Chapter One: Children and Money: An Introduction

When our son was born, my wife and I needed a baby blanket for his crib. Our daughter, who was three and a half, had several old ones in her closet.

"What are you doing in my closet?" she demanded.

"Just getting one of these old blankets," my wife said.

"Why?"

"To give it to your new baby brother."

"I want it!" our daughter screamed.

"But, honey," I said, "you didn't even know that old blanket was there."

"I need it!"

"It's a baby blanket. Don't you want to give it to a baby?"

"I want it!"

My wife and I looked at each other in despair. What to do? Suddenly, my wife had an inspiration.

"Would you take five bucks for it?" she asked.

(No more crying.) "O.K."

Money is a handy tool if you use it wisely. Even very young children get the hang of it in a hurry. In the baby-blanket incident just described, my wife narrowly averted a family crisis by offering to swap an emotionally neutral symbol (money) for an emotionally loaded one (the old blanket). With a crisp five-dollar bill in her piggy bank, our daughter felt justly compensated for this latest unpleasant ramification of the birth of her baby brother. And my wife and I were delighted to give her the cash, because doing so let us go back to what we had been doing before the argument arose: changing diapers, ignoring laundry, and not getting enough sleep.

If my wife hadn't suddenly thought of monetary compensation, our fight would have escalated along a predictable trajectory: my wife and I would have stepped up our efforts to make our daughter feel like a bad child, and our daughter would have stepped up her efforts to make us feel like bad parents. Instead, everyone went to bed that night in a pretty good mood. A couple of months later, our daughter even reconciled herself to the idea of no longer being an only child. Walking alongside her brother's stroller, she said suddenly, with a sigh of resignation, "I don't know who I'll marry. Him, I guess."

GROWN-UPS ARE DUMB

Money is so easy to understand in theory that you'd think more people would do a good job of handling it in practice. But they don't. In many families, financial matters become a psychological theater of war not only between parents and children but also between parents and parents. Why does that happen? We probably don't want to know the real reasons. (One family's story: I claim to think money is pure pragmatism, while my wife believes it's all symbolism and neurosis.) But there are ways of sidestepping the problem altogether, especially where children are concerned -- as long as parents take advantage of human nature instead of ignoring it or futilely attempting to change it.

Most efforts by most parents to teach most kids about money are doomed from the start. Those efforts usually begin (and often end) with the opening of savings accounts. The parents suddenly decide that the time has come to impose order on their children's chaotic financial affairs, so they march the kids down to the bank and sign them up for passbooks. The children are intrigued at first by the notion that a bank will pay them for doing nothing, but their enthusiasm fades when they realize that the interest rate is minuscule and, furthermore, that their parents don't intend to give them access to their principal. To a kid, a savings account is just a black hole that swallows birthday checks.

Kid: "Grandma gave me twenty-five dollars!"

Parent: "How nice. We'll put that check straight into your savings account."

Kid: "But she gave it to me! I want it!"

Parent: "Oh, it will still be yours. You just have to keep it in the bank so that it can grow."

Kid (suspicious): "What do you mean 'grow'?"

Parent: "Well, if you leave your twenty-five dollars in the bank for just one year, the bank will pay you fifty cents. And if you leave all of that in the bank for just one more year, the bank will give you another fifty cents, plus an extra penny besides. That's called compound interest. It will help you go to college."

The main problem with these schemes is that there's nothing in them for the kids. College seems a thousand years away to young children -- who, at this point, probably think they'd just as soon stay home, anyway -- and the promised annual return wouldn't cover even the cost of a pack of chewing gum. Most children immediately realize that banking plans implemented by their parents are actually punitive in intent: their true purpose is not to promote saving but to prevent consumption. Appalled by what their children spend on candy and video games -- and also appalled, perhaps, by the degree to which their children's profligacy seems to mimic their own -- the parents devise stratagems for impounding excess resources.

Almost every family has its unspoken point of no return -- a limit above which monetary gifts are considered too large to be entrusted to young spenders. According to the perverse arithmetic that parents thus impose, a five-dollar bill (which a child is usually allowed to keep) is far more valuable to the child than a hundred-dollar check (which parents usually expropriate and "save"). Not surprisingly, kids soon decide that large sums aren't real money and that all cash should either be spent immediately or hidden in a drawer.

