Teaching Kids to Set Financial Goals

Long story short, kids who know how to delay gratification tend to grow up to be adults with higher paying jobs, have happier relationships, are physically healthy, and are persistent in their pursuits. Let me know if you want the details to this longitudinal research.

Using money, we have an unbelievable way to help our kids learn to delay gratification. It’s all about setting personal financial goals.

There are three types of goals kids can set:

~to purchase a specific item
~to save a certain amount of money
~to reach a certain account balance

Giving kids a reason to set a financial goal is important. This gives them an incentive and a concrete reason to save. Goals, like saving for a coveted toy, are more tangible to young kids. Tweens and teens can begin to work towards saving a certain amount of money which is can then be used as their investing money. Kids LOVE the idea of doing something as grown-up as investing. And if they see how much money can grow over time due to compound interest, they’re usually quite excited to get saving.

Goal duration should be short for young 5-6 year olds, maybe a week or two. These kids need to be successful in reaching their first goal because it will encourage them to set another one. As they get older, increase the time. You may even want to consider matching them dollar for dollar. Not only is this a good motivator, but it allows them to reach “pricier” goals faster.

Another strategy for getting your kids to reach their goal is to introduce them to some Above-and-Beyond jobs. These are jobs that your kids can do around the house to earn extra money. This has the added benefit of teaching kids the value of a dollar as when they work for money, it tends to have greater meaning.

Having kids set financial goals is the foundation needed for them to be ready to set goals such as saving for a car, or for college, or (it’s baaack) saving for a down-payment on a house. That’s a lot of delayed gratification! But it’s so worth it. You’re teaching your child life skills so necessary in today’s society!

And achieving a financial goal that they set out to do gives kids such a sense of personal satisfaction. It’s a joy to watch as a parent. Let’s not deny our kids (and us!) this opportunity.

Getting Kids EXCITED About Saving Money

When Ryan was seven years old, John and I discovered he had a spending problem. As serious as a seven year old can have. It was all about Pokemon cards. Each week he would drain his money on the cute cards in hopes of striking it rich with a rare Charzard.

But not wanting that spending problem to grow into a bad spending habit, we decided to introduce Ryan to compound interest. We wanted to see if the idea of money growing on itself (because he saved it), would have an impact on him. We also wanted to have the idea of saving his money come directly from him.

So we sat him down at the computer, along with his brother Nathan who was a terrific saver already, and plugged 10% monthly interest (parents can do that!) into a spreadsheet. The graph that was generated on the initial $100 we set up, shocked him. Then on came the lightbulb when he realized that saving his money would mean he would end up with even more money. He was a believer. It was this moment that began our work on KidsSave.

Compound interest. Einstein, a very smart dude, called it the eighth wonder of the world. He also called it the greatest force in the universe. And if anyone should know about the universe and force, it’d be Einstein.

And it was compound interest, interest that grows on itself, that made Ryan the saver he is today.

So I’ve put together two videos to illustrate the power of compounding so that you can show your kids this “magic” and get them just as excited as Ryan got. Of course, you could also use our kids’ savings and money management software, KidsSave, as it was the very first thing we designed for the program.

Here’s my most recent video. It’s on the Rule of 72. Don’t know the beauty of the Rule of 72? Then take a peek. It’s pretty amazing. And if it gets your kids excited about saving, let me know!

And after you watch the video, ask your kids what would happen if they invested $2000 instead of $1000…

Watch this VERY COOL video.

Fees Make a Difference

I was so excited this morning after reading an article in the business section of the Sacramento Bee.  It was describing how Wal-Mart is having a positive impact on the environmental practices of companies it does business with, particularly in China.  Apparently, if you want to partner with Wal-Mart, you’re going to have to be eco-friendly.  Nice.

I was excited because Nathan owns a share of Wal-Mart and when a company does good things, it usually ends up being reflected in the stock price.  Eventually.  Besides, being eco-friendly really is a good thing for the planet.

