JJ wanted to spend his birthday money on a Lego Minecraft set that cost £74.99. There’s enough birthday money there as it’s been accruing for several years, but it did pose the question of what we should do now. Let him spend it, or make him save for it?
Annie and I had a discussion that turned into a bit of an argument. Sometimes two cultures collide in the most unexpected ways. My wife is English and she comes from a culture of pocket money, and being allowed to spend it on anything you wanted. I’m from Asia, and there whatever money you had, you saved. Annie talks of the things she bought with her money, some of the unwise purchases she made as well as some of the memorable things she did, and she’s really good at assessing what she wants to buy before she does ahead and gets it. I just remember being bummed as an 8 year old that I had been given loads of red packets full of money at Chinese New Year and all my mother would do was put all that money in the bank. That and I always buy the cheapest thing I can.
Being allowed to spend all the money you get doesn’t always teach you good saving habits. When you’re a kid, you’re not exactly going to think about your pension plan, nor is the college fund a concept on your radar. Annie’s good at saving money, but she didn’t get further than the savings account. Investing is something that she never really learnt.
My mother had only one financial lesson, “Just save”. It is a good lesson as I’ve become familiar with the miracle of compound interest and have a plan for investing. However, within your lifetime, you will be forced to spend money at some point, be it on a new suit or a new roof. Learning how to size up a purchase and assess what value you might get from it is a necessary skill. “Just save” doesn’t teach you this, and when you couple that with always buying the cheapest thing you make a lot of mistakes. I’ve made some horrible spending decisions from the lemon car called “Squealer” to the pager just before mobile phones took off. I’d rather my son made spending mistakes that he can learn from as a child when he’s on a £3.50 a week allowance rather than with a £30,000 inheritance or something even bigger.
The reality is that you need a balance of both, knowing how to spend money and also how to save it.
The dilemma we had was what to do to teach this to our son. Aged eight, he was ready to start learning about money, but the question was, what lessons did we need him to learn? More to the point, when was the best time to learn which lesson?
We decided that the lesson that we wanted him to learn most now was the value of money. Money is sometimes a gift, but most of the time you’re going to have to work for it, just like when you grow up.
So, we decided that we’d give him 50p for every day of good behaviour, and fine him £1 for every day of bad behaviour. He’d get a list of chores in the house that he could get extra credit for if he did them to boost his income. Any gifts of money he received were going to go into a savings account (and/or invested). This way he can save for his Lego set, at a pace we get to control, and he also gets to spend on anything else he wants. If he overspends, he’ll just have to save it all up again.
When we spoke to him about it, we stressed the fact that this was a learning experience. Once he has developed good spending habits (we didn’t tell him when this would be) he’d be able to spend his money as he pleased. For now, he’d have to make an effort to earn his money. In return, once he had accrued his cash, he could spend it on anything he wanted to, so long as it wasn’t illegal or dangerous.
JJ was pretty bummed when we told him this, and he was disappointed that he couldn’t spend his birthday money on the Lego sets that he wanted. Whilst I felt for him, I thought that the lesson he’d learn would be far more valuable in the long run than the short term pleasure I’d get from making my kid happy. Sometimes you just gotta play the long game.