Melinda writes in:

My twelve year old daughter and I are having a money war of sorts. At the start of the school year last month we went shopping for clothes together. I said she could spend $250 any way she chose as long as she got a certain number of items – some underwear, some socks, some jeans, some shirts, and so on. I told her that she could spend more, but it would come out of her allowance. She proceeded to buy only the minimum amount of socks and underwear so she could buy another shirt that she liked. Now she’s having to do laundry twice a week and is complaining all the time about it. I told her to use her allowance to buy the underwear and she says that’s completely unfair. What do you think?

I think this is an experiment that had great intentions that went badly, but there are a lot of interesting pieces worth discussing in here.

First, I really like the idea of using this situation to teach your child about budgeting. In the end, that’s what’s going on here – good old fashioned budgeting. This experiment takes the concepts of budgeting and puts them into something concrete that the twelve year old can really understand and take part in. The idea of using additional money for budgeting

Second, I think you should buy her the necessary underwear and socks. This might surprise some of you because it’s obvious that the child made the mistake of spending that money on a shirt instead of the undergarments. The key thing to remember is that an obvious mistake to an adult isn’t an obvious mistake to a pre-teen, and forcing the child to get by on three or four undergarments is not exactly a great choice from a hygenic angle.

Instead, chalk this one up to a bit of a lesson learned for both of you. The idea is good, but the undergarment requirement from you as a parent should have been higher. If someone is required to do laundry twice a week because their undergarment count isn’t high enough, they should consider more undergarments. Not only will they last longer, but they’ll save on water and energy use by not requiring the user to run laundry loads with only a few items in it.

However, this question leads into a much broader one: what items should a child pay for out of their allowance – and what should their parents pay for?

While it may seem like a black-and-white rule for some, the line between the two can be extremely different from household to household. For example, in Melinda’s household, the child is being encouraged to spend their allowance on undergarments, whereas in my own household, this would never even be a question – we would buy such items for our children.

Where is that line?

For us, the rule of thumb is simple: the parents take care of basic needs, period. Basic needs means food, water, clothing, housing, school and field trip fees, and so forth. While our children remain at home before college, we will provide these things for them without any impact on their allowance.

However, we will often provide for just the basic needs. My children will always have clean clothes, but the shirts might just be generic t-shirts and denim jeans. My children will always have food, but that might come in the form of a sack lunch instead of $10 to spend at McDonalds.

Expenses for “wants” either come out of their allowance or are earned in some fashion. We give our children a small allowance each week that’s not tied to chores, but our oldest child now has the occasional opportunity to do more things to earn money. For example, if I’m out in the yard raking leaves and he spends an hour and a half filling trash bags with those leaves, I may give him a few dollars for his extra effort.

What about those “unexpected” situations? If something unexpected comes up, they may get a very small allowance advance to cover the minimum cost, but that’s all – and by minimum, I mean $3 if they’re going to stop at a fast food restaurant with some friends or something similar to that.

But I don’t want my child going without! Going “without” on small things is a valuable teaching tool. It teaches them that they can go without things that their friends have. It also teaches them the value of not spending their allowance all at once. (Of course, these lessons have to be coupled with involved parenting and discussion. That’s an assumed part of the equation.)

Remember, your job as a parent is not to be your child’s “pal.” It’s to take care of their basic needs while teaching them the skills they’ll need to survive outside of the relative safety of your home. One big part of that is personal finance, and lessons like these build that groundwork.

About three months ago, my four year old son saw a toy at a store. He mentioned that he had played with it at a friend’s house and that he wanted one.

But rather than demanding it this minute, he asked how much it would cost. Then, he asked how many allowances he’d have to save to be able to afford it.

He waited the necessary six weeks’ of allowance (plus some pocket money put into his bank by Grandma), then happily went to the store and bought himself a Zhu Zhu Pet. The weird little electronic hamster has spent the last few weeks constantly running around on our floors – and I couldn’t be prouder.

No, I’m not proud that he got a Zhu Zhu Pet – my primary concern there is that I’m going to accidentally step on it and hurt my foot when he’s sending the toy all over the place and I’m walking through the entryway or the dining room.

I’m proud of other things.

I’m proud that he didn’t have a meltdown in the toy area, demanding one now, which is something that we witnessed two other children doing that very day.

I’m proud that he didn’t simply ask for or expect for me to just buy that toy for him.

I’m proud that he knew to save diligently for it and not to spend money along the way – he even pointed out that if he saved his “pocket money” too and went without the small stuff, he’d get the pet sooner.

