When my wife and I had our first child we made the decision she would stay home with her until school age, and then possibly rejoin the workforce. We were young parents, and had only been married about a year when we found out my wife was expecting.

Of course we were elated to be starting a family together, but I couldn’t help but worry a little. At the time I was working an entry-level job and floundering a bit when it came to finishing my degree.  Around the same time we had two sets of friends who recently had their first child. In fact, our kids were around the same age and as both moms became friends through various “mothers of preschoolers” (MOPS) events at our church, so did our kids. But there was one big difference in both cases – the couples were about ten years older than us.

Both sets of friends had completed college degrees, and enjoyed nearly a decade of career success.  With no kids during that time they also managed to build some serious wealth. They drove new vehicles, lived in a huge (compared to ours) house, and their kids wore handmade dresses and such from the trendiest shops in town.  Unfortunately, we made the mistake of trying to keep up appearances with these friends, probably because we were a little insecure about our own finances, even though our situations were entirely different.

The first mistake I made was leasing a new SUV because we just had to have a bigger vehicle with a baby.  And of course, leasing made sense to the younger me because I could simply turn it in a couple years and get another one.  Of course, now I realize this method of “renting” something to drive is not a wise financial move in most cases.

We also made the mistake of charging a bunch of junk on credit cards when my wife quit work because we did not gear down spending once we were living on one income.  From talking with other couples in similar circumstances, I understand this is a common problem.  But unfortunately that didn’t make it any easier to swallow when the bills came due.

I share these mistakes in the hopes that other young couples don’t repeat them.  And by mistakes, I’m not referring to having children while still young.  I am referring to falling into the financial trap of keeping up with older couples who chose to build a more secure financial foundation before having kids.  That method probably makes the most sense from a financial perspective, but there are many other factors to consider when having children.  And I would argue finances, though important, is not the top consideration, despite what others wondering if they should pay off debt before having kids might think.

Make no mistake; the decision to start a family has a significant impact on your finances.  However, it is the decisions we make that ultimately lead to success or failure.  In our case, it was the poor financial decisions we made early on that caused trouble, not the fact we had kids.  We could have easily made those screw-ups when it was just the two of us!

Having kids magnified those issues because it intensified the pressure I felt to provide a solid foundation for my wife and kids.  In hindsight, it probably would have made sense to wait a few years to finish my degree, work my way up the corporate ladder (in other words, beyond the first rung), pay off our debts and build some savings.  But, I wouldn’t have it any other way!

The following guest post is by John M. Box, Ph.D., Senior Vice President of Education, Junior Achievement (JA) Worldwide.  Information about JA programs follows the article.

If you’re a parent and you’ve stood in line with your kids at the check-out, you know the tiring push and pull you do. Those last minute items your children are desperate for – snacks, toys, candy, drinks.  An attempt at refusal almost inevitably ends in a tantrum of sorts. Parents struggle with the wish to give their children all that they need and the desire to teach them about financial responsibility and the value of money.  Now, more than ever, we all need to teach our children some important lessons that will serve them well for their future.  As we know, this type of education starts at home and is hopefully reinforced with other influencers and educators.

As a way to help them develop a better understanding of money, try the following activities with your children.

• Keep track of the value of the goods and services that you provide your children such as housing, food, clothing, and entertainment. Share the total dollar amount with your children at the end of the month. Hold a discussion with your children to reinforce this concept and to gauge the degree to which the concept has been understood.

• The next time you go to the grocery store, provide your children with a list of the items you plan to purchase along with a dollar amount that you plan to spend. Have them make the selection of products from all of the different brands that are available. As they make their choices, explain comparison shopping. Can they select all of the items on the list and still stay at or below the amount they have to spend? Ask your children what they have discovered as a result of this experience.

• Have your children make a list of all of the things they would like to have, such as clothing, books, video games, toys, music CDs, etc. Add up the total value of these items. Now, ask your children to identify different ways they could obtain the money necessary to purchase these items. How would they prioritize their purchases? Use this activity to provide a perspective on the value of different items and the amount of time it might take to earn the money to purchase them.

You can then use these activities to begin a discussion about working for an allowance or earning money through a part-time job to save for something special. No matter what age, there’s always a lesson to be taught about money to your children. The earlier you start, the sooner they can begin to make wise financial decisions for themselves.

John Box is Senior Vice President of Education at JA Worldwide. Junior Achievement (JA) is the world’s largest organization dedicated to educating young people about business, economics, and free enterprise. JA programs are taught by volunteers in-class and after-school at locations throughout the United States and in 123 countries. To learn more about JA and its programs, or to locate the JA Area Office nearest you, logon to the JA Worldwide website at www.ja.org.

