Years ago I volunteered to teach financial education at John Muir Elementary School in Glendale, CA. At the time I worked for one of the world’s largest banks and as such was considered an authority on such matters. My fellow volunteers and I were assigned to a class of fourth graders. We talked about saving, credit, and general principles of commerce. Part of the conversation was centered around financing cars. We asked the students to volunteer the make and model of their parent’s car. One of the students raised their hand and, when called on, said that their mother drove a Land Rover Range Rover. While a Range Rover is probably not the average person’s car, it did give us an opportunity to illustrate an example of the financing cost of a luxury car.
We informed the students that the average term for a car loan was 5 years or 60 months of payments. We asked the students to guess how much a Range Rover cost and how much they would have to pay per month to finance the purchase of the automobile. First we talked about the cost of the vehicle. We received the gamut of answers. Some kids made guesses in hundreds of dollars, while others guessed in the thousands. A few kids guessed in the low tens of thousands, but not one child was remotely close to the actual price. At the time the Range Rover cost about $90,000 and the closest guess was $30,000.
Once we established the price we asked the kids to venture a guess on how much they would have to pay per month to finance $90,000. The good news was that we had already given the kids some of the basic math, they knew that they had to divide $90,000 by 60 payment periods. A few kids ventured the guess of $1500 incredulously. They couldn’t believe that a car would cost $1500 per month for 5 years. When they learned that they would pay roughly an additional $157 per month in interest they were shocked (based on a 4% interest rate). The next exercise was to total the payments. $1657 x 60 = $99,420. Almost $10,000 in interest alone. One kid joked that this was why all of the bankers in the room could afford to wear such nice suits. When the allotted volunteer time had expired the volunteers left the classroom discussing the disconnect between the children’s perception of the cost of ownership and the actual cost of ownership.
Years later, as a parent, I reflect on my responsibility to educate my children and to help them to develop a money management mind. One of the more interesting ways to help educate children on general commerce came from something that I read. The basic concept being that commerce is exchanging something of value for something else of value. Most kids seem to have a strong affinity to watching TV, playing video games, or being on the internet. Let’s call these activities screen time. Screen time is something the children want, what do they have of value that can be exchanged for screen time? We can use tokens, tickets, poker chips, or really any other item of which we control the supply. The idea being to ascribe value to something that doesn’t otherwise have intrinsic value. At the beginning of each week we distribute 6 tokens valued at 30 minutes of screen time each. The children can redeem these tokens at any point through the week for 30 minutes of screen time. They can also earn an additional token for each 30 minutes of reading that they do that week . At the end of each week, if they have any un-used tokens they can trade them in for $1 each.
Here are some of the lessons that we can teach our children by adhering to such an exercise:
- Money has value because we give it value. The token is just a circular piece of metal unless you can exchange it for something else of value; similarly, a dollar is just a piece of cotton paper unless you can exchange it for something else of value. See my post about the value of money.
- There is relative value of goods based on preferences. One of the children may consistently redeem their tokens for screen time and after depletion scramble to read and earn more tokens for screen time. Another child may never redeem the tokens for screen time but rather consistently redeem the tokens for real money (fiat currency) at the end of each week. We can get creative and show the relative value of the goods in our “mini home economy” expressed as ratios. I.e. Bobby received 6 tokens at the beginning of the week, earned 6 tokens by reading 3 hours, redeemed 2 tokens for 1 hour of screen time, and redeemed 10 tokens for $10 at the end of the week. Bobby is 3x more likely to read than to get screen time (3/1) and 5x more likely to trade tokens for money than screen time (5/1).
- Do the children create side businesses? It is not uncommon for a child to offer to trade a stuffed animal or another toy for tokens. This expands the “mini home economy” and can be likened to creating new goods or services that can be exchanged for value in the broader economy.
- If a child struggles with reading but loves watching TV, this is a great opportunity to talk about the value of hard work. Reading can be hard, but directing effort to completing the task brings the reward of additional screen time. In the “real world” we trade our time and efforts for money when we are employed.
- We can discuss the value of our time. In this exercise, each 30 minutes spent reading has the value of one token, one token can be redeemed for $1, 1 hour of reading is worth $2. How can the child increase the value of their time? Offer $3 per hour to weed the garden, or clean the kitchen. We can show the child that different tasks are worth more to people in the “mini home economy” much like a doctor’s time is typically more valuable than a janitor’s time, because people are willing to pay more for the doctor’s time than the janitor’s time in the broader economy.
Taking this exercise to the next level is founding the bank of the parenting regime and offering interest for funds held in the bank (e.g. $1 per month for holding $10 in the bank). We can also allow the kids to borrow tokens on credit with interest required on repayment (e.g. $.25 per week for borrowing $5).
We should meet with the child on their short and long term goals with money. A short term goal might be saving for a toy and planning for this. If the toy costs $30 and the child on average redeems tokens for $3 per week, explain that at this rate it will take 10 weeks to save enough for the toy. Ask if the child is comfortable with that time frame. If they want the toy sooner, help them to craft a plan to be able to earn more per week and shorten the time frame. Remind the child through the week about their plan and help them to have the discipline to stick to it. Long term goals might be setting aside money for a significant event like travel or educational pursuits.
In this exercise we typically find that the kids will read more, redeem tokens more often for money than for screen time, and generally have a good experience with the exercise.
This is a great way to get the financial literacy dialogue started. Once the child understands the basic premises of commerce, talk with them about the monthly household bills, cost of goods, taxes, etc… We should give our children greater visibility to financial matters while they are young so that when they branch out on their own they are equipped to make sound financial decisions.