I’m proud that even though he was really into saving for the toy, he still put money from his allowance aside for college and aside for his favorite charity.

How did we get to this point? I really attribute it to three things.

First, we bring home the point time and time again that everything costs money and that Mom and Dad have to work to earn the money they have. Whenever we consider any purchase of any kind, this is an idea that’s brought up. We also talk about how the more money we spend, the more Mom and Dad have to work, and we also point out that as he gets older, he’ll also be working for money.

Second, we do not give in to any sort of meltdown, crying, or whining. We leave, period. Neither Sarah nor I have any problem with just walking out of the store if either of our two older children melt down, particularly over a material desire. (Our youngest one is four months – the only reason he melts down is when he wants milk or a diaper change.) Our older kids have learned that crying and such only makes their case and their situation worse, so they’ve largely abandoned it. Yes, they still do it sometimes – they’re four and three, after all – but it’s not something that happens often, and it’s usually when they’re tired and acting more on raw emotion.

Third, we help them mark their progress towards specific savings goals. For example, when saving for the Zhu Zhu pet, we made it clear to our son that he would need $8.50 for the pet ($8 for the item, $0.50 for taxes). Each week, they get a small allowance – $0.50 for spending as they wish, $0.50 for saving for a goal, $0.50 for a charity, and $0.50 for college. Each week, he diligently chose to put the free spending money and the saving money into the saving for a goal slot in his bank. Then, he would ask how much more he’d have to save and he started to get quite excited when he was close to the goal. The clear marking of progress – talking about it, seeing money build up in his bank – excited him far more than the delayed gratification brought him down.

It works. If you want your kids to learn how to save, start young and be diligent. Our four year old gets it – it can be done!

The single biggest personal finance lesson that anyone can learn is that of delayed gratification.

Delayed gratification means that you hold off buying that new cell phone for a while so that you can pay cash for your car in a few years.

Delayed gratification means that you spend the evening reading a book or learning a new skill instead of merely watching television.

Delayed gratification means that you immediately save some of your paycheck instead of even giving yourself the possibility of spending it now.

The more often you practice delayed gratification, the sweeter the gratification becomes later and the more possibilities unfold in your life. Delayed gratification brings financial stability and with it, lower stress. It brings the realization of bigger dreams, too.

It’s one of the things that I most want to integrate into the lives of my children.

The question is obvious: how do you possibly teach delayed gratification to a four year old?

Over the last few years, I’ve been saving little tactics I’ve heard about here and there for just this purpose and, lately, I’ve been putting them to work on Joe. Here are some of the tactics – and how a four year old boy has responded to them.

The Treat Test
I often do this with both Joe and his two year old sister at the same time. I sit them both down and say, “Who wants an M&M?” (one of their favorite treats!)

I then say, “You have a choice. You can either have one M&M now – or you can have two M&Ms in three minutes. Which do you want?”

(I’ve altered the delay a few times.)

My daughter always chooses to have one right away, but she’s just two. My son, on the other hand, usually chooses to wait. Sometimes, if the timeframe is too long, he’ll ask for it now, but he’ll usually find something else to do to distract himself until he can have more M&Ms later on.

Mister Noodle
I essentially do a variation on the “Mister Noodle” sketch from Sesame Street, in which the children give “Mister Noodle” step-by-step instructions on how to complete a task.

Together, we come up with some sort of large project that we want to accomplish. For example, we might decide that we want to make a giant birthday card for Mom that includes a rainbow and pictures of all of the family members in it.

From there, we go through all of the steps we have to go through to complete the project. First, we need to get out the supplies, but we need to get all of the supplies out before we move on. Then, we think about what we’re going to draw – and perhaps even sketch it out lightly in pencil first. Once we have the design, we do all of the painting. Then, if we wish, we add collage elements by looking for the elements we want in old magazines and cutting them out. We then glue on the collage elements. We then leave the card out to dry and put all of the supplies away.

If we focused entirely on just our goal, Joe would turn out a lower-quality card than if we focused entirely on each step as we went along. If we spend some time now delaying the “gratification” of slapping paint on the card and instead think about what we want in the end, we wind up with a much better card.

Joe is just now beginning to see the benefits of this type of planning. I’ve seen it pop up in his thinking about other things recently, particularly in terms of buidling projects with the Magna-Tiles.

focus on the individual steps towards a long term goal

Visual Savings
One big thing we’ve done is focus strongly on what we call “visual savings.”

As I’ve mentioned before, we gave our son a translucent piggy bank for his fourth birthday and instituted a weekly allowance – a small amount of money given to him each week that’s not tied to any specific chore or action. He just receives it as a way of learning money management skills.