What was the first job you held as a teenager? I worked a few side hustles as a young teen, but began my first official job just after turning 16 years-old. It was at a Little Caesar’s (”pizza, pizza”) in my hometown, and I worked there my sophomore year of high school until football practice began the next summer. It was a pretty good job for a teenager–making pizzas, answering the phones occasionally, and all the Crazy Bread I could eat! Too bad I spent nearly everything I earned that year.

Today parents and working children have access to one of the best investment vehicles around, the Roth IRA. That’s right; you don’t have to be an adult to contribute to a Roth IRA, you just have to have an earned income. Parents may need to help set up the account by opening it as a custodial account. The only limitation for contributions is that they must not exceed the maximum contribution amount established for Roth IRAs in a given tax year, or the teens earned income, whichever amount is lesser.

How To Open a Roth IRA for Children

Let’s assume your 13 year-old makes $2,000 mowing lawns, raking leaves and babysitting this year. Assuming he invests that $2,000 in a Roth IRA, and leaves the money alone, it will grow to $284,000 by age 65, also assuming an average 10% return (source: Fool.com). Not too bad! And just imagine what that number could look like if your teenager continued to invest a couple thousand dollars in that Roth IRA throughout high school. He would easily become a millionaire by retirement age. Wish someone had told me that at 13!

The IRS requires proof of earned income to qualify for contributing to a Roth IRA. If your child works for an established organization, he or she should receive a W-2 at the end of the tax year showing how much they earned. If one of your children earns money from babysitting and odd jobs, you will need to keep up with the amounts earned and file a tax return, even if the amount is less than the required minimum for filing. This return is your certification that she did earn that money, and is eligible for a Roth IRA.

Matching Funds From Family

One great gift idea is for family members to match their teenager’s earnings and make the contributions for them. This way all of the teen’s earnings aren’t sent off to the brokerage, and they get to enjoy what they earn.

I actually like some combination of earnings and matching plans for Roth IRA contributions. For example, if a teenager earns $1,000 this year on a paper route, require that $500 be saved for Roth IRA contributions and offer to match the remaining $500 to reach the maximum eligible contribution amount. A matching plan forces the teen to continue to put aside some earnings toward future savings; a skill that is sorely needed from our next generations.

What If They Need the Roth IRA Money Before Retirement?

Roth IRA withdrawal rules allow you to withdraw contributions to a Roth IRA at any time, without penalty. So, if you help one of your children open a Roth IRA, and they need access to that money in their college years, they can always withdraw the contributions, but not the earnings, penalty free. But remember, it’s best to leave the money in your Roth IRA unless children really need it in an emergency.

 
Photo courtesy of freeparking

I chose the image above because according to the owner it was taken around the Depression Era.  Notice the expressions on the kids’ faces.  It’s as if their faces tell the story of the struggles felt at home.

Kids are intuitive creatures.  They often pick up on subtleties lost on many adults.   Over the last few weeks my oldest child has overheard conversations about money, the stock market, and the broader economy.  She’s also heard news reports about the upcoming election, and how the struggling economy is playing a major role in the ongoing political debate.  My daughter is eight years-old; old enough to pick up on these conversations, but not quite old enough to grasp all of the concepts.  She asks questions about the political candidates, about foreclosures and taxes and job layoffs.  Other parents might be fielding similar questions in response to conversations their kids have overheard. Here are the age-appropriate approaches I recommend for addressing their questions.

Small Kids and Money

My son is only four years-old, and he is oblivious to most problems with our economy.  As long as his basic needs are met he couldn’t care less what the market is doing!  What he would be able to detect is financial stress between me and my wife, which is why we try to limit any discussions about money around him.  Like I mentioned in the opening paragraph, kids are very intuitive.  He very easily picks up on stress in the home, even if he can’t yet identify its cause.  For this reason, try to avoid money discussions around young ears.

Preteens Have Lots of Questions

If your kids are anything like mine their favorite question is, “Why?”   I hear this all the time–why is the sky blue?  Why do you have to go to work?  Why are some people rich and others aren’t?  Some of these questions are easier to answer than others.  Preteens are old enough to understand some basic financial concepts, such as compound interest and primer discussions on debt.  However, any worries expressed in the household over finances and overheard by preteens often lead to insecurity as kids start to think something bad will happen to their family if they go broke.  For this reason, try to keep things general when discussing money rather than fully disclosing your financial problems to your preteen. Statements like, “We have some debt and are working extra hard to pay it off” acknowledge the problem, but focus on the steps taken towards a solution.  That’s what kids this age need to hear most.

