Good news

All hope is not lost from our last discussion. After a few days, my daughter came up to me and asked me if I had finished my spreadsheet on saving part of her allowance. I had even better news. I found a little website that would calculate for her - either by inputting the amount saved and the period saved or by establishing a target amount to save by a certain time.

With that in mind we decided to try to figure out how much she would need to save monthly at an average return of 8% to have $500,000 by the time she is 40 if she started with the $7,000 she already has in her two savings accounts. She would need to save $345.88 which seems like a lot to a twelve year old. I explained to her that its really not that much, just $4,150.56 a year which could easily be done once she gets a job. And if she takes at least half of every raise she ever gets and puts it directly in to savings instead of spending it, it will be even easier for her to save beyond the $500,000.

So I think we are making some progress. Or I thought we were until she told me yesterday that she had two things that needed to be dry cleaned. I asked her where she got clothes that needs to be dry cleaned - Abercrombie. So we had a brief lesson in the ongoing expense of buying items that have to be dry cleaned. Dry cleaning costs $2-4 per item, more for women's and children's clothes for some unknown reason. So wearing them once every two weeks and having them cleaned could cost between $24-48 per year just for the cleaning. I told her she could have purchased another shirt for that. Her first reaction was that I was always getting clothes dry cleaned. I told her that was when I worked in an "office job" that required me to dress up in clothes that generally required dry cleaning. She thought I got them cleaned for one fixed month cost. After explaining the per piece of clothing pricing and how much I used to pay for cleaning before I started working for myself, at home, in my jeans, she seemed to have a greater grasp of the concept.

Does anyone else think it is crazy that a children's clothing store has items that are "everyday casual" that require dry cleaning? Especially in this economy.

Where does money come from?

I asked my two youngest children (10 and 12) this question over dinner last night. My 10 year old son's reply, "from the printing press" and my daughter nodded agreement. She asked how and where they print it. I clarified the question.

"How do you get money?"

Again my son answers with a logical response, "I get it from you."

"Yes, but if you needed or wanted money and I didn't give it to you, how would you get it?"

"I would have to get a job or sell something."

Now we are getting somewhere.

"Do I have to get a job?"

I explained that there are several ways to earn money. One is getting a job working for someone else. Another way is to start a business like mowing lawns or babysitting where you charge customers for your service or you make something that you can sell at a profit( I am saving "profit" for another night). My 12 year old daughter makes scarves so we used that as an example. And finally, I tell them if you save some of the money you make it can earn money for you in the form of interest or dividends. I decided to skip capital appreciation for the time being. We were already wading in pretty deep.

"What age do you have to get a job?" asked my son.

Dad responds, "Age fourteen is the minimum age."

"Do I have to get a job then?" asks my daughter.

I can see this isn't going to be easy breaking them of the habit of living on easy street.
We back tracked from the job discussion to allowance. Maybe I could show them how saving part of their allowance every week would add up over time and produce additional income. It seemed like a good idea when I started.

I went to my office to retrieve my computer and started on a mini spreadsheet. My daughter gets $1 for each year of her age, so $12 per week. In return she is supposed to do 3 chores per day, 1 weekly chore and 1 monthly chore (we'll get to that discussion another day). So I used the example of saving half of her allowance every month with a compound rate of return of 7% (probably too generous in the current environment). It didn't take long to figure out that saving $24 a month wasn't going to make anybody rich. She didn't find it even remotely interesting. I backed up again. What if you started with the $2,000 you already have in savings and then added the allowance and half of any gifts ($150/year) and babysitting ($75/year) money added periodically? Then what would you have?

Well, after two years of saving the money had earned about $350. My daughter said, "I could almost buy a new computer with that."

Ouch. She missed the point entirely. I said, "Don't take the money out and spend it. The point of saving is that you are saving for your freedom. Financial and personal freedom." She gave me a blank stare. I explain that having money provides you with freedom in every way. You don't have to work in a boring job or with people who frustrate you, unless you want to (but who would). You can be absolutely independent. Of course, independence is the value that I value the most. I think my 21 year old has the same value system but I am not so sure the other two value independence in the same way. Maybe they are just too young.

I decide that I have overloaded them for the night. They are losing interest. I am going to have to come at this from another angle.

Thirty minutes later while standing at the sink my son walked over to bring me his plate. He looked at me and said, "When I grow up I am going to be a millionaire." So maybe some of it did sink in.

Why don't we teach or children about money?

The financial crisis had made many people rethink where they are financially. It has also given people the opportunity to rethink their relationship to money and the value of a dollar. When I was growing up money was one of those subjects you just didn't talk about unless it was in a whisper. Occasionally I heard my parents arguing about money. My father was a real estate developer and builder and he went broke twice in his life. This is fairly common in that profession but I didn't know it. I grew up with major issues around financial security. As a result, I traded my dreams of being a "creative" person - artist, actress, movie maker for the stable profession of accounting. You can always get a job if you are an accountant.

Over the years I used my accounting training to move in to different roles and learn about business. I also used my understanding of "the numbers" to learn more about investing, finance and operations. I worked long hours climbing the corporate ladder to provide financial security for myself and my family. All the while ignoring the need to teach my own children about money. I have "two families". My daughter from my first marriage is now 21. I didn't teach her anything about money, except that if she needed it she could come to me or call her father (if it was a really big amount) and we would provide. The Bank of M.A.D. (Mom and Dad) is all that many children from her generation know. With my second marriage, I had two more children now ages 10 and 12. I had the opportunity to correct my mistake and teach them about money. But I didn't start out teaching them either.

Teaching children about money is absolutely critical to their survival in EVERY way. How is it that schools and parents and society don't teach anything about this? Its nuts. So I resolved, after the crash, to start teaching my own children about money. It was a slow process without any sort of a plan. So I've decided that having a blog about teaching kids to be financially savvy with help me put some structure around teaching them and perhaps provide some guidelines for other parents who want to do the same. So each week (sometimes more often) I will be writing about a particular lesson or aspect of what I am trying to teach my kids about money.

#1 - Money is good. Money provides freedom. Its not bad to want to make money - its how you make the money and what you do with it that matters.