Mummy, can you turn $24 into $100?


My daughter, who just turned seven, said to me last week "Mummy, what exactly is it you help people with?"  I told her I help people make better decisions with their money so that they have enough to last them for the rest of their lives.  To do that I told her that I grow people's money.  She looked at me with the biggest widest eyes; "Money can grow?"  Absolutely I said.  "If you care for and look after your money, you can turn one dollar into two dollars, and then into four and then into eight".  She ran off into her room and came back with her piggy bank and counted out $24.  "Mummy, can you turn this into $100?".A report by researchers at the University of Cambridge commissioned by the United Kingdom’s Money Advice Service revealed that kids’ money habits are formed by age 7.  Helping them understand basic concepts early is critical to their success in later life.

It used to be that we saw our parents hand over dollar bills in the store.  Now our kids see us hand over a bit of plastic.  They don't learn anything from that except that money is infinite.

I heard a great story on a podcast the other day about a financial adviser who wanted to teach his kids about money.  He went to the bank and took out his entire month's salary in onedollar notes.  $10,000 in ONEdollar notes.  It took days for the bank to get that many dollar bills together.  He took the money home in plastic bags and poured it out on the kitchen table.  Together with his kids they put it in piles which represented the bills the family had to pay - mortgage, school fees, groceries, utilities bills.  He actually showed his children, literally, how much he earned and where it all went.  What an amazing lesson.

I think the most important lesson to teach kids early on in life is that there is an opportunity cost to money.  That is, if you spend it on something today you don't have it to spend on something later.  Being able to delay gratification has been shown to predict how successful you will be as an adult.  You can delay gratification by helping kids save for something they want, or by helping them wait their turn in the playground or by encouraging them not to eat all their Easter eggs at once.  There are teachable moments every day.

For my kids, I want money to be an open subject with no taboos.  I want them to understand how you earn it, what happens when you spend it (it's gone) and what other things you can do with your money.  So, I sat my seven year old down last week and told her that there are four things you can do with money, and asked her if she knew what they were.  She came up with three, and these were her words:

  • Use it
  • Keep it
  • Give it

Pretty good I thought.  She understands spending, saving and giving.

I told her there was one last thing.  Investing.  That is how we make it grow.

So we wrote the four things down on a piece of paper:

  • Spend it
  • Save it
  • Give it
  • Invest it

Next I opened an Excel spreadsheet and we put in at the top "Poppy's money", $24.

We talked about how to split the money between the four things, and decided to do it equally.  We put the $6 saving back into the piggy bank, the $6 spending went into her purse.  The $6 giving has gone into a pot to 'be thought about', and the $6 for investing went into my pocket to grow at a 10% annual rate with monthly compounding.  Over time I will teach the concept of investing in companies and perhaps by her ninth birthday we will have invested money in a company of her choice.  For now I likened investing to planting a seed.  You don't see too much at the start, but leave it there and over time the magic happens.  But you have to be patient, just like when growing a tree.

Al and I are now discussing how much pocket money she will receive and it will then be split equally between the four categories, and I will keep track on the spreadsheet.  Hopefully, she will realise that the spending pot can go into the saving pot and I can teach her lessons like 'if you are not saving for anything specific, how about adding it to the investing pot'.

I am excited about this, and she is excited.  It's a win-win!