Use a Ledger to Teach Kids Money Management Skills

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



Comments

  1. 1

    Ingrid says

    That’s awesome! My boys are 7 and 10 and they need to learn about money really soon! Both have a plastic piggy and they put all their money there, each has a little more than 300, which is awesome! I’ve learned them to save all the time, but i really need a better system. Because when they want something from a store, i tell them not to use their saved money, instead i buy that item for them. And they don’t pay back. This money management that you came up with is really great! What i wish to know is what is their list of chores and the pay for each chore…. maybe i can steal some ideas from there too!!! ;)

    • 2

      says

      Here is a sample of what we pay the kids right now (the chores and compensation change over time):

      Matthew: Pick up dog poo ($0.25/day); Take out trash ($0.50/wk); clean room and make bed ($0.50/day).
      Nina: Set/Clear kitchen table ($0.25/day); Fold laundry ($0.50/wk); clean room and make bed ($0.50/day).

  2. 3

    says

    Hi Len, I think your suggestion of using a ledger is a great way to teach kids to be more financially responsible. I actually just started a short series on teaching kids about money on my site. I suggest leveraging some existing financial products, such as prepaid debit cards and savings account. But I would love to hear what your thoughts are on this. Thanks for your time!

    • 4

      says

      The prepaid credit card idea is intriguing. I like the idea of the kids being able to go to a store, buy what they want and then swipe the card. On the flip side, what I DON’T like about it is the fact that prepaid cards come with LOTS of fees and in the end they are, well, prepaid. There are no real penalties for spending more than they can afford because the card limits the amount that can be “charged” to the total available money. Why do I think that’s a bad thing? The end result is that the kids may get a false sense of security about “real” credit cards because their prepaid card doesn’t do anything to reinforce the insidious “nasty” side of “real” credit cards – that is, if you spend more than you can afford to pay at the end of each month, then you will be on the hook for some extremely onerous interest payments.

      In a twisted kind of way, I think it would probably be better to give them a credit card with a small credit limit and let them learn from their mistakes.

      • 5

        says

        Thanks for your feedback, Len! I agree, using a prepaid card does have its drawbacks and definitely not an end all solution to figuring out how we can teach kids about money management. I’m all for having kids learning from their own mistakes as well. Is it possible to get a credit card with a limit of say from $50 – $100?

          • 7

            Steve says

            I recall opening a secured credit line with a major bank back when I was 18 or so. I put in $200 in an account and that was the secured limit on my credit card. This allowed me to build credit history while keeping a modest limit on my spending for that account. It was a decent way to start and the $200 in the account worked like a savings account when the credit line was paid up.

  3. 10

    says

    Excellent, this is the most unique approach I’ve heard of for handling childrens pocket money. It’s certainly a way of teaching the kids how to handle thier own finances. Its a pity many of todays adults don’t have the same money management skills. Good post.

  4. 11

    says

    Money doesn’t grow on trees, sigh… i hope my children can easily understand this. I am struggling in teaching my kids to spend wisely. This article might get me some new idea to teach them. Thank you

    • 12

      says

      You’re very welcome, Vahn. Just keep drilling good personal finance practices into them and it will eventually sink in. Most of all, lead by example. :-)

  5. 13

    says

    Dude, this is ingenious. I am passing this on to my wife. If I had a financial blog, I’d be giving you some link juice right now =) Sadly I don’t have one.

    • 14

      says

      I can’t take the credit for the idea. I got it from a friend of mine several years ago – but I am glad he passed it on to me. It is a terrific tool for teaching the kids about not only how to balance a checking account, but also the value of money.

  6. 15

    says

    This is absolutely great!

    I have been looking for something to teach my daughters other than checking something off while incorporating technology and responsibility. This is a great idea since it also teaches them the concept of saving and seeing their balance grow!

    Will definitely use this article in an upcoming post on my site!

    Thanks!

  7. 16

    MarianoMama says

    Terrific use of a ledger! Thanks. My 9 year old son wants to make money this summer and we happen to have a ton of construction going on (read: 40 thirsty construction workers every day). Today we bought bottles of water and Gatorade and ice bags. Tomorrow he will go out to them during lunch and sell each drink for $1.00. We don’t pay for chores here because we’ve established that some things we do in the household because we are part of the common good (i.e. I don’t get paid to fix dinner or fold the laundry). So this ledger will be SOOOO helpful in seeing where his money comes in and goes out. Thanks!

