Smart Money Smart Kids: Raising the Next Generation to Win With Money

by Dave Ramsey

  SAVING IN ACTION

  In the last chapter, we focused on spending. That’s pretty much the starting point for kids and money. Being able to go into a store and spend their own money is the most powerful way to reinforce the work-money connection we talked about in Chapter 2. But if we stop there, we’ve got a huge problem. Four-year-olds can get by with the work-money-toy cash flow system; grown-ups can’t. If we want to raise young men and women who win with money, we’ve got to teach them to save.

  Behavior Is Key

  We are definitely not a nation of savers today. A recent survey by the National Foundation for Credit Counseling found that 64 percent of Americans couldn’t even cover a $1,000 emergency with cash.1 In real-life terms, that means they couldn’t pull together enough money for a single mortgage payment, or maybe even a month’s worth of groceries for their family, without borrowing money. Another study from Bankrate.com found that one in four Americans does not have a single penny saved.2 Clearly, this situation is a complete disaster. So why do millions of Americans accept it as a way of life?

  Not surprisingly, research shows that adults are failing with money because of the money habits they developed as children. CNN recently reported on a study of college students at the University of Illinois at Urbana-Champaign. The researchers found one striking similarity among students who consistently demonstrated good financial skills. According to the report, “Nearly all said their parents had gotten them into the habit of saving as young children, suggesting saving is a behavior that comes from experience, not knowledge.”3 That just backs up what my dad’s been saying for more than twenty years: Personal finance is 80 percent behavior; it’s only 20 percent head knowledge.

  DAVE: After decades of coaching adults who have messed up financially, as well as those who have become wealthy, I am more convinced than ever that behavior is the primary indicator of successful wealth building. If you want to know if someone will win with money, all you have to do is look at his behavior and the character that drives that behavior. An adult’s ability to work well with people, have extreme integrity, and display emotional and spiritual maturity are key to building wealth and keeping it. Great talent might cause someone to get rich, but it usually flames out if he doesn’t know how to behave like a grown-up.

  When you repeatedly teach your child proper spending, saving, and giving behaviors until those behaviors become character traits, you are ensuring the future success of your child. When a kid saves money, it is not a mathematical event; it is a maturity event that gives dignity. When a kid buys something with money he or she has saved, it is not merely a financial transaction; you are watching poise, confidence, and maturity develop right before your eyes. When you grow great behaviors and character traits in your children, you are really teaching them how to win at life.

  RACHEL: Saving money can be hard to do no matter how old (or young) you are. So teaching your kids how and why to save money as early as possible will give them a major head start. You also have to give them the opportunity to experience saving money. Information alone rarely changes our behaviors; instead, we tend to learn the most by doing or experiencing something. I’m meeting more and more teens and young adults who have trouble saving money simply because they never had to do it, and they never really saw their parents do it. It was something their family never made a priority.

  As a parent, you need to understand that your children are in the best position of their lives to learn about saving money. Young kids living at home are usually in the most financially secure position they’ll ever be in. Give them the opportunity to experience saving in action.

  Saving Teaches Patience

  Kids aren’t always naturally patient people. Shocking, I know. One of the most terrifying moments for many parents is getting to a restaurant and hearing the phrase, “We’ve got a forty-five-minute wait.” When you’re five, forty-five minutes is an eternity! Those moments, however—as painful as they can be for kids and parents—are important. They teach children how to wait for something fun, and that’s a huge lesson in today’s world.

  We live in a culture of instant gratification. We don’t want to wait for anything anymore, and technology keeps feeding our get-it-now attitudes. You can check the weather, make dinner reservations, order a pair of shoes, and send a picture to a friend, all while walking into work. When it comes to buying stuff, marketing, advertising, pop culture, and “easy payments” have all come together to create a perfect storm that’s turned us into a ridiculously fast-paced, instant gratification society. We can have almost anything we want, any time we want, whether or not we have the money to pay for it.

