As I said in my post on teaching kids about money and money related habits (part 1), I feel strongly about the paycheck method and its ability to teach children good money management habits.
Before I fell in love with the paycheck method and fully saw how it would help kids truly learn good money management, I looked at first the concept a paycheck in my mind and what skills had I developed over the years and pitfalls had I hit when I learned money management. First, a paycheck is income I received for work I do based on the work, how specialized the work is, my level of expertise, and my experience and education. Its a set rate that is paid either by the hour or by salary. I can receive increases (or in theory, decreases) based on how well I perform the task and as my expertise and experience grow. The government gets their share in taxes that are taken out.
Second, when I receive a paycheck, its important to impound for my future – retirement and emergencies and savings – of approximately 10%. Its equally important that I practice charity in thanks for all the gifts and graces in my life – again approximately 10%. With the remainder, priorities need to be established based on expenses coming in and goals I have, or in other words, establish a budget. In doing so, it was equally important to understand the difference between good debt and bad debt and how to avoid the later and minimize and manage the former.
That said, here is The Paycheck Method for teaching kids good money habits:
One: Establish Paychecks are for Doing Your Job
First, establish that paychecks are received for performing their job and performing it well. So, you might be asking, “My kid is 5. What kind of job could she/he possibly have?” In my mind, their job is school. Starting with pre-school, our children’s primary task is to go to school, learn, come home, do homework for learning and to perform well in school. To me that is no different than you or I or our husbands going to work.
So the next thing you might be thinking is, “Okay, that’s fine for September through June, but what about July and August when there is no school?” This is at your discretion. There are several options. In my personal opinion, there is so much “learning” that our children lose during summer months that to continue school related activities is not a bad thing. I personally think “assigning” something that is school or health related and age appropriate for them to do during those two months is more than appropriate but in the longer run is better for them as productive learners.
For example: Teenagers too young to work at a traditional summer job could spend an hour on college and scholarship research, or SAT/ACT prep studies, or do reviews of work they did over the school year, or take a lifeguard or first aid certification course.
For pre-teens, an extra class such as arts or music that they may not get to take in school, or read a book a month such as the Harry Potter or Charlie Bones series that are age appropriate, or a karate or dance class, or do reviews of work they did over the school year.
For elementary and pre-school kids, take a mommy & me exercise or yoga class, or swimming lessons, or practice ABCs, numbers, writing, reading, basic math, or take a library trip and pick out activity books to do, or see if there are local age appropriate art or music classes.
There are so many opportunities offered through cities, community colleges, adjunct learning centers, libraries, and schools and churches for little to no cost as well as activities that can be done at home for no cost, that children can keep up their job during the summer.
There is always the option of no paycheck in the summer. Many teachers have a salary that is paid over 10 months and they have to learn fast how to budget and save so that they have enough funds during the two months without paychecks.
Whatever you decide your children’s jobs are, define and let them know. (Again, I personally feel chores are a responsibility of being a part of a family, not something to be paid for doing.) Also, let them know your expectations for their job. For example, I would never expect that my kids should get straight A’s all the time, every time. However, I do and would expect that I see they are truly trying and doing their best and are putting forth their best effort. I would not accept them rushing through homework or being satisfied with “good enough”.
I personally wouldn’t start with a paycheck any earlier than preschool, say age 4, but kindergarten is more than appropriate to start. Children understand and can learn far more than we give them credit for. That said, the younger the kid, the simpler the concepts.
Also on a side note, if a child does get a part-time job during the summer but elects not to continue in some form of “education”, then the paycheck stops until they return to school. They are electing to do another job in the summer so that becomes their paycheck.
Two: Establish a Pay Rate
Now that they have a job, establish a rate of pay and pay schedule for your children. Just like any business would, look at your own personal resources and determine what your budget feels comfortable with paying them AND how often you feel comfortable paying them. My personal suggestion is to match their pay schedule with yours. If you get paid every two weeks, then they would too. If you get paid monthly, they would too.
