Is doing the best for your kids really the best for them?

The 5/50/500 Rule

by Steve and Annette Economides


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This excerpt is from the new book, The MoneySmart Family System: Teaching Financial Independence to Children of Every Age by Steve & Annette Economides. Published by Thomas Nelson. Chapter 1, The 5/50/500 Rule

Most parents want to give their children the best things in life, but the truth is if you give your children the best (whether you can afford it or not), they'll be very obliging and take it. It's human nature to receive when someone generously provides. And the more you give, the less incentive your kids will have to work and provide for themselves.

Even if you can afford the very best for your children (because you earn a higher income), what will the end result be, especially if your children never achieve your level of earning? Will they shun your lifestyle for one they can afford? Will they work two or three jobs so they can afford your lifestyle? Will they look for alternate ways to get the things you earned? Will they look to you to continue providing for them?

We've got to honestly ask ourselves: Will giving my child the best things in life truly create financial independence?

The questions we're posing aren't the result of mere speculation. They are based on our experience with our own kids, observations of other families, and from our time as volunteer budget coaches. For many years, before we started our writing and speaking career, we met with families to help them sort out their debt and spending. While reviewing their financial habits, we regularly discussed how much money they were giving to or spending on their children. Usually it was money they could ill afford. We often heard reasoning like, "My children shouldn't suffer and do without because I've made bad decisions" or "I need to give my children the same things that my parents gave me." Does this type of thinking actually help kids become financially responsible?

Why a Book on Kids (of all ages) and Money Is Important

Very few books have been written that comprehensively cover the topic of helping children of all ages to be financially independent. And when we say children, we mean your children or grandchildren from the ages of zero to fifty-five!

We can hear the resounding, "What! Fifty-five! You've got to be kidding!" You're right, we should have been more careful in what we wrote. We've seen cases where the financial dependents were well into their sixties, and their parents were still funding a "child's" habitual overspending. We are going to address every stage of life and how you can help your kids (no matter what age) spend their own money instead of your retirement reserve.

We believe that it is best to start teaching children about working, earning, saving, and spending their own money as young as possible. But if your children are older, don't despair. It's never too late to start, and we'll tell you how. However, you should be aware that any kind of delay might intensify the power of a menacing money rule we discovered.

What Is the 5/50/500 Money Rule?

Many years ago, when Steve worked as a graphic designer, a printing company salesman taught him an important lesson about making type changes during the three-step printing process.

Step 1. Back then, a typesetter would print out text for an ad or brochure on photo paper. A paste-up artist would paste the type and any borders, headlines, and photos on an art board. The work would be proofed by someone else in the office and then sent off to the printer.

Step 2. The printer would put the art board on a reproduction camera and take a picture of it on negative film. That film would be "stripped" or taped to an orange carrier sheet or flat, a blue-line proof (like a blueprint) would be made from the negatives, and then a metal printing plate would be burned.

Step 3. Finally the plate would be put onto the printing press and the actual transfer of ink to paper would begin.

The print salesman told Steve to make sure he proofed the typeset copy very carefully, because catching an error during Step 1 would cost only $5 to fix. But a typo caught in Step 2 would cost $50 to fix, because new film would have to be imaged. The salesman paused, furrowed his brow, and said, "But if you find a mistake once the job is on the press (Step 3), the press will need to be stopped, the pressman will be standing around with nothing to do, the print shop schedule will be delayed, and that will cost you around $500 an hour. Be sure to proof your work."

That was when we discovered the 5/50/500 rule of life. Most of life's lessons have an escalating scale of cost. For instance, a toddler who throws a tantrum may need to be put in time-out for five minutes. A teen throwing a tantrum at school may receive fifty minutes of detention, but a young adult who loses his cool and starts a fight may get a criminal record and 500 hours of community service. The cost of an unlearned lesson will always escalate with time.

The same is true with teaching kids about money. Unfortunately, the rising cost of funding this unlearned lesson is usually borne solely by the parents.

There are five stages to the 5/50/500 money rule:

The $5 stage: ages 0 to 5
The $50 stage: ages 6 to 11
The $500 stage: ages 12 to 17
The $5,000 stage: ages 18 to 23
The $50,000 stage: age 24 and beyond

In the $5 stage, each of your toddler's "wants" costs you five dollars. Repeatedly footing the bill for his whims reinforces the thinking, "Every time I want a toy, Mommy will buy it for me." If you don't deal with that attitude now, you will enter the escalating cycle of the 5/50/500 money rule.

Not teaching your children to manage their own money when they're young (at the $5 stage) will ensure that the price tag keeps increasing. Some teens expect their parents to buy them $50 sneakers, pay for their $500 cell phone or portable computer, and replace their totaled cars. And how about the college freshman who calls home looking for a $5,000 credit card bailout, and Mom and Dad pay the bill? Some twenty- or thirty-somethings return home expecting their parents to pay for extravagant weddings, graduate school, or divorce-debt rescues. Unfortunately, these stories are becoming increasingly common. That's the $50,000 stage, and that's bad news.

Of course, there are times when parents need to be a safety net for their adult children and grandchildren. And we'll talk about that in later chapters. The good news about knowing the 5/50/500 money rule is that the sooner you start training your children to manage their own money, the smaller the price tag will be, and the sooner they'll proudly be seated upon their own nest egg.

Each chapter in The MoneySmart Family System tackles a specific area of a child's learning, working, or spending. We will describe what we've done with our kids during the various phases, what you can expect of your children, and what it could cost you if you fail to train them. If you start young, the price tag for failing is relatively small, but the longer you wait, the more expensive it becomes. When we address specifics about the older stages of the 5/50/500 rule in the $5,000 stage (18 to 23) and the $50,000 stage (24 and beyond), we'll mainly be referring to situations where these adult children are single and living in your home. Once your kids leave home, financial training will usually stop, unless they come to you for advice or for a handout.

You are a rare breed of parent. You want to support, love, and help your children. But you know that there is incredible value in the struggles, failures, and trials that life often sends their way. You want to protect them from harm, but you don't want to shield them from growing strong through the experiences that life's "vitamins" bring their way. Let's stand shoulder to shoulder, committed to raising a generation of strong, courageous, principled, and MoneySmart kids!

We strongly believe that it's never too early, too late, or too hard to start teaching financial responsibility to your children.


Steve and Annette Economides are authors of America's Cheapest Family Gets You Right on the Money (A New York Times Best Seller) and internationally recognized personal finance experts frequently interviewed in newspapers and on websites and radio programs. They have been featured on Good Morning America, The Today Show, ABC's 20/20, Fox TV's Your Life with Neil Cavuto, The Dr. Phil Show, and in Good Housekeeping, People, and Real Simple.

To learn more super practical ways to raise MoneySmart kids and young adults, get Steve & Annette's book The MoneySmart Family System: Teaching Financial Independence to Children of Every Age. Published by Thomas Nelson.

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