  But you are a lot more cautious about a purchase if you take the time to actually save up and pay cash for it. When that happens, you’re learning delayed gratification. As that becomes part of your personality, you understand that you can’t have everything you want right when you want it. This is a great lesson to learn early in life. From a child’s perspective, saving means it will take a few weeks to have enough money for that special toy. As children grow up, they’ll understand that it will take several months to save for a car, and probably a few years to save for that down payment on a house.

  Having your children save up for big purchases—and giving them the chance to see you do the same—teaches invaluable lessons in patience and goal setting. Plus, slowing down and saving up to buy things teaches them to make wiser, less spontaneous purchasing decisions. This was definitely a lesson I needed to learn when I was fourteen and saving for my dream car. Most importantly, though, learning how and why to save money over time helps prevent the horrible entitlement mentality that many kids have today. Simply teaching kids how to save money from a young age can completely prevent that “I deserve it” attitude from ever creeping in to their mindset.

  Remember, your children are watching you. If they see you work hard, set a goal, save up, and pay cash for a big purchase, that’s probably what they’ll do too. On the other hand, if they see you put a big purchase on a credit card and then stress out about paying the bill for the next few months, then that’s how they’ll think money works. The stakes get much higher as your kids get older. The opportunity to learn and witness the discipline of saving at a young age can be one of the greatest tools you pass on to your children.

  SAVING FOR PURCHASES: AGES SIX TO THIRTEEN

  My dad has always taught that people need to save for three reasons: first, an emergency fund, then purchases, and then wealth building. I completely agree with that, but when you’re dealing with children, you need to change up the order a bit. Like we’ve said, the best opportunity you’ll have to start teaching your young children about money is in their purchases. So that’s where we’ll start.

  Introducing Saving

  When your kids are ages six to thirteen, they can start to grasp the concept of saving. Remember, up until age six, all the money was essentially marked for spending in the big clear plastic container. Now they have envelopes to allocate some for spending, saving, and giving. When they move into “big kid” envelopes at age six, you can really play this up. Make sure they understand this is a big deal! Also be sure to add more jobs to the chore chart to give them more opportunities to make money. If you keep their commissions the same but start dividing their money into three envelopes instead of just one big Spend bucket, you could accidentally demotivate them.

  In my family, Mom and Dad helped us allocate the money across our envelopes. Early on, I got five dollars a week for my chores, and two dollars of that went into my Save envelope. So, as a rough guideline, you might try marking 40 percent of your child’s commissions for saving. That’s not a hard rule; you should use whatever works for your family. Just remember—we’re not talking about saving for retirement here. For ages six to thirteen, the Save envelope is really just a bigger, slower Spend envelope. This is how kids will be able to buy a toy themselves, so be careful not to give the impression that the Save envelope is a black hole where thei
r hard-earned money disappears!

  Savings and Goal Setting

  It’s a great feeling to set a purchasing goal, work hard over time to reach it, and then actually buy the item. That feeling is magnified when it comes to your kids saving for their own purchases. There is an enormous sense of accomplishment for a child when he walks into a store and makes a significant purchase with money that he earned himself. Something inside him lights up and shouts, Look what I just did! Having Mom and Dad alongside, cheering him on, adds to the thrill because he’s so proud of what he’s achieved.

  Help your child pick out a toy, movie, video game, or other item that he wants, and if it’s in a reasonable, attainable price range, encourage him to set a savings goal to buy it. Remember, kids are incredibly visual, so print a picture of the item and tape it to the refrigerator next to his chore chart. As he works toward it for the next few weeks, ask him how it’s going. Knowing that you are excited for him can keep his motivation level high as he puts money into the Save envelope every week.