I know these things happen, because I made all the same mistakes. When my daughter reached kindergarten, I gave her a lecture on the virtues of fiscal prudence, then opened a savings account in her name with a deposit of a hundred dollars. Her excitement about my scheme, never great, sank to zero when I told her that she would not be allowed to touch that money any time soon. No matter how enthusiastically I praised the American banking system, she viewed her savings account as a fiction.

My first reaction was that she must be too young, or maybe too lazy, to plan, in a mature and responsible fashion, for her old age. However, on further reflection (over the course of several years, unfortunately), I realized that the problem wasn't a defect in her character; the problem was a defect in my plan. After all, I don't have a savings account myself -- and why should I? I'd rather keep money in a mattress than do all that driving back and forth to the bank for a lousy 2 percent per annum. I store my wealth in the same places you store yours: in stocks and bonds and real estate and money-market accounts and other investments, all of which generate better returns over time than a dumb old savings account. Why had I believed that a five-year-old, for whom a year seems to last at least a decade, would be impressed by handfuls of pennies doled out over eons? Hadn't I closed out my own childhood savings account the moment it came under my sole control? (Yes.)

I had also forgotten that, to a kid, "long term" does not mean "long term" -- it means "never." Encouraging a nursery-schooler to save for college is like encouraging a fifty-year-old to save for the colonization of Mars. When I was five, a century did not seem longer to me than the period between my first day of kindergarten and the day when I would finally be old enough to do the one thing I wanted to do more than anything in life: drive a car. (A further proof, as if any were needed, that time passes more slowly for children than it does for adults: you never hear a grown-up say, "I'm six hundred and seventy-three months old" -- although I did once hear a forty-year-old say, "I'm half-dead now.")

This perception of the passage of time isn't even an illusion where children are concerned; when parents talk to their kids about "long term" in connection with money, the parents usually do mean "never." Parents force their children to lock away their money because the parents hate to think what their children would do with that money if they could. The real purpose of almost all parent-mandated saving schemes is not self-improvement but confiscation. A savings account is just a jail in which parents incarcerate their children's money so that their children's money won't be able to go around causing trouble when the parents aren't looking.

REAL REASONS TO SAVE

You and I don't think of saving for ourselves as a form of punishment. You and I save because we are convinced that saving will make our lives better, and that it will do so while we are still on hand to enjoy the fun. If we sacrifice some spending now, we believe, then someday in the foreseeable future we will be able to buy a fancier car, or play more golf, or add a swimming pool to our yard, or send our kids to more impressive-sounding colleges, or retire at eighty-five instead of ninety. In other words, we save for selfish reasons. We spend less money now in order to spend more money later.

If children are to become savers, I suddenly realized, then they need selfish reasons, too -- selfish reasons that make sense to them. To be attractive to a child, saving has to make life better for the child -- and the benefits have to be tangible, just as they are for adults. Those benefits also have to arrive in what to the child seems like real time, rather than being pushed so far into the future that in the mind of the child they simply do not exist.

Most important of all, I realized that up until that moment almost all of my efforts to teach my daughter financial responsibility had consisted of reducing or eliminating what few financial responsibilities she had. How could she possibly learn anything about handling money if I was just going to keep dreaming up new excuses for taking money out of her hands? Don't we learn about money the way we learn about anything else -- by making a series of gradually less horrible mistakes and living with the consequences?

I think we do. And it was all of these realizations that led to the ideas that I describe in the rest of this book.

GOOD OLD SHORTCUTS

Of course, the notion of setting out to teach children about money is nutty, in a sense, because all of us parents have been teaching our children about money on a daily basis ever since they became old enough to notice the difference between them and us. We teach them about money every time we make a wise or foolish purchase, brag or weep about a recent experience in the stock market, appear happy or sad when we return home from work, capitulate or fail to capitulate when they focus their energies on persuading us to buy them something idiotic, and either pay off our credit cards or run up our debts to the point where we prefer to let an answering machine handle our incoming calls. Over the course of an entire childhood, these mostly unconscious lessons make a deeper impression on our kids than anything we might think to tell them. The best way to teach a child about money, therefore, is to live a life in which money plays just the right role, whatever that is, and to set nothing but good examples, whatever those are.

Holy cow, though, that's a depressing thought. For one thing, setting good examples is exhausting. For another thing, I, like most parents, want to shape my children directly, through the application of powerful child-rearing techniques. I don't want to sit back and let nature take its dreary course; I want to use scientific methods to program my offspring to surpass my own meager accomplishments in life and to build large personal fortunes with which they will be able to sustain my wife and me in our old age. And I want to do it quickly and easily, without having to turn myself into a better person.