Teenagers Have All the Answers

If preteens have all the questions, teenagers have all the answers. Don’t believe it?  Just ask one.  If you are struggling financially it makes sense to include your teenager in discussions affecting your household, such as a parent taking on a second job, or selling the family car to lower your monthly payments.  If kids know about the difficulties you are facing as a family they will be less likely to question the sacrifices made during tough times.  Not that there is a problem with simply telling kids no, but sometimes it helps to explain why you can’t afford to do something or buy something in the context of a larger plan to turnaround your financial situation.

Although you are freely telling teens about your financial difficulties, it is also important to reassure them that things will be okay–that you will pull through as a family, and you are busy making sacrifices to support them.  Older teens may even feel inspired to pitch in by picking up a part time job, and this provides a great opportunity to do a little character building that will last a lifetime.  As a parent, you know your kids better than anyone, so tell as much or as little as you feel comfortable sharing, but always do it with their best interest at heart.

I admit it–I was wrong to create the allowance chart as the sole source of earning allowance money. Well, I was half wrong.  Several months ago I wrote about the elaborate commission-based allowance chart I had created for my kids whereby they would earn a bit of money for each chore completed.  The idea was inspired by Dave Ramsey’s Financial Peace Junior materials, and his reinforcement of the idea on various calls to his radio show.  However, the more I reflected on the idea, the more I didn’t like it the allowance chart we had in place.  So, I decided to change it, and created a combination comission system and allowance chart.  The plan is scheduled to start in October, and I think the kid are looking forward to the change.

The New Deal

Under the new allowance system, our kids will receive a base allowance based roughly on their age. To receive an allowance they must complete a basic set of household chores such as keeping their rooms clean, helping with the dishes when asked, putting away clean laundry, etc.  Of course, there will be some things they do as members of the family (put water down for the dog, help set the table, etc.) that will not be included in either the allowance system or the commission schedule.  After all, I don’t get paid to mow my own lawn!

Our kids will also have the opportunity to earn bonuses, or commissions, based on the completion of a variety of advanced chores and special projects.  This is not unlike most sales positions that offer a base salary plus commissions, with the base salary represented by the kids’ regular allowance.  Initially, they will be paid each week on Saturday (chore day) because I want the reward of receiving payment to happen soon after the bulk of the work is performed.  As they get older, we will likely increase this to a biweekly payment plan, and then possible monthly, as they improve their budgeting skills.

How Much to Pay for Kid’s Allowance?

This is the tough part.  There are lots of formulas floating about the web, particularly on kids and money sites and parenting blogs.  Instead of coming up with an age-based amount per allowance “pay period,” I worked backwards from a ballpark figure I had in mind that seemed a reasonable amount for each child.  For instance, my daughter is the oldest at eight, and $20 per month seems like a reasonable amount for an eight year-old to earn as a base allowance.  Subtracting a little for savings, and a little for giving, that is still enough to buy a CD, book, or something that she is wanting.  Remember, she can also do extra chores to boost that amount (more on that later).  $20 per month breaks down to about $5 per week, which is less than the recommended dollar per week per year of age plan.  That is by design.  $5 per week is plenty considering all her other needs are met, but is low enough to encourage her to work for extra money.

The Commission Schedule

Our kids can earn extra money by doing things like helping dad with light yard work, sweeping the back porch and garage, etc.  The commissions for each chore vary based on degree of difficulty, but most range from $0.25-$1.00.  Not a bad deal for a few extra minutes of work each week.  A commission schedule is posted on our refrigerator each Saturday afternoon after the previous week’s payments have been made.  As the kids complete the chores they check off the chore and add up their commissions earned each day (never too early to work on those math skills!).

A Kid-Sized Budget

Our only requirements for the money they earn are that they must divide them into three categories:  saving, giving, and spending.  I want our kids to be savers and givers (yes, the two can co-exist), so to reinforce that idea we tell them to toss their money into separate jars for that specific purpose.  My daughter has several opportunities throughout the year to participate in fund raising activities at her school, such as drives for the American Cancer Society, and other notable charities.  It is much more meaningful for her to put a dollar she earned into the collection jar, than to hand over one I’ve given her.

Do you pay your kids an allowance?  Is it based on their age, or some other factor?

Additional Resources

• Magnetic Responsibility Chart

Over the last few weeks I’ve seen a frequent search term that leads people here to Frugal Dad:  “Should We Pay Off Credit Card Debt Before Having a Baby?”  I make two assumptions from the volume of hits I’ve received–there are a lot of people interested in having a baby, and there are a lot of people deep in credit card debt.  Many financial planners out there advise to have your financial house in order before expanding your family.  In general terms, I think that is pretty good advice.  However, I do not fully subscribe to the idea of holding off on having children just because you owe money.  Here are a few reasons why.