A portion of that allowance is “saved” for a known goal. He’ll identify a toy that he wants. Each week, he saves a portion of his allowance for that toy. Recently, for example, he had been saving for a particular Iron Man toy.

We identify how much it costs and tell him how much he’ll have to save up for it. He puts his allowance in each week and also sometimes adds some “found money” to it. He watches the money build up. We talk about the toy he’s saving for and how much it will take to reach that goal.

At first, he was very impatient and would change his goals all the time so that he was saving for a lower-cost toy. In the last few months, though, he’s really started to see the benefits of saving for a better toy. He saved for months for his current Iron Man toy and, for him, the patience really paid off.

Reward Hard Work Instead of Results
My son spent most of an hour picking weeds from our front garden over the weekend. He didn’t do a perfect job by any means – he missed some weeds and picked a few flowers in the process.

But rather than criticizing his results, I just complimented his efforts. “Wow, Joe! You spent a ton of time weeding and now, because of your hard work, the garden looks great!” I then bent down with him to help him finish and simply showed him which ones were flowers and where some of the missed weeds were, not in any sort of a scolding way, but in a “Hey, Joe, check this out!” kind of way.

The focus is on the effort, not on the results. I fully intend to do the same thing when he’s in school. If I see him studying his school materials, thinking about what he’s learning, and asking questions related to them, then I know he’s learning and that earns the praise. The report card? That’s not nearly as important to me.

But don’t we want our children to have great results? Of course we do, but great results are a reward unto themselves. Plus, great results are often the endgame of a lot of hard work. If you’ve worked hard, you will get great results as a matter of course. Our focus is in making sure our children learn the value in working hard, not just chase results.

Working hard builds great things. Chasing results ends up like Wall Street, circa October 2008.

Wendy writes in with an email I considered using in today’s mailbag, but my response kind of grew into a full post:

When well-meaning relatives give gifts to your children, do you always allow your children to keep those gifts? My mother-in-law (who lives 20 hours away and only sees us a few times a year) not only gives gifts that are not age-appropriate or do not meet our standards for marketed characters or quality of play, but she gives so many at birthdays, holidays, and throughout the year that I feel like the boys would drown in toys, even before the other family members add to it. My mom has happily adjusted by providing ‘experience’ gifts for the grandkids- swimming lessons, zoo pass, etc., but my MIL really likes new things and does her absolute best to instill the love of something ‘new’ in our kids.

My sister in law thinks we are excessively prohibitive when it comes to toys and sweets. Rather than talk to us about what kind of toys or gifts we would like our kids to have, she gets mad when she finds out we get rid of some of the gifts after a couple of days. She also ignores what tips I’ve tried to provide in the past. I know they both love our kids dearly, and I know they are frustrated by the different priorities and values my husband and I are trying to instill in our kids.

The worst part of this is that they both seem quite willing to do what they think is appropriate even when it is at odds with what we’ve told them we allow or don’t allow. Neither of them have taken the kids on her own because I can’t even trust them to follow our guidelines when we are present. I feel like my SIL is just itching to sit my son in front of a DVD to show me that he really does like it; i know he probably would, but that doesn’t mean there aren’t better things he would like as much or more.

Right now, our kids are young enough that they aren’t attached to most ‘things’ they encounter. We openly or quietly give the excess away to friends and sell or donate what our friends don’t want. I know this will become more difficult as they get older.

How do you deal with gifts for your kids that don’t fit in with your lifestyle?

This is actually an issue in our own life, something we’ve puzzled over quite a lot.

Our two (very soon to be three) children have a lot of relatives who adore them. They have four grandparents, a great grandparent, four aunts, two uncles, and a small army of cousins who just adore our kids. Many of them give them gifts at a seemingly constant rate.

Here’s the thing, though. These gifts are given out of love. People give our kids gifts because they love them so much and it’s their way of expressing it. For me, telling them not to do so is akin to saying, “Please don’t express your love and caring for our children.”

I’m just simply not going to do that. I might not particularly like the method they use to express their love for our kids, but it’s not a harmful way of doing it.

Instead, I focus on passing my values on to my kids. My children both choose what they most enjoy playing with and play with that, but part of that equation also involves what toys they’re likely to see Mom and Dad playing with and approving of, too. I often play ball games in the yard with the kids. I also will get involved in a lot of the more open-ended toys, like Legos and craft/art projects.

Unsurprisingly, over a long period of time, my kids prefer these toys. My son loves nothing more than playing with a football out in the yard, throwing it around. My daughter – at two years of age, no less – will literally spend periods of an hour or more playing with her Magna-Tiles.

