Kids & Money Lesson 6: Defining Rich Relational Budgeting

Last month we shared a game dealing with a SWEEPSTAKES scenario to help you understand the importance of communication when you want to make the best decision for all involved.  This concept applies to teaching kids how to work with others when it comes to money – a hard lesson usually learned as adults.  Here’s a way to share this lesson at home:

First, we want to pair or team up kids who are pretty close in age to each other, if possible (doesn’t work so well if you pair a 7 year old with a 14 year old).

BASIC RULES: The shared budget (for 2 kids) starts with a minimum of $10 every month. Each kid can spend up to half of the monthly budget in any given month. Any unspent portion of the monthly budget is doubled.

HOW IT WORKS: You can quickly see that if each kid spends their half ($5) for the month, the residual is $0, so the pot resets at $10. If each kid spends only $2 each, the residual will be $6. By our stated rules, the $6 doubles to $12 starting the next month.

WHAT WILL HAPPEN: First, the kids will realize that if one saves their $5 and the other spends their $5, the residual doubles to $10, meaning the kid who tried to save missed out on spending $5 that past month and doesn’t get ahead the next. Remember our game theory example with the sweepstakes? Here’s what this scenario looks like in the game format:

1) If Child A SPENDS and Child B SAVES, Child A gets to spend $5 this month and next month; Child B spends $0 this month and only has access to $5 next month.

2) If Child A SAVES and Child B SPENDS, Child A spends $0 this month and only has access to $5 next month, while Child B gets to spend $5 this month and next month.

3) If Child A SPENDS and Child B SPENDS, each child will only have $5 each month to spend. [Nash Equilibrium]

4) If Child A SAVES and Child B SAVES, each child will not have any money to spend this month. However, they’ll each have access to $10 next month. [global optimal solution]

WHAT THEY LEARN: If they communicate and work together, they can both choose to SAVE for 2 months straight. That would create a pot of $40 giving them each up to $20 spending cash. That’s a 25% increase over the amount they’d have to spend if they just spent their $5 each month. This scenario teaches communication and consideration of others (teamwork) AND delayed gratification through discipline. The parent can, of course, cap the doubling rule once the pot hits $40. Any of these numbers can be massaged to fit your situation. For example, if 3 kids are “sharing the budget” you can change the minimum to something like $12 or $15 (easily divisible by three).

This is only one example of teaching Relational Budgeting.  The point is to come up with some way to have your kids understand how important it is to hone the skill of communication when it comes to money as most will end up with spouses and families of their own.