Nathan chose to invest in Wal-Mart for this very reason.  He liked their focus on socially conscious practices.

I handed Nathan the article to read.  I deliberately don’t tell my kids what the article is about because reading the newspaper, especially the business section, is a skill.  Heck, sometimes I have to read an article several times before I get the gist.

But Nathan got this one right away.  “I knew it,”  he said.  “They’re doing good stuff for the environment.”

And then he looked a little sad.  “Let me see what it’s at now,” he said as he left his Facebook page to check the latest share price.

“It’s at $54.  I’ve got a ways to go.  I bought one share at $50 plus the transaction fee of $12.95.  So it’s going to have to go up to $63 before I break even.”

Okay, these are the times when I wonder what kind of guidance I gave him when he wanted to buy in.  I’m very aware of the fees and that in making a purchase, they need to be taken into consideration.  Especially if only a few, or in this case, one share is being bought.

Since I’m the one who sits with the kids at the computer when we make our purchases, I can only wonder what planet I was on to allow him to purchase one share which, in effect, plummeted as soon as the purchase was complete.  I felt really, really bad.  Some guidance I was.

But, it was a good lesson.  Although the fees have since gone down to $7.95, it’s still an important factor in making purchases.  A factor that neither one of us is going to forget the next time we decide to own a little piece of a company.

1 in 1,592,937

I use my husband and kids as guinea pigs.  That’s what I was doing one evening during dinner when I handed everyone a post-it note.  I was practicing a lesson I was planning on teaching the next day to a group of fifth graders.

“Write down five numbers from 1 to 47 on your post-it.  You can use your favorite numbers or simply choose random ones.  It doesn’t matter.  If you match any of the five I write down, I’ll buy you a soda the next time we’re out.    If you match all six, I’ll give you a $50 gift card for itunes.”

I was pretty sure no-one would match all five numbers, but I didn’t want to clue them in by saying something like I’d take them on an all-expenses trip to Hawaii.

My family loves competition.  All it takes to get them 100% involved is to throw in an incentive.  So they got busy writing down their numbers.  That actually took a while because my oldest, Nathan, is such a deliberate worker.  He has to know that each one of the six numbers he was about to choose was carefully thought through.  Not that it would make a difference.

So when we revealed our numbers and they saw that I had written the consecutive numbers 1, 2, 3, 4, and 5, Nathan about had a tissy fit.

“No-one ever chooses those numbers!” he said.

“I did,” I countered.

“Yes, but no-one else does.  It’s silly to choose the numbers one through five.”

“Really?” I asked.  “Don’t I have the exact same chance of winning as you do with your five numbers?”

He knew I was right.  That’s why it really bothered him.

My lesson the next day had to do with unwise things to do with our money.  I put buying lottery tickets near the top.  Not that buying an occasional ticket is bad.  But a lot of people do it a lot, and they’re the ones who shouldn’t be doing it, at all.

When I was researching the lesson (since I don’t buy lottery tickets I had to read about how the whole thing worked) I discovered a popular lottery game in California is called Lucky Lotto.  Players get to choose five numbers from 1 – 47 and then a mega number from 1 – 27.  I decided to have the students only go for five numbers because it would make the lesson easier to teach.  (Believe me, I’ve been doing this for a while.  The probability of there being at least one kid in the class that would choose a number greater than 27 for the mega number was pretty high.  I wasn’t going there.)

The probability of matching all five (and not necessarily in the same order) is 1 in 1,592,937.  By the way, to match all five and the mega number:  1 in 41,416,353.

Sure people win.  But most don’t.

Isn’t it wiser to put that money in an investment that, over time, would earn ridiculous amounts of money?

The problem is, people don’t want to wait for 20, 30, 40 years.  They want it now.  Which means in 20, 30, and 40 years, they’ll still be playing the lottery.  Someone needs to make them pick the numbers 1, 2, 3, 4, and 5.  Then maybe they’ll understand how silly the lottery is.

