Use a Ledger to Teach Kids Money Management Skills

I recently shared with you a little insight about my 11 year-old son and 9 year-old daughter’s current level of sophistication about money in My Kids’ Loan Interview with the Bank of Dad.    To recap, let’s just say that they are, understandably, still rookies in the world of personal finances 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 Arnold Schwarzenegger managed California’s when he was governor.   

I know, what you’re thinking: “Len, you’re not setting the bar very high.”  After all, I’ve already discussed why Arnold would make a lousy household CEO. But let me remind you, as Lucy Liu wisely said in an episode of Cashmere Mafia, “the journey of a thousand miles begins with a single step.”  Sage advice.

But I digress.   Where was I?

Oh yes.  So to help my kids understand money management I recently decided to teach them the art of bookkeeping.

What is bookkeeping, exactly?  Well, besides being the only word in the English language that is spelled with three consecutive sets of double letters (!), it is the act of chronologically recording income and expenses in order to understand how much money is available at any given time.

For managing personal finances, a single-entry system such as a checking account register is all that is required.  I am having my kids use a slightly modified system which is no more complicated but better geared for their needs.

Today, most bookkeeping activities are done using spreadsheet software, but for this task I have my kids going the old school route; they are using a good ol’ composition book, like the kind you might use in college or high school, as a ledger.  Here is 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 $2, etc.

Every time the kids complete a chore on the list, they enter the activity into their ledger book in black ink.  They then have the entry approved by either me or their mom, where we sign our initials; the 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. 

The kids have their own ledgers that they are responsible for.  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 employer and management. 

The ledger gives the kids an up-to-the-minute accounting of their current financial situation.  When the kids are ready to make a withdrawal they enter the amount of money they want in the ledger’s debit column using red ink.  The kids are then promptly paid by The Bank of Dad and are asked to sign their names on the ledger sheet to verify that they received the money.

To encourage saving, the kids are given a 25% 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.”

The kids are also permitted to withdraw more money than they currently have in their account.  In essence,  I am permitting them to take a loan from the Bank of Dad.   To discourage going into debt, the kids are charged 25% 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 they take out the loan, they could have as long as 60 days to get their balance into positive territory before having to make an interest payment.

For example, if my son took out a loan on Jan 5th that put his balance in the red, he would have until the end of February to get back into the black.  As long as he paid the loan off before the end of February, he would avoid an interest penalty.  However, if on the last day of February he still owed The Bank of Dad $4.00, then his ledger would be marked with an additional “interest” charge of $1.00.

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 6 or 7 years old.  My kids have eagerly accepted the use of ledgers and are already becoming adept at simple bookkeeping.

I’ll keep you updated on how it affects their savings habits in a future post.

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