Teaching Your Kids to Invest Their Allowance

I recently decided that I had to teach my four year old about money. So I started researching the best way to give an allowance. Now this may seem crazy to people, but I find that most things have been done before so why not spend half an hour looking into a topic instead of just doing what you think is best. Some interesting points came up.

  1. If you give a child an allowance tied to chores, they can say no in the future if the amount of money doesn’t represent the work involved. I thought this was good insight as after a kid gets $20 from a birthday they likely don’t care about the $5 tied to a week’s worth of chores.

  2. If you just give them money, they’ll learn about the value of items and saving, but will miss the tie that money comes from hard work.

  3. Have your child split the allowance into spending, saving and giving.

Now this all seemed like decent advice so I discussed it with my wife and we ended up giving our son $4 a week...because he’s four. I know, super scientific.We helped him split his money into a saving, spending and giving piggy bank. In the future we would also like to tack on extra chores tied to extra money to make sure he realizes that money doesn’t grow on trees.

The first week went by and the spending money was blown on kinder surprise, a delightful chocolate lottery where a highly processed milk chocolate egg hides a horribly cheap little toy in the middle. But it was his decision, as it’s his money so in the cart it went and he paid for it at the till.

The next few weeks a hot wheels toy ended up in his hand or some other little toy/treat all the meanwhile his savings piggy bank was growing. Fast forward a few weeks and he spotted a toy he wanted. A Side Swipe Rescue Bot that transformed into a car in one simple move and had the pull back to race forward mechanic. It was fantastic (seriously I grew up with Transformers they’re awesome), but $15 was out of his price range. So I bent down, pulled the toy out of his hands and tried to explain to him that $15 was more than he had and he’d have to save up to buy it.

Now I have to say I felt like a jerk. Here I am in a position to easily buy this toy and all the kids around me are with their parents picking out something and I’m explaining to my son that he doesn’t have enough. But, and this is key, this is how you get and stay rich. You don’t spend on impulse, you make decisions.

So we went home and a few weeks passed and we realized he finally had enough money. So the next visit to the store we picked it up and it’s one of his favorite toys.

But here’s the issue now. He’s spending his saving account and we’ve tied that to saving up for bigger items. Like an overpriced Blaze Race Track (his choice, got to let it happen).

In one sense it’s good, we’ve shown him that by saving money you can buy bigger things. But I want to teach my kids that by investing lots, the dividends can buy many things. Most importantly, early retirement.

So I’ve come to the conclusion that I need to start an investment account for my four year old. 

That way he can put his money to work and I can show him that it grows and makes its own money. I’m also thinking whether to limit any withdrawals. If I limit withdrawals, then he gets the amazing experience of seeing the power of compounding. But then he doesn’t have control so he’s not actually learning to delay consumption for future gain.

Here’s the real issue though as Derren Brown said in his book Happy “The greatest burden a child must bear is the unlived lives of the parents.” And as a kid out of school I did well saving right away for retirement, but I didn’t save the 50%+ that would let me retire extremely early. I’d like my kids to be more aware of this option. So I’m thinking of guiding half of his allowance into an investment account and then the remaining would be split between a spend/giving jar.

How do you invest half of $4 per week? With the Bank of Mom and Dad! I’ve created a google sheet that will track deposits and withdrawals, calculate interest and show the incredible force of compound interest. You can even pick the return you’ll give your kids. I’m doing 10% per year, it’s a bit rich compared to real life, but it’s on a low balance and I want him to be motivated.

You can view and download the Bank of Mom and Dad google sheet here. Just click "File" then "Download as" and pick an excel format or google sheet. 

And let me know in the comments how you’re teaching your kids about money and getting them to take care of their future. I’m sure there’s a ton you could share with me and I’d love to help our community help the next generation of Buck Builders.