be taught in schools. I’m not sure that’s even possible. Let’s look at the things that are needed for people to learn before they can be considered able to handle money.
The first phase is where my kids are currently. They are just starting school and they really don’t understand the idea of saving money. Right now, we seem to talk a lot about what we will choose to spend our money on. “No, we didn’t bring money to the supermarket to buy candy with. We’re not going to buy candy because we’re buying healthy food.” When they get some money of their own, either for allowance or for working, they use it to get what they want, usually candy and toys. It’s important for them to develop a feeling of ownership and control. When they understand that it’s their money and they can choose how to spend it, even on something we disagree with, they develop the basis for being responsible with their money.
In the next phase, they will learn to save. If they want to save for a toy or something else that costs more than they receive in a single payment, they will need to learn to save. They each have a wallet and a piggy bank. They keep spending all the money they put in there, even though we keep talking to them about saving for later. The four year old says he’s saving his $1.20 for an iPhone, but maybe they need something more realistic to save towards.
After the saving phase will come the investing phase. We will open a bank account for them and they will learn that if they put money in the bank, it earns interest. We will open a brokerage account for them and they can see that some investments earn more interest than others. Some also go up and down over time. For long-term savings, they will understand that this is a preferable strategy.
The debt phase will be tricky. I don’t know if I’ll allow the kids a credit card with a very low limit (say $250) or if I’ll give them an informal loan. But they need to learn that there are two kinds of interest: the kind you earn and the kind you pay. They need to see that interest expenses and debt repayment eat up a budget. They need to experience the lack of freedom that a debt obligation imposes.
An economically healthy adult needs to carry out a careful balancing act. They will need to manage recurring spending, one-time spending, debt repayment, interest expense, saving and investing. These are all things that children can learn and understand, but must be learned by experience. Giving our children the opportunity to have money, make choices and make mistakes in a safe environment will help them to be successful when they are ready to join society as independent adults.