A few years ago I conducted a little experiment in order to ascertain my young kids’ sophistication level regarding money. Essentially, I subjected my then-9-year-old daughter, Nina, and 11-year-old son, Matthew, to a detailed loan interview with the Bank of Dad.
The interview basically revealed that my kids were, understandably, still rookies in the world of personal finance and money management.
As a parent, it is extremely important to me that they know how to manage their personal finances before they eventually spread their wings and fly away to start their own lives.
At the very least, I want my kids to be able to manage their personal finances better than most politicians oversee national budgets.
I know what you’re thinking: Gee, Len, you’re not setting the bar very high.
That’s true. But as Mr. Miyagi told Daniel-san in The Karate Kid, “First learn stand, then learn fly.” Indeed, Mr. Miyagi. But I digress.
The Art of Bookkeeping
To help my kids learn about money management I decided to teach them the art of bookkeeping (which happens to be the only word in the English language spelled with three consecutive sets of double letters).
For managing personal finances, a single-entry system such as a checking account register is all that is required. My kids use a slightly modified system which is no more complicated, but better geared for their needs.
Yes, I could use spreadsheet software, but for this task I have my kids going old-school; they each have their own small composition book, like the kind you might have used in high school, as a ledger. Here’s how it works:
Instead of getting a fixed allowance each week, my kids have a list of chores that they are responsible for doing. Some chores can be done on a daily basis, others less often. Each chore has a “wage” assigned to it. For example, making the bed is worth a quarter, pulling weeds is worth two bucks, etc.
When the kids complete a chore on the list, they enter the activity into their personal ledger book in black ink. The entry is then initialed by either Mom or Dad; our signature not only ensures quality control (is the bed really made, or are the covers just thrown over the top of the bed), but also guards against phantom entries being recorded into the books.
Each composition book is divided into six columns as shown in the example below. Inside the front cover of the ledger is a list of their chores and the corresponding pay for each task. This avoids any disputes between, um, employees and management.
The ledger gives my kids an up-to-the-minute accounting of their current financial situation. When Matthew or Nina is ready to make a withdrawal they enter the amount of money they want in their ledger’s debit column using red ink. The kids are then promptly paid by The Bank of Dad. Upon payment they are also asked to sign their names on the ledger sheet to verify that they received the money.
Reward Saving … and Penalize Borrowing
To encourage saving, Matthew and Nina are given a 25 percent bonus on the last day of each month on the net money saved for the month, after withdrawals. Of course, this bonus is recorded in the ledger as a “savings bonus.”
To encourage responsible borrowing, my kids are also permitted to withdraw more money than they have in their account — in essence, a loan from the Bank of Dad. However, the kids are charged 25 percent interest on their outstanding negative balance. The first interest payment is applied on the last day of each month, starting with the first full month their balance is in the red. Depending on when my kids take out their loan, they could have as many as 60 days to get their balance into positive territory before having to make an interest payment.
For example, if Matthew takes out a loan on any day in April that puts his balance in the red, he is given until the end of May to get back into the black. As long as he retires his loan before the end of May, he avoids an interest penalty. If not, I’d mark Matthew’s ledger with a nasty interest charge.
And that’s all there is to it.
Of course, you can modify and make any rules you want in implementing your own ledger project for your kids.
Because bookkeeping requires nothing more than basic addition and subtraction skills it can be done by kids as young as six- or seven-years-old. Both Matthew and Nina have been using this system for over three years now and it’s been a great success. They eagerly accepted the use of ledgers at a young age and quickly became adept at simple bookkeeping.
To this day, Nina takes great pride in keeping her ledger balance in the black; Matthew, not so much. But although Matthew still has trouble saving money, thanks to his ledger, he does at least fully understand the financial ramifications of borrowing.
Hey; it’s a start. First learn stand, then learn fly.
(This is an updated version of an article originally written on February 13, 2009.)
Photo Credit: James Thompson