  Then, once he reaches the goal, make it a celebratory trip when going to the store to buy the item. Occasionally, if you’re able, you might even add a special surprise to the purchase. For example, if your son saves up and buys a video game, maybe you could surprise him with a new controller. Or if the item he wants is really out of his price range, you could offer to match his savings on a big goal. You shouldn’t do this every time, but sometimes it can be a fun way to celebrate with and encourage your child.

  A friend recently told me about a six-year-old he knows named Drew who set a major savings goal—and completely dominated it! Drew had spent some time playing with an iPad Mini in a store while his parents shopped. He decided then and there that he really wanted one. His parents saw that he was serious, so they sat down and explained what a big goal it was and how long it would probably take to save enough money for the purchase. Drew was so determined that his parents knew they needed to make this a major learning experience. They told him they’d match his savings dollar for dollar on an iPad, but he’d have to come up with his half on his own. Being only six, Drew wasn’t making a fortune in commissions, but he got creative and found new ways to make money. When his birthday rolled around, he told his whole extended family that he only wanted money for the iPad. That meant no toys, games, or other gifts. For a six-year-old, not getting a single toy on your birthday is a big deal, but he was focused on his goal.

  Drew was still seventy dollars short one night when his parents saw that the local retail store had discounted the iPad Mini he wanted. They counted up his money, applied the match, and Drew had just enough money to go to the store and bring his iPad home! Can you even imagine how proud that little boy must have been? At six years old, he was able to make a purchase that many adults can’t afford. And he did it through hard work and patience—and with some encouragement from parents who really get it.

  Parents’ Role in Purchases

  DAVE: One of the most important reasons you teach your children to spend wisely and save is to give them life skills. The actual transaction should not matter; what’s important is the exercise itself and the lesson learned. So as you are leading them in purchases, you will have to decide when to bail them out as an act of grace, and when to hold strong and walk out of the store with a disappointed child. Be an advisor to them, teaching them about quality, negotiating, and gathering information. Sometimes you can let them buy the cheap toy even after you warned them it may break the first day they own it. When the toy breaks just as you predicted, remind them that you love them and that they can trust you on future purchases. At other times, you will have to step in and put your foot down to protect them from themselves.

  Under no circumstances do you give up your right to parent and make a ruling simply because your child earned some money somewhere. “It’s my money, and I can buy whatever I want” was not a statement that we allowed in our family. Children cannot be allowed to buy things or do things you don’t approve of just because they earned some money. If your kids are allowed to do whatever they want, you are not a parent; you are a zoo keeper. Obviously, if a teen wants to spend his or her money on cocaine, you are not going to allow that. Hopefully, drugs won’t be a problem in your home, but you will have to make parental—not financial—decisions on proper clothing, tattoos, piercings, trips with questionable friends, cell phone usage, and much, much more. In those cases, you will have to decide for your household where the line is. Just because you are creating teachable money moments does not mean you resign your role as parent. You are still in charge.

  Many years ago, one of the Ramsey girls was saving for a Celebration Barbie. When we got to the store with her little jar of money, she wasn’t even close to having the full amount. It was very hard as a dad to look at that little girl and not bail her out and buy the Barbie. Even though she had a closet full of Barbies, this was the desired purchase. I helped her with the math, showing her that she had five dollars and the purchase was twenty-five dollars. Then I gave her the option of buying something less expensive or leaving the store and coming back after saving a while longer. Before you think I am a tough ogre, this was not a big goal that had been discussed and systematically saved for over many months. This was simply a trip to the store that didn’t work out. If she had been close after diligently working a long time, I would have chipped in a little. But the character built by understanding that Celebration Barbie was not in her budget was worth more on that particular trip. Rather than going home with Celebration Barbie, we went home with “Sorta Had a Party Barbie.”

