The Family Bank: How to Start Teaching Young Kids About Money

You might laugh, but when I got pregnant with my first child, some of my favorite “baby books” didn’t actually talk about babies at all. Instead, they focused on different ways to teach your kids about money.

If you’ve read a bit of my story, you’ll know I was very grateful for the early money lessons my mom taught me, and I knew that I wanted to empower my kids with an even greater foundation of financial literacy (since unfortunately, they’re not going to learn much about this topic in school). 

Based on many of the lessons and stories in Ron Lieber’s book The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money, my husband and I started using a simple concept in our house called The Family Bank.

By sharing our Family Bank structure with you today, these are the questions I aim to answer:

• Why is it important to talk early and often about money with my kids?

• What is a real-world example of a Family Bank and what are the tools and resources I need to create and run my own?

• How does the Family Bank system evolve as my kids get older? 

FOSTERING A HEALTHY RELATIONSHIP WITH MONEY FROM THE START

When I first start working with client families, we have in-depth conversations to understand what the family values most - what is the money for? - and then we make sure their money and financial strategy are designed to support that. My goal is to reframe money as a tool to live their definition of a great life.

I wanted to give my kids an introduction to this concept of reframing money as a tool - understanding that money is something that requires responsible stewardship but which can also allow us to live a great life aligned with what’s most important to us in the world. 

The truth is that many kids grow up in an environment that fosters unhealthy beliefs about money. They carry these beliefs or “money scripts”, as Dr. Brad Klontz calls them, into adulthood, and certain bad habits develop as a result of thinking that money is good or evil.

Ken Honda, author of Happy Money, explains that we should instead view money as neutral - it is not good or evil. I came to understand that good parenting meant we were modeling this for our kids as early and as often as possible. 

I’m surely not alone in wanting to raise generous kids who aren’t materialistic, who are patient, and who understand the benefits of delayed gratification. By giving kids structure and a safe place to practice and make mistakes with money, they will naturally adopt these values as their own and carry that into adulthood.

TEACHING BASIC FINANCIAL CONCEPTS & BEHAVIORS EARLY ON

There’s so much influence on my kids that I can’t control, especially when I think about them starting their first real job or leaving the house for college. What I can do is model and teach them basic financial concepts and encourage healthy money behaviors so they’re better prepared once they’re on their own.

Below are some examples of money lessons we hope to teach our kids in their early years and later on when they’re teenagers too. 

Money lessons in the elementary school years:

• Basic math and familiarity with different forms of money: cash, coins, checks & debit cards

• How to organize and understand cash flow: spending, saving, & giving categories

• The power of delayed gratification and compound interest

• How to write a check and track purchases with a check register

• Understanding the privilege of having money in the first place and the importance of giving back to the community

• The values of responsibility and ownership from stewarding your own money and making independent purchasing decisions

• Differentiating between paid and unpaid work and the value of contributing in equal parts as a family to run the household 

Money lessons in the middle and high school years: 

• How to leverage spreadsheets or other technology to stay organized around cash flow

• How to do your tax return

• How to save money for college

• The powerful long-term growth that is possible when investing in the markets

• Understanding certain types of investment accounts and how they are taxed (taxable vs. pre-tax vs. tax-free)

• How to open a Roth IRA when they get their first job

• How to responsibly use a credit card, building your credit score, and why credit matters for future purchases (i.e. buying a house or buying a car)

This is by no means an exhaustive list of money lessons kids can learn with our guidance, but you can see what’s at stake if we put off these conversations and leave this education entirely up to chance.

I would’ve loved to have learned everything above before I lived on my own, and many of my peers and clients tell me the same. As parents, we have the chance to take on this responsibility and proactively set our kids up for greater success as adults. 

OUR FAMILY BANK & TOOLS TO CREATE YOUR OWN

Now for the nuts and bolts of our Family Bank. This system lays the groundwork for healthy money discussions and more mature financial lessons as our kids get older.

We have a six-year-old daughter and a three-year-old son, and over the years they’ve received small amounts of “spending money” from family and friends on their birthdays or holidays. Our daughter has also lost a couple of teeth at this point, so she is already familiar with the concept of the Tooth Fairy. 

Since the kids were receiving monetary gifts and starting to understand the concept of money at a basic level, I was eager to follow The Opposite of Spoiled’s suggestion and have them split their money into three categories - Spend, Save & Give - with a certain percentage going to each. This would be their first introduction to a basic cash flow framework. I initially tracked this in a free family bank spreadsheet I’d come across online.

The problem? My kids were (of course) too little to understand the spreadsheet. It was convenient for me and my husband, but the whole point of the system was to serve as a teaching tool for our kids, and that wasn’t happening. 

They needed something more tangible and visible if I wanted them to really grasp the system, so my husband and I decided to tackle a little DIY project and make Spend/Save/Give banks. With these physical banks, they get to drop their money in each jar and watch it up close on a daily basis.

