This guest post from Dustin Riechmann is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes. Dustin blogs about maintaining a happy marriage at Engaged Marriage and at Fit Marriage. Previously at GRS, Dustin wrote about strengthening your family on the journey to financial freedom.

“Can we go to the store today, Daddy?” my five-year-old son Braden asked recently. If you have young children, you’ve undoubtedly been asked this question in some form many times. With a bit of trepidation, I asked Braden what was on his mind.

“I hadn’t planned to go to the store,” I said. “Why? Is there something we need?”

Captain AmericaWith the sincerity that only a small child can muster, Braden said, “We really need to get a new Super Hero Squad toy. We’re missing Captain America, and we can’ t play without him. Let’s go buy him.”

Ah, yes. This missing action figure was a true emergency in his eyes. However, as a father of three, I knew the default response that I had to throw back: “Braden, you’ve already had your birthday, Christmas just passed, and you don’t have any money to spend on a new toy.”

“I know Daddy,” Braden said. “But you have money that you can give me to buy it.”

Uh-oh!

It’s Time for a Money Lesson
I told Braden I needed to talk to his Mom about how we can help him learn about money and give him the chance to earn cash so that he can buy the things he “needs.” After a short discussion with my wife, we decided it was time to implement a plan that we’d kicked around several times over the years.

It was time for an allowance a money management system for Braden — and eventually our two younger children.

We prefer not to simply give Braden money at regular intervals with no responsibility on his part. For this reason, we decided that an “allowance” wasn’t really what we were talking about here. That’s probably the way most parents refer to the money they give to their kids, but we wanted to use this opportunity for a teachable moment. We wanted to show that money isn’t simply given to someone because they exist.

Our Money Management Plan for a Five-Year-Old
Instead, we developed a simple, easy-to-understand board with household tasks that a five-year-old could complete with a bit of effort. When Braden completes his tasks without undue pestering, he gets money in return for his hard work.

These aren’t sweatshop duties, though; they’re simple chores, such as feeding and watering our family cat, setting the table at dinnertime, cleaning up his toys, and other similar tasks. There are certain “activities” that come along with being part of our family (like behaving well and brushing his teeth), and those must be done with no financial incentive at all.

Braden gets paid for doing extra, quality work independently. If the tasks aren’t completed, then he doesn’t get paid for those items. It’s a simple cause-and-effect system that he fully understands. Work and get paid. Don’t work and don’t get paid.

At this point, we’ve settled on a total possible compensation of $5 per week. We plan to increase this by $1 each year to match his age and increased responsibilities and needs.

Teaching About the Uses of Money
While understanding the role of work is important, we’re most enthused about the ability to teach Braden about the value and use of money through this system. We taught him that money can essentially be used in one of four ways:

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

While the specific breakdowns will likely vary a bit as he matures, we agreed that he will split each dollar up as follows:

  • Give 10%
  • Spend 60% (or he can opt to save this in his short-term “account” for larger purchases)
  • Save 10% short-term
  • Invest 20% for long-term needs such as a car (hey, it’s only eleven years away!)

Again, we certainly expect to deviate from these percentages from time-to-time, and we’ll still be giving him gifts, but these are the general guidelines that we’ll follow to help Braden manage his money. The best part of this system so far is that he’s really excited to handle his money like a “grown up” and just to have money to handle.

For the most part, this system has been easy to implement. Braden can give money weekly at our church and, of course, spending is no problem for him. We decided to put his short-term cash savings in an envelope that we’ll keep for safeguarding, so the third use of money was taken care of easily.

However, how should a five-year-old invest money and learn the lessons that come along with it?

While I’m eager to teach him about investing in mutual funds, bonds, and real estate as he gets older, we decided that for now his long-term savings should be kept in a high-interest online savings account (actually a sub-account to our existing online savings).

It will be great to eventually show him the power of compound interest, but for now we’ll forgo lessons on exponential growth and first stick to the concept of addition through regular deposits. Braden can see his progress in action by simply logging into his account occasionally to see his “investments” growing with time. Plus, he’ll even witness small interest deposits from time-to-time as a reward for his good habits.

The Big Day and Beyond
At this point, we’re only a week into using the new money plan, and after each task he completes, Braden is fond of asking, “Do I have enough money to buy Captain America yet?”

Of course, with his current compensation levels, he’ll need around two more weeks of pay before he’ll have enough to purchase the toy he wants so badly. It’ll be great to watch him hand over his small stack of dollar bills to the cashier and then leave the store with a well-earned action figure.

I suspect the idea of buying Super Hero Squad characters may lose some of its luster when he fully comprehends it takes three weeks of “work” to buy each one. Then again some people are a bit fanatical about their favorite comic book characters.

My wife and I are really excited to teach Braden valuable money management skills at such a formative age. At this point, we plan to do the same with his two younger sisters, and it seems like age five is a good time to implement this system.

The idea of working diligently, budgeting and saving up cash for purchases isn’t always common in our culture, but we are happy to instill these values in our children in the hopes that they’ll avoid repeating our debt-laden financial story. We’re grateful that Captain America and his fellow “squaddies” could help us teach vital money management skills to our son on a level that he can appreciate. Hero Up!

I’d love to hear from my fellow GRS readers on this important issue. What are some effective ways that you’ve taught money management lessons to your small children?

Photo by DuckBrown, who has some cute cat photos, including this one.

Reminder: This is a story from one of your fellow readers. Please be nice. After more than a decade of blogging, I have a thick skin, but it can be scary to put your story out in public for the first time. Remember that this guest author is learning about money like you are. Henceforth, unduly nasty comments on readers stories will be removed or edited.

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