Raising Financially Responsible Children


(This is a reprint of an article from Living Magazine, Summer 2001, p. 31)

William C. Wood, Ph.D.

What do these incidents have in common?

  • A five-year-old makes such a fuss in the grocery store that his parents give in and buy him a box of animal cookies.
  • A 12-year-old mows the lawn for her parents. She doesn’t do a very good job but her smiling parents give her $50 in payment.
  • A 15-year-old loses a valuable jacket at the football stadium, but reacts casually to the loss because “Mom and Dad will just buy a new one.”
  • A new college student runs out of spending money well before the end of the semester.

These are all steps along a road that can turn young people into financially irresponsible adults. Both young people and the adults in their lives need to be careful to avoid this road. But how?

Young people can become financially irresponsible if they face increasing privileges, and increasing accountability, as they grow up. Gradually they are given more and more responsibility, until as young adults they can stand on their own. As a college professor, I have seen too many students who left home without having had to make spending choices and face the consequences. The result is young adults who don’t know how to handle money.

To become financially responsible, young people have to learn about scarcity. Economists define scarcity as the inability to meet all wants at the same time.

Most parents and grandparents today understand scarcity all too well. They grew up at a time when everybody knew that you can’t always get everything you want.

They had to make choices. If they spent more at the grocery store, there might not be enough left to get the car fixed. Vacations and new furniture were not guaranteed, but were attainable if the household could save and conserve.

Increasingly today after years of prosperity, children have little contact with scarcity and choice. This is especially true in affluent households, but even in less well-off households, children may be insulated from scarcity and the choices that must be made as a result.

The challenge for parents, then, is to help their children learn to make decisions and confront scarcity on their own.

In the grocery store, for example, the five-year-old needs to learn that you can’t get your way by fussing. I recommend that parents facing the “grocery store grabs” set a limit and enforce it.

“You may have one special treat” is a good idea for children old enough to understand the concept. If he gets the animal cookies, he won’t get the snack crackers. Let him pick the one special treat, don’t bend the rules, and don’t open the package before you get home.

For older children, “you may put two dollars’ worth of special treats into the cart” can teach valuable lessons about scarcity. The important thing is that the boy or girl understands that there are limits that must be respected.

As a child matures, giving an allowance properly can help teach valuable lessons. The best way is a two-part allowance: part that is paid each week automatically and another part that is to be earned by doing household chores.

Children shouldn’t be paid for every job they do in the household. They need to understand that they have responsibilities to each other, and they don’t just do what they’re paid to do. Remind them that the adults do a lot for the household – and they certainly don’t get paid for it!

Beyond the base allowance, however, it’s a good idea to pay for big chores. The pay should not be too high or too low. Remember the 12-year-old who mows the yard badly but then gets a $50 payment? She is on the way to disappointment, when the world of work offers much less pay for harder work. Better than overpaying would be a more reasonable fee, coupled with gentle encouragement and coaching on how to do a better job.

It’s equally important not to pay too little. Kids can become discouraged if they think their work is not being rewarded. Usually it’s best to pay about half of the hourly minimum wage to 10- or 12-year olds for big jobs, then gradually increase to about the minimum wage for teenagers.

The 15-year-old who leaves behind a valuable jacket in the stadium, unconcerned because it will automatically be replaced by parents, presents a difficult situation. At this age, teenagers need to be taking responsibility for their belongings.

Although parents earlier may have automatically replaced lost items (so that their kids wouldn’t get cold), by age 15 it’s important for young men and women to face some consequences for lost items. The best strategy is different for different families, but a teenager who loses items should be required to work – inside the home or out – to pay for part or all of the replacement cost. To require less shows disrespect for the parent whose income originally bought the lost item.

By the time young men and women enter college, they should be on “almost adult” standing financially with their families. The student who runs out of money before the end of the semester has only a few opportunities left to learn financial responsibility. If the parents step in and solve the problem with additional money, an important opportunity will have been lost. After all, the parents won’t always be there to solve their children’s problems.

Credit cards will sometimes make it seem as though scarcity doesn’t exist. Advertising makes us think we can spend more on everything, if we just put it on the card. When the bill comes in, however, scarcity is back. Credit cards only delay it. They don’t defeat it. Young people need to learn that before they start getting those attractive credit card offers in the mail and in student newspapers.

Learning about money isn’t all about saving and conserving, however. It also involves giving. Beyond assigning children more financial privileges and responsibility, parents need to model the right attitude toward money for their children.

It is a powerful example for children when parents cheerfully give away a tenth or more of their income – an Old Testament practice that was specifically commended by Jesus. Cheerful giving demonstrates that money does not have a hold on us. Yes, we conserve it and save it and spend it carefully, but we also give it away to help others.

As children grow up, one of the hardest things for parents to do is to let them make mistakes. As children learn about money, however, it’s important that they begin to make their own mistakes. If a child spends an entire allowance on candy and later regrets it, that’s not all bad. A good lesson can be learned.

In the Bible, we read about the prodigal son who took his inheritance and spent it all in wildliving. His father could have denied him the money, but he didn’t. He let his son go on. Sure enough, the son made big mistakes with the money, until he got so hungry he envied the pigs he was feeding.

The father’s response is a model for parents and a model of God’s love. When he saw his son coming home, the father called for an extravagant party with choice food and music and dancing. Killing a fattened calf to provide beef for the party was a considerable indulgence in Biblical times, but the son’s safe return called for a big celebration.

In following this example, parents sometimes have to let children make mistakes. It’s far better if those mistakes are small and easily corrected, relatively early in life. When a big mistake is made, sometimes parents have to just pray and wait. And when a child turns away from the dark and back to the light, it’s time for a celebration.

Children will grow up happier if they learn through their parents that money and resources are limited, but God’s love is not.

William C. Wood is Professor of Economics at James Madison University and a financial adviser. He operates a Christian personal finance website at www.plainmoney.com.