I won’t lend my daughter money
21 Mar, 2021
Bold statement huh!
Mainly because it breaks the first (completely made up) rule of parenting: “Never say never”
It’s not something I’ve ever really thought deeply about before, but in the back of my mind, I’ve always just assumed that we would never let our daughter borrow money from us. It seems pretty obvious to me - and I’m speaking entirely about myself here - that’s because I feel particularly strongly about teaching good money principles to my daughter and I would feel like a failure as a parent if there comes a point that she has failed to plan ahead and I have to lend her money.
I remember being caught short in my very early 20’s and having to ask my own parents to lend me money for a flight home from Australia. The reason I ran out of money was that I simply spent it all having too good a time and failed to budget for the airfare home. Oops. Poor me huh! They made me pay it back too, you can be sure of that!
How do I teach my daughter?
People often ask me how I teach my daughter to be responsible with money and make good choices and the main lesson is that both Jonny and I lead by example. It’s fair to say that we talk more about money in our house than most, that’s just the nature of writing a blog about money, but in general, our conversations are not about deep financial stuff, they are more about day to day things.
Like this text message I got from Jonny last week when he and our daughter were in Queenstown:
Jonny - Briscoes are having a sale (surprise!), do we want to replace the broken kettle?
Me - How mucho they ask?
Jonny - $30 - $40
Me - Yep, go for it
Learning points for our daughter were: shopping a sale, discussing a purchase, only buying something we actually need.
Another example was last week when our daughter asked for her weekly money for the school canteen and I was all out of cash. Again! We chatted about me starting up a direct payment into her bank account because I’m always running out of cash, in fact, I now only keep it for pocket money/school canteen purposes. We talked through what day would suit her (Monday) and how much is just enough ($5).
Learning points were: Setting up an automatic payment, setting a budget for the school canteen, discussing what items cost, using her EFTPOS card safely.
Another example was five of us going out for a family lunch, it was delicious and it cost $100. Later in the week Jonny did our weekly grocery shop and spent $230. That started a conversation about how we can feed our whanau for a whole week at $230, yet we spent $100 on a single lunch. How so? So that leads to a conversation about all the costs of running a cafe: the food, the staff, the building, the electricity, the insurance etc.
Learning points were: Eating out is expensive, eating out is a treat, there are many elements to consider when running a business.
I also tell her what I earn per hour ($24), what Jonny charges an hour ($100) and what income both Jonny and I bring into the household each month. This leads to more conversations about the fact that I might have an hourly rate of $24, but from that, I have to pay tax and also pay into my KiwiSaver etc so I only end up with about $19 of that. Also, Jonny may have a higher hourly rate, but he has expenses to pay out of that too. I wonder how many children are incredibly disappointed when they receive their first paycheque and then realise for the first time what the word ‘tax’ actually means in real life? We want our daughter to be better prepared than that so I see no point in being secretive around what we earn and how much of our income the government takes etc.
Learning points were: Mum worked for five hours to pay for the family lunch! We pay taxes to help pay the running costs of Aoteroa.
Lead by example
Conversations that happen to contain a reference to money are just a daily occurrence and after 13 years of hearing them, she has been able to begin to build up a mental picture of how money works, what income looks like and what expenses look like. We are leading by example by being very good managers of our own money and she sees us making repeated calm and rational decisions on a daily basis. By sharing with her our own real-life examples it’s probably shaping up to be the best education she is ever going to get about finances because let’s face it NO ONE else is teaching her this stuff and I know from interviewing for my podcast that the key thing that people who struggle with money missed out on was education from their parents while they were growing up.
It’s because of these ongoing lessons that I have the view that we will never lend her money. Because if she has to borrow money, we have stuffed up somewhere!
What do kids want to buy?
The most common things I see people lending money to their kids for is: Toys, Phones, Bikes, Cars
So I’ve decided to learn from those people and worked out early on that my own daughter is very likely to want the following: Toys, Phones, Bikes, Cars
Therefore, she can start early and financially prepare herself for these costs that ARE GOING TO HAPPEN. It is not IF, it’s when. And if we all know she has expenses coming up we can help her prepare for them.
I’ve covered this stuff off before, so I’ll just do it again quickly here:
For every dollar she earns, she must invest 50c into something that will give her a return. No excuses, she has a 50% savings rate. She is pretty smart though and last Christmas asked anyone who was thinking of giving her money to give her gift vouchers instead because they are not cash! Cunning!