And as for my husband and kids?  No-one matched a single number.

The Risk Continuum

Nathan finally did it.  He bought his first shares of a public company.  Not the company he was orignially looking at.  That was Pacsun and those shares have tripled in value in the few months he waited. No, instead, he bought several shares of Walmart.  He likes how environmentally conscious they are and believes that they can have a big impact in this area.

I like that he’s given serious thought to his investment.   And I like that it is in concert with his value system.  He’s concerned about the environment and sees that Walmart has taken climate shift seriously.  Although, no doubt, the bottom line plays a role here, we still all benefit.

Buying his first shares was a big deal.  He’s a pretty conservative investor because he works hard for his money.  And we all know that on the risk continuum, stocks are at the risky end.  It’s all about how much risk you’re willing to take on.

Mutual funds are less risky and the boys have been steadily adding to their Vanguard 500 Index fund since 2005.   But after one of my money classes last year, they have both been interested in testing the stock market waters.   The trick is to decide the balance. 

Since the boys are still in their teens, their time horizon is longer than it is for me and John.   So they can take bigger risks than we can.   Although Ryan’s company stocks take up 13% of his portfolio and Nathan’s only takes up 8%, they both only recently began investing this way so they are taking it slow.  

But, as Nathan learned, taking it too slow can mean lost opportunities.  What they need to do now is decide how much of their portfolio will be in individual stocks and begin the balancing act.  This will give a pretty clear picture of where each sits on the risk continuum. 

But what a great position to be in.  Teenagers armed with information that can shape their financial life 30 years from now.  If only I knew then what I know now…

It’s Just That Easy

Ryan and two of his friends were hanging out the other night.  Earlier in the day before either friend came over, Ryan had been MySpacing one of them about buying baseball cards on ebay.  His friend had bought a Willie Mays card several months ago as an investment.  According to him, it has already increased in value.

That’s when Ryan’s little ears perked up.  Ryan is all about investments.  He knows he has time on his side and he’s willing to wait.  He wanted in on this baseball card investment thing.  I told him to make sure, as always, that he does his research before putting any of his hard-earned money on the line.  I trust him to do that.

True to form, Ryan spent some time researching a baseball bat signed by Willie Mays.  He was tempted to plunk down $300 and wait it out.  But after emailing the seller and discovering that the sale was final, he decided not to do it.  It just didn’t sit right with him.  And $300 is a lot of money.

$4.25, on the other hand, is not a lot of money.  When his two friends came over later that day they checked out several other baseball cards.  I was busy doing something else and figured they were having fun discussing cards, ebay, and investments.

That’s when Ryan came to me and asked me for my paypal account number.  Excuse me?  Apparently, his friend decided to add on to his collection and Ryan allowed him to buy his card using our ebay account.  In all fairness, we’ve done this before for one of Nathan’s friends but have long since retired that habit.  Ryan did not know this.

I now found myself in an awkward position.  I didn’t want to embarrass Ryan in front of his friends.  Unfortunately, I was so shocked that they had bought the card, I forgot to check my comments at the door first.  “Are you kidding me??  Absolutely not,” I blurted out.

All’s well that ends well.  I tried back peddling which never works, but paid for the $4.25 using my credit card.  Then I had Ryan pay me the $4.25 in cash.  I’m pretty sure his friend is good for the money, but I’d rather not be the one waiting around for it.

This little incident got me thinking about how easy it is for kids to buy stuff online.  Especially if they know their parent’s password.  But password or not, what are kids thinking about money when either they or their parents place orders on line?  Is there a connection between the hard work done to earn the money and the item that was bought?  Has technology made things so easy for us that it’s really making things harder?

And should parents be filtering their children’s access to “spending sites” just as ferverently as they filter their access to “adult” sites?

Some things are just too easy.

The Waiting Game

Nathan and I had it all figured out.  The timer was set for two hours and twenty minutes as a backup in case I forgot my role in his Odyssey Black Series i9.  Now it was simply the waiting game.

