In teaching kids about finance, the assumption most parents make is that they, not the children, need to be in the driver’s seat. Although this isn’t entirely false, you might want to think twice about never handing over the keys. Ideally, both parents and kids should be able to exercise some degree of control over kids’ money.
Parents Should Drive Because…
In the parents’ corner, kids simply don’t have the life experience adults do. That means they can’t always rationalize purchase, savings, or donation decisions as well as grownups. It is for precisely this reason that, no matter what label you might assign to it at home, legally speaking, money your child has in a joint checking or savings account with you doesn’t just belong to him. It belongs to you, too, and subsequently, you have legal rights to do with the money as you see fit. The law actually assumes that children won’t be able to understand the ramifications of all the financial or contractual decisions they might be faced with.
Kids Need the Keys Because…
On the other hand, when you hyper-manages the money your child has, the risk is that you end up teaching your child only what you think is a good buy—what has value is subjective. For example, if you are a carpenter or mechanic, you likely would immediately see the value in your child buying a tool set. It might be harder for you to see the value in, say, ballet shoes or a video game system. Money allows your child to be expressive, and although you don’t want him to throw his money away, you want him to develop as a unique person, not merely a mini you.
Another issue with taking absolute control over money your child has is that it sends the message that you don’t trust them to make a good choice. Children might not understand the ramifications of everything, but they are often smarter than parents give them credit for, and sometimes what kids want to do with their funds is surprisingly fruitful. If you never let them decide anything for themselves, they will continue to see themselves as incompetent, immature and dependent on you.
Two Compromise Options
In some households, parents approach this problem by giving kids free reign of their money up to a certain dollar amount. Past that amount, children need to first seek the counsel of mom and dad. They don’t necessarily have to go with what mom and dad say, but they do need to hear their parents out and show how and where the money is spent.
Another option you could try is to set some specific objectives or goals your child needs to be met. For instance, you might have him setting aside 10% of his allowance for school. If he meets these objectives, then any money leftover he has is his to spend without question. In other words, you check that he’s sticking to his budget, and if he is, you leave the discretionary funds to him. (This doesn’t mean he doesn’t talk to you about what is going on with the discretionary money, only that he has the final call about when and how it is spent.) This is often seen by experts as a more real-world approach, because when your child is an adult, he has to meet certain money goals (e.g., rent, food) before he can think about what to do with any “extra” funds.