In my previous article, Raising Savvy Investors: A Parent’s Guide to Kids and Money, I discussed how my kids invest in the share market. We refer to their investments as their “golden goose,” which produces “golden eggs” (dividends). As long as the golden goose is alive, it will continue to produce these eggs. However, if they “kill the golden goose” (sell off the shares), it dies, and they won’t receive any more eggs.
The second part of the story is about feeding the golden goose. We do this by investing more money, which aligns with the concept of paying yourself first, similar to how the government collects taxes.
Our children are fortunate to receive money from various sources. A practical approach we use is to divide up this money. A certain percentage needs to be allocated to their investment account. The table below outlines the agreed minimum amount they need to allocate to their golden goose (investments). They can choose to allocate more if they wish.
Ideally, I would prefer they invest all the money they receive, as they already have an abundance of items that will eventually be donated or thrown out as they outgrow them. However, money is meant to be enjoyed. It’s also a valuable lesson for them to make mistakes with smaller purchases now rather than with expensive items in the future. This practice helps them learn the importance of balancing enjoyment and financial responsibility.
| # | Type | Investment % | Example |
|---|---|---|---|
| 1 | Allowance | Kids Choice | |
| 2 | Gifts | 65% | Birthday, Christmas |
| 3 | Earned Income | 65% | Paid Jobs, Selling items, business |
| 4 | Event Budget | Kids Choice | Investment Income Return |
| 5 | Win | 65% | Day out at the show |
| 6 | Change | Kids Choice | less than $5 given by grandparents |
| 7 | Income Investment | 50% | Invesment Income Return |
#1 Allowance
Our kids receive monthly allowances, for their allowance we give them the freedom to decide whether they want to add money to invest. Currently, they manage their money using three categories: splurge, save, and charity. In an upcoming article, I’ll delve into the details of their allowances and explain what each category entails. We’ve adopted this strategy from the Barefoot Investor approach.
#2 Gifts
My kids are fortunate to have a large, generous family and friends, including grandparents, aunts and uncles. The money they receive from gifts, such as birthdays or Christmas, can be substantial.
We’ve agreed that 65% of these funds will go towards their golden goose investments. This approach teaches them the importance of saving a significant portion of unexpected income while allowing them to immediately enjoy a portion for their desires.
#3 Earned Money
When kids earn money by providing services, such as selling items or doing jobs outside of family contributions at home, they invest 65% of their earnings. This practice is designed to teach them, as they grow older and start earning from jobs, the importance of paying themselves first before spending on other items.
Reflecting on my own experiences, I wish someone had instilled this belief in me earlier; it would have put me in an even better financial position today.
#4 Event Budget
When we go out for family days to shows, theme parks, or other events, I give each child a budget to spend as they wish.
If the kids want to spend extra they can also take their own money. This teaches them to plan and budget for fun activities, balancing enjoyment with financial responsibility. It also prevents me from overspending in the excitement of the moment. They can also save the money and not spend it at the event.
For example, at an event when they were 4 and 5, I gave each child $15. They wanted to buy merchandise, but the cheapest item was $30. This taught them about high prices and making smart choices. Instead, they bought a snow cone with a reusable cup and used the remaining money to buy a toy from K-Mart. They were happy and got better value for their money.
This approach helps kids understand budgeting and smart spending in a fun, practical way.
#5 Win
Winnings, such as raffle prizes, should also see 65% invested. This approach ensures that children learn not to splurge all their unexpected gains but to consider their financial future. They prioritise long-term benefits over immediate gratification by investing a substantial portion of their winnings.
#6 Change
Occasionally, when kids are out with their grandparents or uncles, they receive change from purchases, usually coins or amounts under $5. Allowing kids to decide how to handle this money teaches them to recognise and utilise small amounts.
This gives them a sense of empowerment and excitement about managing their own money, fostering independence and financial awareness from a young age.
#7 Income Investment
Investment income consists of returns they receive from their investments, which, in my kids’ case, are dividends. At least 50% of their returns are reinvested. Currently, my kids are reinvesting 100% as they are focused on growing their golden goose. This practice encourages the growth of wealth through reinvestment, highlighting the benefits of patience and long-term financial planning.
By consistently reinvesting their earnings, they learn the value of compounding and the importance of building a solid financial foundation for the future.
Teaching kids to manage their money in these ways equips them with essential financial skills. They learn the importance of saving, investing, and making thoughtful spending choices. This structured approach prepares them for future financial independence and instils a sense of responsibility and foresight.
Starting these practices early sets your kids up for a financially sound future. However, even if your kids are older, it’s never too late to begin. Remember, these strategies can be applied to your finances as well. You can start with smaller percentages for your investments and gradually increase them over time.
What strategies do you use to teach your kids about money management? Share your tips and experiences in the comments below!
Frequently Asked Questions (FAQ)
Where do you invest the kid’s money?
I invest the money into index fund shares for the kids. Read all the details here: Raising Savvy Investors: A Parent’s Guide to Kids and Money.
Disclaimer: This article is not financial advice. I am simply sharing what I am doing for my kids’ financial setup.
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