The i9 is a putter.  Retail it sells for about $250.  But a number of years ago Nathan discovered ebay and since then has rarely purchased a club in his ever growing arsenal to be a scratch golfer that wasn’t online.  He’s saved a lot of money over the years and been completely satisfied with his purchases.

It takes Nathan a while to research his interests because, when it comes to golf, everything is so expensive.  So he had spent several months carefully scrutinizing his next prized item.  It came down to Friday at 4:15pm when the auction closed.  The only problem was that he had a tee time at 3:51pm and wouldn’t be able to close the deal himself.  That’s where I came in.

Under strict instructions to call him at 4pm (thanks to the reminder from the timer we set), he would guide me through his purchase.  It’s not that I hadn’t bought anything through ebay before, it’s just been a while and I didn’t want to mess anything up.

He had decided that the most he would spend on the i9 was $15o.  When we set the timer the current bid was $50.  So I waited.

He called a few minutes before the timer went off.  And it was a good thing because the computer had gone into sleep mode and was having a hard time waking up.  While I was booting up the Mac in case the old PC decided it simply was not going to be cooperative, I heard Nathan say, “Would you like me to tend?”  It’s golf lingo for standing next to the flag getting ready to pull it out of the cup, if necessary.   I figured the guy he was playing with was probably very understanding of his quiet conversation with me since a putter was involved.

When old faithful revealed the refreshed auction page, the putter was sitting at $195 with less than two minutes to go.  So I had plenty of time to submit a bid.  “What do you want me to do?”  I asked Nathan.

“Don’t bid,”  he said.  “My max was $150 and I’m not going over that.  I’ll try again later.”  And with that it was done.  No putter.  No regrets.

That was a perfect example of how expensive items should be done.  Since both my boys pay for all their discretionary spending, they have learned to get the best value for their dollar.  They research, think it over, try things out, research some more, then make a decision.  $150 was all Nathan was willing to spend.   So when the temptation was in front of him, he never wavered in his decision.  That certainly does not mean that there won’t ever be any small compromise.  But his experience has told him another putter will come along and he’s willing to wait.  

Besides, I’m not sure he really needs a new putter.   He sunk one in from 10 feet on that first hole.

YOU are Your Investment

Nathan and Ryan came home a little dejected.  They had spent three hours working for Tom and they didn’t get paid for the work.  

Tom is our neighbor.  He’s retired and does a lot of stuff around his house.  The boys work for him from time to time and love it because Tom pays them $13/hour.  But they have to earn it.  When they come home from a day at Tom’s, they sleep well that night.

Last month Tom and his wife Margie skipped around Europe for two weeks.  Nathan and Ryan were tasked with feeding their cats while they were gone  in addition to a few other minor things like covering the patio furniture if it rained.  So when Tom returned from his trip he paid each boy $50.  Yowza.  The kids thought they hit pay dirt.

But Tom mentioned, as he handed over their earnings, that there were some minor things the boys could do for him and then they’d be even.  So on Saturday, the boys went to Tom’s to finish up their “cat sitting”.

Three grueling hours later, they returned sans any compensation.  “I knew Tom wanted us to do a little extra for the money he gave us feeding his cats, but I had no idea he would put us to work like that,” said Nathan.  “That’s a total of six hours of work we did for him.”

I felt a lesson coming on.  “Tom’s been good to you.   Sometimes we need to do a little extra without feeling like we must be compensated for it, as hard as that is to do. Even if that little extra turns out to be a big extra.   It’s like investment in your future.  You may not see it now, but the habit of extra effort will pay off in the long run.”

“What do you mean?” he asked.

 “When you least expect it, something good will happen that was a direct result of your extra effort.  Like the time your self-portrait was chosen to hang in the school office because you went above-and-beyond the assignment.  It doesn’t happen all the time, but when it does, it’s nice and can lead to other things.  The trick is not to expect something every time you put in the extra effort.  Put in the effort and one day it will pay off.”