  Grace vs. Legalism

  RACHEL: I definitely agree that parents shouldn’t always step in and rescue their child when she doesn’t have enough money for her purchase, but please—please—don’t go overboard with this. I spoke to a group of moms a while back, and one of the women came up to the front afterward and said, “Rachel, our family does everything you and Dave teach. My ten-year-old son is on the envelope system, and he saved up $300 for a PlayStation.” I thought that was going to be the end of the story. I mean, that’s incredible! I was about to give her a hug and tell her what a fantastic job she was doing with her son. Seriously, a ten-year-old saved $300!

  Then she continued, “But he forgot about tax. When we were at the store, they rang it up and the tax made it more than he had. So we left the store without it.” I could tell she was actually proud of herself in that situation. I think she was expecting me to congratulate her on taking such a hard stance with her son’s big purchase. Well . . . she was wrong.

  My jaw dropped, and I thought, What? Your ten-year-old worked and saved $300! You pay the tax! Are you kidding me? See, that’s exactly the kind of behavior you want to reward in your children. If you have a child that age saving that much money, making big financial goals and actually reaching them no matter how long it takes, you want him to remember that as a positive experience. Don’t rain on his parade by making him go home empty-handed!

  When you’re trying to decide whether or not to step in and help, the bottom line is this: Too many rules is legalistic, but too much grace is enabling. You want to encourage and reward their hard work, but you don’t want to make them think you’ll always be there with a handout if they fall short. You’ve got to maintain that balance, especially for ages six to thirteen.

  SAVING FOR PURCHASES: AGES FOURTEEN TO COLLEGE

  Teenagers have a whole new set of savings goals. Sure, they’re still buying some “toys,” but those look more like electronic gadgets or purses. On top of that, the normal expenses of teenage life begin to resemble adult life. They start going out with their friends, going out on dates, buying gas, paying cell phone bills, and generally needing more money.

  Parents, your little baby is growing up—and so are her financial needs. That means it’s time to get more focused and intentional than ever about saving money.

  We already explored what work looks like for teenagers, so we know where the money is coming fro
m. Now let’s talk about where that money is going. There are basically two huge expenses that most American teens face these days: buying a car and paying for college. How to go to college debt free is such a big deal that we’ll devote a full chapter to it later. For now, let’s talk about how your teen can buy her first car.

  The 401DAVE Plan

  Mom and Dad told us kids from a young age that there wouldn’t be a brand-new car sitting in the driveway with a big red bow on it on our sixteenth birthday. They told us they would pay for half the cost of our cars when we got our driver’s licenses. Whatever amount of money we saved, Mom and Dad agreed to match it. Dad liked to call this his “401DAVE” plan. So if we wanted a car, it was up to us to save for it. I remember when Denise turned sixteen, all three of us kids held our breath to see what Mom and Dad would do. I knew they always kept their word, but at the same time I held out this hope that when the time came, they’d surprise us by telling us to keep our hard-earned money while they paid for the whole car themselves. I could just imagine Dad saying, “Great job, Denise! I’m so proud of you for saving so much money. I’ll let you in on a little secret, though. We planned on buying you a car all along! Happy birthday!”

  See, I was fourteen at the time and had some money saved, but not enough for a car. Maybe a nice bike, but definitely not a car. And honestly, the thought of saving up that much money seemed impossible. They had to be joking, right? I mean, who expects a sixteen-year-old to have $2,000 or $4,000 or $6,000 on hand for a car? The more I thought about it, the more I became convinced that this was just one of those “Dave Ramsey teachable moments,” and he wasn’t really going to go through with it.

  When Denise turned sixteen and got her driver’s license, they counted up everything she had saved, and it added up to $4,500. Mom and Dad congratulated her, told her what a great job she had done, and then . . . they matched it. Dollar for dollar. Just like they said they would. There was no car in the driveway and no shiny set of new car keys in a tiny box beside her birthday cake that night. My parents did what they promised, which meant Denise went car shopping with a total of $9,000 to spend. That sent a clear message to Daniel and me: 401DAVE was real, and the kind of car we would get depended entirely on how hard we were willing to work and how disciplined we were about saving.