Thursday, June 11, 1998

Foolish Teaching Tools
by Chris Walsh (

I really liked the recent Fribbles on what to do with loose change. Like their authors, I believe that using loose change constructively is the right idea. I use it to teach my kids valuable financial lessons.

You see, I have two boys: James, 7, and Jonathan, 10. I pay their allowances out of my loose change. I also set some limits on the uses of allowance money. A budget is required. One third of their allowance goes to a long-term project, which I have arbitrarily named "college." One third goes to a medium-term project that will require at least two months of saving. The kids get to determine why they are saving this money. (They usually save for the latest cool toy they see on TV, but Jon is turning into a budding artist and occasionally saves for some art supplies he really wants.)

The remaining third they can spend as they choose. It has been known to last as long as five minutes.

I like this approach and it has a lot of advantages, at least to me as a parent.

First, the kids learn the value of setting aside money for long-term projects before they spend anything. They can spend everything that they have in their pockets, but their nest egg has already been padded. In a great book entitled The Millionaire Next Door, by Stanley and Danko, this approach to budgeting is called creating artificial scarcity. Coupled with investments in appreciating assets, this method is credited with making millionaires out of people who otherwise spend very little time doing household budgeting.

I also have a ready-made answer when Jon or James asks for the latest cool toy they just saw on a commercial. "Well, if you want it that bad, you can save up for it with your medium-range project." Which is why my kids usually have their medium project aimed at a cool toy, but since they have to choose which cool toy it will be in advance, they learn to make difficult decisions about their real financial priorities. "Do I want to save for the Super Splash water gun or Godzilla's "Stomp 'Em Flat" action figure?" is the seven-year-old equivalent of "New living room furniture or remodeling the bathroom?"

Next, I can set the hook deep, and foster a desire to go to college. After all, they will have been saving towards it for over a decade by the time they get there!

It also encourages the kids to practice teamwork. I was really proud of both boys when, on their own, they decided to pool their medium-range funds to buy a television set for their room. It took them a year of saving, but they did it without assistance from Mom and Dad. This achievement also makes them popular; all their friends like to come over for sleepovers. (Although I consider Sonic the Hedgehog at midnight on sleepover nights to be a bit of a drawback, this is one fault to my loose change plan I can live with.)

The financial lessons that I teach will also get more sophisticated as they get a bit older. In a couple of years, their college money will be the seed money to teach them a little about the stock market and mutual funds. (Using Foolish methods, of course!)

But most importantly, I have a built-in mechanism to get rid of loose change!

The funds that Jon and James have immediately available, not surprisingly, get spent immediately on video games, movie rentals, bubble gum, trading cards, and the other usual necessities of life. So much change goes away this way that I don't have to worry about getting rid of loose change on my own. In fact, this method works so well that I occasionally run out of loose change to pay allowances! When that happens, I buy back some of the change from their college fund. We then make a trip to the bank, and deposit the bills in their real college fund. Then I recycle the change in the next few months until I run out again.

The end result is that I don't view loose change as an annoyance. I view it as a constructive tool for teaching my children some of the basics about financial accumulation. So the next time you are paying $3.14 at the drive-through for a burger, put that $0.86 to good use: Teach your kids a lesson with it!

Have a similar tale?
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