Shortcuts, then. As luck would have it, there are some good ones.

SOME ADVICE ABOUT ADVICE

Before I get to that, though, I want to deal with a couple of preliminary issues. First, I want to answer a question that I suspect may be forming in the minds of some readers: Does teaching children about money turn them into money-grubbing creeps?

My answer is, No, of course not -- as long as what we teach them is rational. In fact, one of the goals of teaching children about money is to prevent them from ever becoming money-grubbing creeps. The more thoroughly children understand money -- and the more comfortable they feel in its presence -- the less likely they will be to become obsessed or overwhelmed by it as they get older.

I'm not one of these people who claim that greed is good. Greed is very bad indeed, because it is insatiable and because it, like all addictions, leads only to unhappiness. One of the goals of teaching children about money is to make them immune to greed, by helping them learn to view money intelligently and unemotionally, as a practical tool for improving their lives.

I had a friend in college who decided, in a typical gesture of adolescent absolutism, to stop wearing a wristwatch. He was tired of being hung up about time, man, so he freed himself from civilization's arbitrary and oppressive chronological prison. The joke, of course, is that without a watch he was forced to think about time all the time. Soon, he was spending a large part of every day asking other people what time it was -- a necessity, since his professors and the operators of local movie theaters, among others, still paid attention to the clock. Getting rid of his watch didn't liberate him; it turned him into a raving timeaholic.

Children should learn about money for the same reason that my friend soon went back to wearing a watch: to keep them from having to devote too much determined mental energy to an activity that often works better at the level of reflex. One learns about money partly in order to stop brooding about it. And no one spends more time brooding about money than someone who is scared of it, or who doesn't understand it, or who willfully tries to ignore it.

The other issue I want to address has to do with advice. Almost all the advice books I've ever read have followed one or the other of two basic pedagogical strategies: they have either taken something virtually impossible and made it sound pretty easy (losing weight, becoming physically fit), or taken something pretty easy and made it sound virtually impossible (raising children who aren't totally screwed up).

Financial advice usually conforms to the first model. As you read some expert's ten surefire rules for achieving financial freedom, you think, "Gee, I'd have to be a moron not to be rich by the time I close this book." Then, of course, reality sets in -- and the stocks you buy go down instead of up, and you can't find a supplier who is willing to sell you deeply discounted rolls of commercial-grade toilet paper by the gross, and no bank seems eager to offer you an unsecured ten-million-dollar loan so that you can renovate the abandoned apartment building that you are planning to buy in a foreclosure auction with no money down. If advice books really worked as well as they claim to, there wouldn't be so many of them. One how-to-take-off-fifteen-pounds-and-keep-them-off guide would be plenty for everyone, thank you, and we would never outgrow our clothes.

In addition, I suspect that most of us think that reading or listening to good advice is a perfectly acceptable substitute for following it. I know I feel that way about Consumer Reports, which I have read faithfully for many years. I love that magazine's careful analyses of various consumer products, but I'm pretty sure that I have never actually made a purchase based on any of the articles. What I tend to do is buy first and then -- days, weeks, or months later -- discover in the magazine whether my purchase was sensible or not. Subscribing to Consumer Reports makes me feel like a smart shopper, but consistently following its advice would be an awful lot of trouble. In fact, I'd be willing to bet that even the people who test products for Consumers Union probably feel largely the way I do, and that their homes are filled with stuff that didn't do all that well when they evaluated it for Consumer Reports.

Another confession: I myself don't always follow all of the advice in this book. No one could. (I also would guess that Jane Brody, the "Personal Health" columnist of the New York Times, hasn't put wide strips of reflective tape on the risers of her stairs, as she once advised her readers to do.) Real life is too complicated to be conducted sensibly at all times, and all of us are not only different but also busy. I think I've done a good job of helping my kids develop reasonably healthy attitudes about money, but we've had our moments, believe me.

The goal is to raise children who aren't overwhelmed by the financial side of life, and there is more than one way to achieve that goal. You can pick and choose among my ideas, or you can be inspired to cook up ideas of your own, or you can leave the whole thing alone and hope for the best. My own kids' interest in financial matters has ebbed and flowed over the years, and it has been heavily influenced at times by such seemingly extraneous matters as how much homework they had that night and who was going to the mall.

Besides, no one's life should be dominated by what someone else thinks about money, even if what someone else thinks about money is awfully smart.

Copyright © 2003 by David Owen