She earns $1 for every year of age, so she currently earns $13 pocket money each week.
Each week $6.50 of that goes to her own bank account where she can choose to spend it all or send a little of that into another account where she is saving towards a bigger item that she wants to buy.
The other $6.50 goes into her Sharesies account and every fortnight or so I encourage her to log in and invest that money into the only fund she has, the US500. Her current balance is $1900. This means that over time she has actually earned $3,800!!! So, it’s actually no real hardship to save half now, is it? Adults, if you paid attention you would get quite a surprise at how much money comes their way over the years.
So, she has $6.50 a week spending money as a minimum starting point and she can spend all of that if she likes and just enjoy it. The reason being that having sent the other $6.50 off into her Sharesies account, she has her longer-term goals being taken care of. What might these goals be, you ask?... Toys, Phone, Bike, Car
This is where making good money choices begins…
Now, what about the $5 lunch money, must she save half of that? Well, no, that is genuinely for her to buy her lunch, I’m not that hardcore. But if she spends it all on one day, spends it over a few days, or doesn’t spend it all and packs her own lunch, well, that’s up to her. If she makes a little more additional money during the week then half goes to her investment, the other half into her bank account. The only limit to her income is her ability to get off her tush and earn it!
This is where making good money choices BEGINS, with tiny amounts of money that she gets to be 100% responsible for and she gets to make decisions about what she does with it. Because she knows the value of $1 already, she is already thinking strategically about how much to spend. Or not spend. There are many purchases she backs away from because of the time it took her to make the money. Yet there are other purchases she knows she wants to make and must save up for.
And before long, the value of the things she wants will begin to rise, they already are, so we are just teaching her to 10x the amount of money, but apply the same principles. It is not a matter of if, but when her (second hand) phone gets to the end of its life. But she needs to be thinking about that now, months and hopefully years before she needs it, so a savings account to start to set money aside for this is a thing we will discuss. It is a known cost that she can prepare for.
And I’ll tell you what, she already knows the cost of the latest iPhone, she already knows that is an insane amount of money for a 13-year-old earning $13 a week to spend, she is already thinking about the next model down (which will be cheaper) or finding a second-hand one (cheaper again) because she already knows the value of a dollar and just yesterday we had a conversation around how she might afford it when the day comes. Jonny and I will contribute towards the cost but she will know well in advance how much, so she can factor that into her own saving plan. We won’t loan it to her, our contribution is in my mind just part of being a parent, but she will need to raise the rest on her own.
Because there is no way on earth that I’m going to loan $1,000 to my 13-year-old daughter and dock her “paycheque” of $6.50 by $3 for the next 333 weeks to “teach her a lesson about money”. By the time she pays this off the phone will be obsolete, she may have lost or broken it and have had to replace it already, taking on more debt with the Bank of Mum and Dad.
Sound familiar anyone?
Don’t teach our kids how to handle debt
I personally think that “teaching our kids how to handle debt” is the absolute worst thing we can do. Nothing that a 13-year-old needs should be covered by debt. Nothing. Particularly for a consumer item that depreciates in value down to ZERO!
I do not want to teach my daughter how to have debt. I want to teach her the exact opposite.
To me, that mentality is the ambulance at the bottom of the cliff.
Instead, I am arming her with the skills to rationally think about the difference between a “want” and a “need” and helping her work out how to pay cash for it by setting money aside BEFORE she buys it. It’s about teaching our daughter to delay gratification and that she can have anything she wants, just not everything she wants and she needs to prioritise what comes first.
Because if I just lend her the money, that is not me leading by example, that’s the beginning of normalising debt and it might be her paying Mum and Dad back for a phone today, but tomorrow it will be a car, next a student loan and on and on it goes. And once The Bank of Mum and Dad declines a lending application, they will have reached an age where Afterpay or ANZ will happily accept it and the next, far more damaging cycle, of relying on debt to pay for a lifestyle that you actually can’t afford begins.
We wonder why living paycheque to paycheque is so common, it’s my view that we as parents and caregivers teach it to our kids, so we really shouldn’t be surprised when they end up skint and with consumer debt, should we? I will NOT be teaching my daughter to think it is acceptable to pre-commit her future income and hand over a portion of her pay to a lender week after week for the rest of her life.
So, that is why I will never lend money to my daughter.
Instead, I’m teaching her to financially plan ahead because she will live a much happier life that way and she only needs to look at her parents to see that it actually works.