These life lessons are sometimes hard to teach kids.  It requires them to trust you because the results aren’t immediately apparent.  That’s why it’s important to look for opportunities to make connections for our kids.

For example, the next time you see your children do a little extra, tell them that you’re proud of their work and the extra effort they put in.  And when they receive recognition for going above-and-beyond, make the connection between the effort and the “reward”.  Then when they come home from the neighbor’s house a little miffed that they didn’t get paid, remind them to be patient.  Investments take time to grow and much can come to those who are willing to wait.

Bumper Sticker: I Break for Lemonade Stands

Okay, this one’s too cute.  John walked in from work this afternoon holding two teeny paper cups.  And I mean teeny.  The ones really young kids use after they’ve brushed their teeth.  The ones that hold maybe two ounces of liquid.  He held them up to me and said, “I stopped for orange juice.”

We are big believers in kids getting a chance to exercise their entrepreneurial spirits.  And it usually starts with the infamous lemonade stand, or in this case, orange juice stand.  I’ve seen kids who I would never consider the lemonade stand type out on the corner selling their brew.    

I really feel that kids are born with a desire, and the gift, to do something constructive that can earn them a little extra money while having fun.  Somehow, slowly over time this desire disappears. 

Kids are optimists.  Because of this they tend to think they can conquer the world.  That’s not a bad thing.  But often, parents need to bring kids back to reality.  I’m not sure how to help you build a teleporter is one time I remember having to do a reality check on Nathan.  How do you explain to a first grader that having voices travel over the airwaves is a little different than having a person travel through space and time.

But because kids are optimists I also think we need to take the time to help them think through some of their ideas.  Maybe if we do that, kids won’t slowly give up that entrepreneurial spirit they seem to be born with.  Not all their ideas will come to fruition, but you may find that you’re pleasantly surprised.  Like I was when Ryan decided to start a soda-making business.

So the next time you see kids having a lemonade/orange juice stand… stop.  And when their little hands submerge the teeny cup into the pitcher then hand you a sticky, dripy cup…smile.  That quarter you just handed over could be the beginning of a huge empire.  Maybe one that will one day teleport you to your next business meeting.

Discipline Required

Here’s the thing about the stock market.  Rarely can it be timed.  I may even go a step further and say that never can it be timed.  But I’m not an expert.  What I do know is that over time, the stock market seems to do pretty well.  Statistics say that it averages a gain of about 11%…over time.

There’s the key.  Over time.  And that’s exactly what we talked to Ryan about when he decided to plunk down about $250 of his own money for 5 shares of CMG back in September.  Unless you’re a professional and will spend your days scouring information about companies, trends, and P/E ratios, the best bet is to do your research, invest, and then forget about it for awhile.

So when CMG (Chipotle Mexican Grill) went up to $82 a share recently, and Ryan was visibly upset because he had missed an opportunity to put even more money in, we had to sit him down again and go over the if you’re going to invest in the stock market rules.

Ryan had been waiting for CMG to drop so that he could buy more shares.  His original investment of 5 shares cost him $47/share.  When he last looked it was around $73/share.  The market’s been so wacky lately that he figured it was bound to plummet again and then he’d go back in.

But that’s not what happened.  He was shocked and mad at himself that he had not put in the other $250 that he’d been holding on to.  Especially after I reminded him about two weeks ago that he shouldn’t try and time the market.  A lot of people think they can out-smart the market.  It does happen.  But mostly it doesn’t.  

It took a little bit to help him recover.  The stock market is such an emotional thing.  That’s why it can’t be timed.  And frankly, I’m glad he’s learning this lesson when he’s 14. 

He’s okay now.  He should be.  The value of his stock increased by 74% in a short period of time, for crying out loud!   At least, that was the case a few days ago.  He’s not interested in taking a peek.  Best let it sit for awhile.  He’s got lots of years ahead of him.  Even at $82/share, one day that’s going to be a bargain.