How To Encourage Kids to Save Money

This is the first in a series of Kids and Money Quick Tips videos that I will be putting together. This first one is on getting kids in the habit of saving money.

Should We Reward Good Grades Monetarily?

An interesting article appeared this morning in The Sacramento Bee. Apparently college students can now make bets on their performance in school. Twenty-five bucks says I’ll ace this class. Fifty bucks, I bomb. It’s the genius of two guys, Steven Wolf and Jeremy Gelbart, who point out that, technically, it’s not gambling since students are betting on themselves and not others. It’s really about students, ahem, investing in themselves. So they created Ultrinsic, a site that allows college kids to place wagers on themselves.

Hmmmmm….I can see this go in several directions. It may motivate some students to work hard. On the other hand, if there’s a lot of money involved, it could evolve into something that never happens (!) on college campuses….cheating. And then there’s a potential for increased altercations with professors over a grade on an essay. It’s enough to keep anyone from wanting to teach at the university level. When money is on the line, I find it’s best to stay clear.

But let’s take a look at money and grades from another angle – rewarding elementary, middle, and high school kids for high marks on their report cards. Unlike the college student scenario, the money would come from outside, most likely the parents. That makes it what behavioral psychologists call an extrinsic reward.

So the questions are: Does paying kids for good grades motivate kids to do well? Do kids get stressed out over tests and grades knowing there’s a price tag attached? Is this type of reward fair or unfair?

I’m going to go with my personal bias here which is based on my background in child development and my 23+ years of teaching kids. That, and current research on what motivates us.

But first let me say that it has been my experience that all parents love their children. They want their children to succeed. And they’re willing to do what they think is right (and what fits into their very busy schedule) to help their kids attain this success. But just because someone thinks something is right doesn’t necessarily make it the best choice.

For example, what about the kid who really works at his studies but just seems to come up short on test days? Is he less deserving because he didn’t pull that A or B? And let’s be honest, we all know kids who have slept through an entire semester of lectures only to end up acing the class. Is this person more deserving of the money than the one who burnt the midnight oil and squeaked by? There is a difference between “getting good grades” and “effort” that doesn’t always show up on the report card. Besides, rewarding kids who already do well in school by paying them for their grades robs them of the opportunity to develop intrinsic motivation.

And speaking of motivation, behavioral psychologists say that extrinsic rewards, like giving money for grades, are not sustaining motivators. They may work well initially but usually tend to peter out. That’s because extrinsic motivators like this are more geared towards controlling a certain behavioral outcome, in this case, getting good grades. After a while, kids just aren’t interested…unless, of course, you up the ante…again, and again, and again. Besides, the focus becomes on the extrinsic reward, the money, and not on the intrinsic reward, the desire to reach our potential. And that’s not what we want.

So, my personal experience, then, is that it’s better to work on developing a child’s intrinsic motivation. And I have backup. Again, enter the behavioral psych. Turns out, we are motivated to do things when we have more personal control over them. And -when our work is validated and encouraged. This last one is important because it offers parents an alternate way to reward kids for trying and “doing well” in school. Kids often perform better if they feel that what they are doing is important. Anyway, who says you can’t go out for ice-cream as a family to celebrate success. That gets everyone involved in validating work well done.

But I can’t dismiss the argument that states that giving kids monetary rewards for good grades simply mimics the real world. It comes up a lot when I talk with parents. Here’s my argument back:

We want our kids grow up and choose a career that is interesting to them (intrinsic motivation). They will get paid to do their job, but the focus won’t be on the money. The focus will be on feeding their intrinsic desire, their desire to be a part of something larger, something meaningful.

At least, that’s the hope for my kids. Unless, of course, they make a killing off of betting how well they’ll do in each of their college classes, in which case, they may not need to work at all.

Kids Earning Money? Set Up a Roth IRA

I took Nathan and Ryan to our broker this morning to discuss Roth IRAs. Both boys have jobs and I thought it was time to have them begin thinking about their retirement. John and I decided to match any money they made this summer, dollar for dollar, and, well, my boys have never been known to turn down free money. They were all in.

I could have easily set up their custodial accounts online but I wanted the boys to have the experience of meeting with an expert. Besides, I’m not all that familiar with Roth IRAs, I had a few questions to ask, and I wanted them to learn right alongside me.

Our broker started by asking the boys what they already knew about Roth IRAs. Nathan volunteered that it was a retirement account that they wouldn’t be able to touch until they were 65 (turns out it’s 59 1/2). Ryan offered the fact that taxes were taken out before the money gets deposited into the account allowing for the money to be drawn tax-free later on. I was proud of both of them for being able to discuss the basics of these types of accounts.

I know it’s hard for many kids to even entertain the notion that one day they will be retired. It’s even harder to get them to begin to prepare for it. I’ve been lucky in this area with Nathan and Ryan. They’ve sat in enough of my money classes to know that they are in the best position now to set themselves up for financial freedom later in life. A little sacrifice now can pay greatly later.

When our broker started talking about the compounding effect of money, and having money work for them, Nathan and Ryan started to smile. They know all about it. In fact, once kids see the power of compound interest, they’re usually quite interested in making those sacrifices.

We then got into risk management. The question posed both boys was What would you do if your account value dropped by 10%? Sell, stay put, or buy more? It was an interesting question and I was curious what each would say…although I already knew.

Ryan said he’d buy more. Nathan said he’d stay put. Ryan has made a killing on his stock picks this year; he’s a little bit more of a risk-taker. Nathan is simply not willing to lose money if he has a choice. This fits in with the next question: When are you looking to retire? Under any other circumstances this would have been an odd question to pose a 15- and 17-year old. But we were in his office to discuss retirement, so it was totally appropriate.

Ryan wants to have the option of retiring when he’s 40. Nathan said he probably wouldn’t retire any time before 55. With this information, our broker created personal target funds for each of them. Then he printed them out. That alone was worth the 45 minutes in his office. The boys were fascinated with these pieces of personalized information and devoured them in the car ride home. Very cool.

And me, all I could think about in that car ride was how I was jyped of information when I was a teenager. Had I known then what I know now, I’d have left that office in my flip flops ready to head out to the beach and work on my tan.