The Money Jars System
The first financial system you need to establish for your kids is to automate what they do with their allowance (incoming) and expenditure (outgoing) financial resources. The Money Jars System is part of this basic money management system. In other words, it will automate what your kids can do with all of the money that comes into their life, regardless of the source.
The foundations of the system should be strong, such that it will keep you en route to your goal. With such a system in place, you should be unable to do regrettable things without first leaping over fences constructed by your well-thought out system! You will know exactly what to do when certain financial events happen in your life. You do not have to think about what to do with your money all the time, or where to deploy money when money-making opportunities arise.
As with any good system, the Money Jars has core characteristics of maintainability and separation of duties. It is easy to use and is helpful in making your life easier as well. It is also stable. One of the greatest hurdles to achieving financial goals is psychological bias. In his book Thinking Fast and Slow, Daniel Kahneman showed us that we can get twice as much pain from the feeling of losing money as we do from the enjoyment from winning money. This is one of the biggest reasons why people cannot make themselves save enough to achieve their goals. This also means that once you have implemented a system, it endows you with a huge psychological advantage as loss aversion is a big behavioural bias for people to overcome.
One of the ways I have designed this financial system is to be fun and creative, such that children of all ages will be engaged and be able to maintain the system pretty much by themselves. It teaches them responsibility in managing their allowance. This is especially useful for those given a monthly allowance or an allowance more than what an average kid needs.
Building a Family Ritual..
My family started a piggy bank with each of our kids when they reached two years old. Every cent given to them at this age is meant to be dropped into the piggy bank. It was labelled the SAVE piggy bank. When they were old enough to receive an allowance, we got them another two piggy banks – the SPEND piggy bank and SHARE piggy bank.
Every Sunday night, the family would undergo a little ritual. My children get their weekly allowance on that night. We give it to them in small changes instead of a single big note. This allowed them to portion the right amount into the different piggy banks or money jars
The percentage we had mutually decided to allocate to each jar was 60 per cent of the weekly allowance to the SPEND Jar, 30 per cent to the SAVE jar, and 10 per cent to the SHARE jar. (Eventually, we adjusted the percentage to 70 per cent SAVE, 20 per cent SPEND, and 10 per cent SHARE.).
My children had to fill the money jars as soon as they collected the allowance. There is no excuse for them that the money given was unable to be divided into the right amount to fit into the allocated percentage of the jars, since my wife would have already made all the calculations and given them the exact loose change.