  8. 17

    Foglia says

    Dear Len
    I have no idea how long ago you wrote this blog but what a great great idea. I already borrowed your idea and used it on my 14 year old. I gave her a small book similar to my saving account bank book when I was young and did the six columns like you suggested. The only difference is that I gave my daughter a little tin and that is her bank for her money management. So I give her the money and we both signed on the approval and she managed the money. If she used money from her account she does the debit entry. For me it is a) a great way for her to learn basic accounting and the management of money at a young age b) for her to see where her money goes (my teenager has endless pairs of earrings as you can imagine that’s what they do at this age and c) an incentive for her to save money for her goal and for her to do big things helping out around the house such as babysitting for us (we have a younger one as well). I made the mistake of offering pocket money before I found out your system and it is a bit too late to take it back. It is not a lot of money £5 each week but the only condition I attached is if she does not behave well or not living the family value then she will not be entitled to her weekly pocket money and on top of that when she helps out chores she will earn more. I know in any case teenagers will want to go out and buy things to feel they are grown up so it is better she enter what she buys and see for herself if they are meaningful than she just spends and we don’t knwo what she used. If this works, Len, I think this will be the best gift I can give my daughter. When I was young I was a pretty good girl and I did well etc but I don’t think I learn how to manage money or plan for my future because I was earning good money. I ran my own business and it did not really make money because I was not good with cashflow etc and I kept plouging my own money into my business putting everything in one bag now that I have learnt many financial lessons and business lessons I must say I think everyone should teach their kids how to manage money, how to love managing money and not scared of money and should treat this topic just like any hobby. Money itself is not evil but not knowing how to manage it or let money manage you could be dangerous. So thank you very much for a great idea. I would love to know whether you also found it worked well for your kids.
    Foglia from London UK

  9. 18

    says

    Getting kids involved in managing their own money is key to helping them develop responsible money skills. Our MoneyTrail App is a free resource for keeping track of the same financial items for kids & teens using a computer, cell phone or tablet. You can find it in the Google Play app store or at our website, http://www.moneytrail.net.

  10. 19

    says

    What an awesome idea! This helps them really see exactly how long it takes to save up $15 for a new toy. That’s something I didn’t learn til I graduated and had a steady paycheck.

  11. 20

    Oscar says

    While it’s great to teach your kids how to manage their money, there is no way I am paying my kids to do their everyday chores – life is not going to pay them to make their beds or clean their bathrooms when they are older, so there’s no point in setting that precedent now.

    However, I like the idea of having a list of additional tasks that are not on the everyday list that they can do for a fee (something I might hire someone to do or do myself to save money), like grass cutting, painting, etc. Those are also skills they can use to make extra money elsewhere. Nobody is going to pay them to come make their beds.

  12. 22

    Samantha says

    I love this idea and will definitely use it! How old were your kids when you started using it and/or what age is a good time to start, do you think? Growing up I had the weekly allowance, and I remember spending hours looking at the Barbie aisle in Wal-Mart weighing buying one item over another. I never had this system of keeping track and everything. My husband had something similar to this, only I think the Bank of Dad was usually closed and very reluctant to part with money. Usually they had to get Bank of Mom to convince Bank of Dad. Thanks for sharing this!!

    • 24

      Jessica says

      The children repay the loan by performing their usual tasks. For instance, Bailey made her bed and pulled weeds. That earned her $2.25. She posts it to her ledger and since she has an active loan the money she earned goes toward paying the debt. Once she has paid the balance of the loan (and any subsequent interest) any money earned from that point is a positive, spendable amount.

  13. 25

    Daira says

    I like the idea of the ledger and teaching the value of the money, but I disagree with paying my children for the stuff they’re supposed to do like taking the trash out or cleaning their rooms, doing beds and setting the table. You live under this roof and each family member is supposed to pitch in. Now picking dog poo, washing my car, mowing lawn, I agree, are good chores to be paid for. I’ll have to reread The First National Bank of Dad: The Best Way to Teach Kids About Money by David Owen because it had many great tips. I’m not promoting the book, I’ll get it from the library when I need it. My DD is 7, but she’s not ready for the money management yet or even a piggy bank. I’ll wait until she’s 8.

Trackbacks

  1. […] 5. Letting your kids fail. It may seem cruel, but parents who aren’t afraid to let their kids spend their money on ill-advised purchases — especially those with limited shelf lives — are actually doing them a favor. Experience is a terrific teacher and, with respect to personal finance, it’s better they err early when the impacts are relatively benign. Those “wasted” dollars are money well spent — an invaluable investment in your kids’ personal finance education. […]

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