If You Wait for the Perfect Time, You May Wait Forever

So many times in our lives we put things off in the name of waiting for a better time to get started. Many people put off weight loss plans until next Monday, or next month, or maybe January 1st.  High school graduates put off immediately attending school to “experience life” through backpacking adventures, or working, or just taking a break and living at home.  But those things seem awfully trivial compared to the idea of having a child.  Children are our legacy.  Raising a child is one of the most beautiful experiences two people can share, and it deepens the love shared between partners in parenting.  Because we never know what twists and turns life will throw our way, it isn’t advisable to wait to have children simply in the name of finances.

Kids Are Not Really That Expensive

When you think about it, babies do not require as much upkeep as us adults.  Sure, they must be diapered and fed, and there are a few other baby expenses unique to having children, but babies do not eat nearly as much as grown adults.  Infants have not yet been exposed to commercialism, so their wants and desires are fairly easy to cover without spending much money.  Of course, as they grow older kids do add additional expenses to your household budget.  Hopefully by the time you are school shopping and fitting them for their first bicycle you will be doing better financially, and can easily handle any budget impacts.

Kids Can Inspire Greatness From Parents

When my wife and I decided to try for our first child some thought we were a too young.  We married at 20 years old (well, my wife was 19, a bit shy of her 20th birthday).  We were so young we toasted sparkling grape juice at our wedding!  However, we were both mature beyond our years and neither of us believed in long engagements.  After all, once you’ve met your soul mate, why delay the inevitable?

I had just started an entry level call center customer service job when my wife and married, and I quickly recognized moving up in the corporate world would be more difficult without returning to school to finish up my degree.  I put school on the back burner, and instead spent the first year or so of marriage just enjoying being married.  When my daughter was born everything changed. It was a reality check that led to a wake up call, of sorts.  Suddenly I realized there was more at stake than just my wife and I surviving, financially.  I wanted nice things for my daughter.  I wanted her to have an easier path than I did (although thanks to the hard work of my mom and grandparents, I had it pretty good, too).

So the summer after she was born I enrolled in a local university, changed majors to business, and embarked on a long, challenging pursuit of a college degree.  It was probably the worst timing possible considering I had a wife and newborn daughter at home, but I was not going to put off the pursuit of my dreams any longer.

When deciding whether or not to start a family, do not allow financial issues to completely dissuade you.  Give more consideration to the partner you have chosen to share this responsibility.  Give more consideration to readying your home for a child.  Do not allow money to control your destiny, and the destiny of your children.

When I was a teenager I worked a diverse set of part time and summer jobs. My first job was at a pizza place taking orders and making pies. From there I moved on to various retail jobs including a couple stores in the mall, a GNC, a golf driving range, etc. I was lucky; back then there was plenty of work for teenagers looking for summer jobs. Sometimes you had to search a little harder, but if all else failed the traditional McDonalds jobs were always there. However, thanks to a rough economy and higher minimum wages, good summer jobs for teens are harder to find.

Should My Teenager Get a Job?

I have mixed emotions. Part of me recognizes the work ethic that can be developed at an early age by the added responsibility of holding a part time job. There is also some financial reward, and the opportunity to earn scholarships. However, there is a downside to teenagers working. Part time jobs take valuable time away from studies, and limit extra-curricular activities kids can be involved in at school, such as sports or after-school clubs. I remember having to quit my pizza job one summer when football camp started up, and I felt conflicted over which activity to continue. Part time jobs also interfere with the social aspects of being a teenager. When friends are hanging out at the mall, or a friend’s house, you might get stuck working until 9:00 or 10:00 at night.

Find Hard Work Before College

By “hard” work, I mean physically hard work. The summer before I left for college, and the summer after my freshman year, I worked for a landscaping company installing sprinkler systems, mowing lawns, and building retaining walls. Pushing a Ditch Witch through a 3/4 acre backyard in 100-degree heat will make you long for pulling all-nighters back at school. There was a time when I wanted to do that type of work, but I decided I would try to use my brain instead of my brawn (although I still enjoy doing this type of work, and even mowed lawns last summer for some extra cash). Continuing my education meant I could do landscaping if I wanted to, not because I had to. It was a good lesson.

Make Savings a Priority

If your teenager does decide to get a part time job, be sure to reinforce the importance of savings. In fact, anyone with an earned income can contribute to a Roth IRA (up to the income limits established by the IRS). Imagine if a sixteen year-old socked away $1,000 in a good, growth stock mutual fund inside a Roth IRA. Even if they never added another penny to the account they would have about $106,000 tax free at age 65. Now that’s a great head start on retirement savings!

photo by Randy Son of Robert