Should kids spend their money however they want
If your kids seem to have more money than you, well, welcome to the club. Between monetary presents, allowance, visits from the Tooth Fairy, etc., kids are just raking it in. But what happens when they want to spend all that dough on everything (and anything) their heart desires? We asked Solomon Amos, founder of Advisorsavvy, a company that helps Canadians connect with trusted financial advisors, for his expert advice. Here’s what he told us.
ParentsCanada: Birthday money, holiday money, Tooth Fairy money, allowance, cash from visiting grandparents, etc. Kids seem to have more cash than their parents these days. Should kids be able to spend their money the way they want. Why or why not?
Solomon Amos: Ultimately, this is a personal choice in how you wish to parent your children. But in most cases, children (and often adults, for that matter) learn by doing. Sure, you can give kids financial advice or help them build a budget, but it’s up to them to execute. And if they make a mistake? It’s better they learn now rather than later. The great thing about being a kid is you can make mistakes that don’t greatly impact your life. If you give them the room to experiment with money on their own, they’ll learn and be able to apply those lessons later in life.
ParentsCanada: Some parents opt for the “thirds” rule, or some variation of it — one-third of their kids’ money goes into a savings account, one-third is set aside for giving back, and one-third can be spent however kids want. (Some parents skip the giving back third and make spending or saving two-thirds.) Is this strategy to be a good plan?
SA: I think this strategy is a good plan. The rule of thirds is a good spending tactic that many adults use. Guiding your kids through this process will help them prepare for managing finances in adulthood. That said, there are so many ways to budget and allocate money, so don’t feel as if you must use this strategy with your kids. Some parents teach their kids to save 10 percent of what they earn. Other parents teach the logic of budgeting and allocating money, then let their kids fend for themselves. And some parents help their children create a customized budget depending on what they value and want to spend on. At the end of the day, the goal is to teach your kids that money is finite and therefore must be allocated accordingly.
ParentsCanada: Many parents are eager to teach their kids financial literacy, and many believe it begins with teaching them when to use the money they earn/receive as gifts and what to spend it on (or what not to spend it on). For example, younger kids might want to break their piggy banks for candy; school-agers might want to spend their money on online games; older tweens and teens might want to spend their cash on the latest technology. Should parents have a say in what their children purchase when they’re using, say, the one-third put aside for spending?
SA: Before answering this question, it’s important to consider the concept of value. In economics and finance, “value” is defined as the benefit someone receives from a particular product or service. Because we are human, we place greater value on some things over others, depending on our unique preferences. For instance, you might like to spend money on a home theatre because you and your family love to watch movies and TV shows together. But your neighbours might prefer to spend money on family vacations and outings. It all depends on your preferences and where you get the most value for your money. Try not to forget your children are watching—setting a good financial example is important when it comes to helping kids be financial confident.
As your kids age, they will become more independent and develop their own preferences. It might start out as candy in the younger years and evolve into technology in the later years. Often, your kids’ preferences are going to be different from your preferences, whether you like it or not. There are a few reasons for this. For one thing, the world we live in today isn’t the same as the world you grew up in. As an example, technology wasn’t nearly as big a deal when you were growing up, so it can be challenging to understand why your kid spends so much on tech. And of course, they’re becoming their own people, so their preferences will evolve accordingly.
You may struggle to understand why your children value something that you don’t value. For example, you may find it difficult to understand why your children spend money on apps instead of outings with their friends. As a result, you might feel you need to control their spending in order to achieve what you think is best. In most cases, this will lead to frustration for both of you. Remember, your kids are becoming their own people and they should have the freedom of choice when it comes to the money they set aside or saved—back to the thirds rule. You won’t always be there to control their spending, so it’s better to set that pattern now rather than later. In addition, you should focus on teaching them to spend on things that bring them value, not things that you think have value.
Finally, it’s better if you don’t try to control what your kids spend on. If you do, it will probably result in unproductive conflict. Instead, try to respect your children’s choices when it comes to spending. If they love to play video games, let them spend their money on it. It doesn’t have to make sense to you, and they’ll appreciate your support in the long run. When they eventually become fully independent adults, the concept of spending on things they value will stick with them.
If you are going to control anything, it’s best to be controlling of the budget aspect. More specifically, encourage them to save a certain amount of their money, instead of spending it all. And if giving back is something your family values, guide your children toward donating to charities that help a cause they care about. Otherwise, give your kids the freedom to spend on whatever brings them value.
ParentsCanada: What tools can parents use to teach and monitor their kids’ spending? For example, are there apps you’d suggest, or spreadsheets parents can adopt that would help?
SA: There are several tools and apps available to help your kids learn about money. Considering how much technology is incorporated into our lives now, having them track it online is a good idea. It will help them build the necessary skills to manage their finances digitally. However, there is nothing wrong with the old pen-and-paper approach.
A few apps to consider include MyDoh, Walo, iAllowance and TreasureCard. These apps usually come with a debit card so your child doesn’t have to carry cash and can get used to plastic cards.
Some parents prefer to teach their children rather than letting an app do all the work. If this is you, help them create an Excel or Google spreadsheet to track their earnings, goals, spending and savings. Then, help them devise conclusions from the financial information, like an app would.
ParentsCanada: If kids make what a parent believes to be a “money mistake,” how should we handle this? We don’t want to throw it in their faces that they’ve screwed up, but it’s important to make this a teachable moment.
SA: One of the challenging things about being a parent is knowing when to provide help and when to step back and let kids learn for themselves. It’s easy to want to give our kids everything because we love them, but that doesn’t exactly foster character building. So, how does this pertain to finances?
The idea is to create a financial atmosphere in your home that best replicates the “real world.” One thing to consider is not helping them when they make a mistake. This might sound harsh but trust me—keep reading. As adults, we have financial obligations. If we don’t meet these obligations, we run into consequences. For example, if you miss a mortgage payment, the bank will begin bothering you for the payment. If the issue prolongs, you might even face repossession and lose your home. You can mimic this situation within your children’s lives. For instance, let’s say your teen really wants a pair of “it” shoes. They choose to spend a chunk of their money on them. But the next day, your teen’s friends are going to the movies. Unfortunately, your teen doesn’t have any money left for a ticket and popcorn, so they ask you for money. You might be tempted to give them cash, so they don’t miss out on an outing with their friends, but that’s not quite how the “real world” works. Instead, consider saying no and let your teen learn what it means to spend money on one thing to forgo another. This will help them understand the value of a dollar and develop a sense of what they find value in. We can’t have everything all the time, and the sooner your kids learn that, the better.
When saying “no” to fixing a money mistake your kid made, it can be easy to have an “I told you so” moment. Perhaps you already taught them about budgeting, and they failed to execute. Be kind in the face of the mistake and remind your children of what you’re teaching them with respect to money. Tell your kids that your money isn’t infinite either and you can’t always come to their aid when they make a financial error. This will help them learn that they’re responsible for their own finances, not you.