In my mind, the pay rate should be reflective of the age and grade a child is in. A kindergartener versus a 7th grader, the 7th grader has “more expertise” so perhaps should get a greater pay. At least, I think they should. Whatever rate you decide, make sure you share it with you little ones.
As they get older, you can introduce new concepts to them such as “raises” based on their expertise and experience increasing. Say in kindergarten they got $5 every two weeks. Once in 4th grade, they get a raise to $7 and in 6th grade, they get a raise to $10. You can also give “bonuses” for exceptional work such as straight A’s for the semester or quarter or year or for doing well on a really hard test or project. Obviously, these are at your discretion AND based on your own financial state.
Three: Don’t Forget the Taxes
We get taxed and so do they. I think one of the biggest shocks for new workers is not only that taxes are taken out of their paycheck but how much. If children are use to this concept from a young age, when they go to work it won’t be a big deal. And because they have already been exposed (for about 10 to 13 years) to the concept, there won’t be the devastating reality of I worked that hard just to have the government take my money.
Make it simple though. I realize we get taxed at anywhere between 15% to 33% but I personally suggest taking 10% out of their paycheck for taxes. It requires a little bit of planning on your part to execute this. Let’s say my son’s pay rate was $10 twice monthly. I would have 5 one dollar bills and 1 five dollar bill. I would also have an envelope labeled taxes. When he gets paycheck, I would say to him, “Okay, here is your paycheck of $10.” I would then count out his paycheck and when I hit $9, I would then say and 10% for taxes or $1 and have him watch me put that in the tax envelope.
Four: Savings, Charity and Theirs
Just as important as relating doing their job earns a paycheck, teaching kids about budgeting and saving is equally important. As you give your child their paycheck, have two more envelops. One labeled CHARITY and the other labeled SAVINGS. If you have more than one kid, make sure their name is on it. I again suggest doing the same as we should as parents – 10% to savings and 10% to charity. Share with them that their savings is an investment in their future such as college, car, and car related expenses. As they grow and can understand more, share with them that when they are 21 and working fulltime, then their savings becomes savings for retirement, emergencies and savings.
By having them save 10% of their paycheck for charity, you are teaching them to care and give to others. I encourage letting your children pick the charity they want to give their charity money. If they love animals, see if their is a local animal rescue they can donate. If they love babies, see about taking them to a Ronald McDonald house to donate. This gives them a sense of ownership and true sense of giving.
Five: Now You Have Money, Lessons Continue
Most kids, once they have money in their pocket, are going to want to spend it like its burning a hole in their shorts. Let them. Hear me out before you start to say, “But then they will have spent it all.” I know. I’m not saying don’t give counsel, do! For example, if they have $7 left and they want the stuffed teddy bear on sale for $6, feel free to ask, “Are you sure this is how you want to send your money? After its gone, you will have to wait to your next paycheck.” Most kids, at least the first couple of times, are going to say yes and purchase the bear. Let them. It’s their money.
Here is where the lessons come into play. The next time they ask for something, you reply, “You are welcome to get it. Do you have your money?” They are going to say no. If they are savvy, they may ask to borrow some from you. Again, stick to your guns and say no. If you let them borrow, you teach them to buy on credit and get in debt. BUT if you tell them no, it won’t take too long before they start thinking about their purchases. They will begin to make decisions based on what the really want (and in the future need) versus impulse purchasing. They will also learn to buy things based on what they actually have in the way of cash. If something costs more than they have, then they learn to save for it if they truly want it until they have the cash.
Make sure boys have a wallet and girls a purse so they can keep their cash with them. This will also teach them responsibility for holding on to things. The first time they lose their money, will most likely be the last. They had to earn it so they are going to want to hold on to it.
There will be so many opportunities to teach them good habits AND correct bad ones by using the paycheck method. Couple this with having them watch you pay bills, develop a budget each month, and managing it as you incur expenses, and kids will grow up with solid and healthy money habits. Encourage questions and take the time to share with them when you have perhaps not been so wise with your own money. Better they learn from our mistakes than by making them on their own.