This year our daughter started 1st grade and we decided to begin giving her a weekly allowance equal to her age; we’ll do the same for her younger brother eventually too. We view allowance strictly as a money teaching tool, and it isn’t tied to the completion of any chores (more on this later in this post…)

Below is an example of the cash flow rules we came up with to split the money between the three jars. A weekly allowance means more chances for our daughter to interact with the family bank system and really start to learn the responsibility and ownership of having her own money. 

Every Sunday afternoon our six-year-old daughter receives $6 of allowance money. 

Give Jar - Right away, $0.60 (10%) goes into the “giving” category.

Just like we want our kids to share their toys and other belongings, the hope is that our kids learn to be generous with their money. I want them to recognize the power it’s had in their lives, so they feel excited to turn around and give a portion back in the form of charitable donations. We’ll help them pick a local charity where they will donate this money and see the services their contribution provides. 

Taxes - On the remaining 90% of her allowance ($5.40) my daughter will either have to pay me a 20% tax to receive all of that as spending money, or she can choose to save a portion to the Save Jar. With this tax, I have her physically give me back that 20% so it sinks in. 

Save Jar - If she wants to avoid the allowance tax, my daughter can choose to set aside twice as much as the tax (40% of the allowance in this case) and then collect a 100% match (turning a 40% savings rate into 80%). If she chooses these savings, that would be $4.80 into her Save Jar each week. The Save Jar also earns 10% interest each quarter. 

I borrowed this tax/savings rate/matching idea from one of the parents in Ron Lieber’s book. I liked that it gave my kids a choice when it came to paying a tax vs. receiving a higher savings rate. It feels like there’s a higher likelihood the lessons sink in if we can give them choices and let them figure things out on their own.

The Savings category is likely for goals much further into the future too, like helping to purchase a car or paying for a portion of their college expenses. It’s also useful to see the concept of a matching contribution since it mimics a 401(k) and similar retirement savings plans that my kids might have access to as adults. 

Spend Jar - The remaining 50% of the allowance ($3.00) goes into the spending category

My daughter is allowed to use this money to buy whatever she would like. I plan to have her use a check register to track her spending money, and I’ll carry this with me when we’re out running errands. If she has an impulse to buy something, she can check to see if she has enough money in the spending category to purchase that item herself. 

EVOLVING THE FAMILY BANK SYSTEM AS YOUR KIDS GET OLDER

I mentioned already that we made the choice to have allowance stand on its own as a teaching tool for our kids. I think it’s so important that they interact with money at an early age, for all the reasons we’ve discussed above, but I want my kids to be able to differentiate between paid and unpaid work and the value of contributing in equal parts as a family to run the household.

We refer to “chores” as “family contributions” in an attempt to put a positive spin on domestic household responsibilities. These tasks need to be done, and not with the expectation of compensation. Family contributions are also something we swap around continuously so both my son and daughter know how to do everything around the house. 

As our kids get older though, I like the idea of asking them to come up with creative ways they can make extra money by completing certain one-off projects, things that aren’t everyday tasks to run the household. There’s a whole host of tasks I might pay someone else to do around the house, but if my kids want to come up with a game plan to accomplish those items and think of a fair wage they’d like to receive for that work, I’m all for it. 

I see our family bank system evolving too as my kids get older and can take more responsibility for purchasing much of what they need throughout the year, such as buying school clothes, helping pay for summer camp, going out with their friends, helping pay for their car/gasoline/insurance, and eventually helping to pay for college.

This will likely require us to take the money we might’ve spent on them in those categories and direct that into their weekly allowance so they have the responsibility of spending and saving toward those goals.

When they’re old enough to have their first job, we’ll help them split this money between the categories and decide on reasonable ways they can use the money to contribute to their spending and savings wants and needs. 

There’s definitely a chance one of our kids spends all of their allotted school clothes money on one expensive pair of shoes or jeans. Then they’re stuck wearing the same old clothes because their budget has been shot, and I have to remember not to bail them out so they actually learn something from that experience!

I know those of you with kids realize parenting is one of the hardest things you’ll ever have to do, and the system I’ve described above doesn’t make that any easier. It’s my hope this shows you the benefits of creating an environment where your kids can learn from their money mistakes early on.

By taking the time to teach them these lessons, you’re providing the priceless gift of financial literacy. You’re also empowering them to align their money with what they value most which ensures they have a much healthier relationship with it in the long run.

Today we covered ways to talk about money with younger kids, but stay tuned for more advanced ways you can help your middle school and high school kids learn about money too!

If you’d like customized help using your financial resources effectively in order to make the most out of your wealth-building years, please schedule a free consultation here or email me with questions kelly@kkfp.co

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Disclaimer: This blog post is not intended to be a substitute for specific financial, tax or legal advice. The article is for general informational purposes only. Reproduction of this material is not permitted without written permission.