Why? We encourage our kids, more than anything, to play with open-ended stuff that encourages their creativity and their engineering skills or gets them physically active. That’s what we value and thus we focus on it ourselves.

Hand in hand with that, we explain to everyone who gives them gifts that we often off-load the toys that wind up in the bottom of the toy box. If my daughter keeps choosing the Magna-Tiles, then other toys are going to slowly wind up at the bottom of the toy box – and will eventually head to Goodwill or to a charity that will accept them. When they come to visit, let them witness what stuff is on the top of the toybox and what is on the bottom.

With regards to sweets, we follow the same philosophy. If a grandparent gives them a sweet treat, they can eat a bit – no problem. However, we don’t give them such sweets on any sort of regular basis. We have a “candy tub” that gets filled with candies from such events (like Easter and Halloween) and we allow them one piece a night if they remember and if they behaved well and ate adequately at supper. The result? We still have candy from Halloween.

From there, we carry it forward. We talk to the grandparents and other relatives about what our kids are obviously enjoying.

“Our son’s favorite food is black olives.”
“Does he eat candy?”
“Not really. You like bananas, don’t you, Joe?”

“Kate really, really likes her Magna-Tiles.”
“What are those?”
“They’re kind of a building block toy. She just gravitates to those kinds of things.”

“What did you do this weekend?”
“We let the kids choose and they wanted to go to the Science Center and the zoo. They just love going out and experiencing stuff instead of playing at home all of the time or just watching videos.”

“Don’t they like watching movies?”
“On rainy days, maybe sometimes. But if the weather is nice, we’d rather be out in the yard. Even on indoor days, we usually wind up making pictures and building stuff.”

Repeated over and over, attentive grandparents and relatives start to get the hint. We value open-ended toys. We don’t value sweets beyond moderation. Experience-oriented things are really loved around here, while passive toys aren’t valued as much.

This accomplishes a lot of things at once. It includes the people who care about your kids in their life. I know that both sets of grandparents – as well as the aunts – constantly want to know more about what our kids are up to, so we tell them. It also reveals in a pretty strong way what the kids enjoy – and what they don’t enjoy.

Perhaps most worthwhile (in relation to The Simple Dollar, anyway), it saves everyone money. The relatives know what kinds of toys our kids like and value, so they get them things in line with that. Thus, they aren’t spending their money on toys that won’t get played with much (and thus get quickly sent to Goodwill).

I have no objection with (almost) any of our relatives watching our kids, even if I know they won’t necessarily encourage the optimal activities I might want. Why? I know my kids. When they go there, they’re going to gravitate towards the stuff that they like – playing in the yard, playing with building-oriented toys, and so on. They might be encouraged to do other stuff and they might go along, but I’ve seen my daughter gravitate to the building toys many, many times and I’ve seen my son ask for paper to draw on and crayons many, many times.

There’s also another key lesson here that will help you in other areas of life: talk positively about what you value without talking negatively about what you don’t value. You can actually have a civil discussion about politics or money or religion or parenting if you never go negative and just don’t respond to negativity. The same is true with this discussion. Talk about what you value in a positive light without painting other viewpoints in a negative light and other people will be engaged. It works, I think, partially because people so rarely do it.

Instead of criticizing the gifts that your family gives, thank them for the gifts. At other opportunities, though, use positive comments to talk about the types of gifts that are in line with what you value. You’ll be surprised how much positivity can help any situation like this – or in any situation.

Anthony writes in:

My wife and I have two children, ages 2 and 1. We’d like to have more; we both think that four would be a great number, although there’s no particular logical reason for that number. The problem is the expense. With daycare costs, adding each additional child will cost another $260 a month. If we stopped paying extra on our student loans and cut our savings per month to $145, we could afford the daycare for the third child, but a fourth would require more painful cuts. We already live frugally: buy used clothes, drive used paid-for cars, make almost all of our food at home, etc. I’ve looked into second jobs, but there’s very little IT work in the area, other than what I already do. And with our county having the highest unemployment rate in the state, I suspect even paper-route jobs and that sort of thing would be hard to find.

My job pays decently and is very secure: her job also pays well and is less secure, but still not much in jeopardy. In Michigan, that’s significant. We can’t sell the house without taking a loss, but it is big enough—barely—for two more kids. If we need to upgrade the car to a mini-van, we’ll have enough in our car fund that we can pay cash, so that’s not an issue.

I hate to make children about mere numbers, but purely by the math it seems like more children is unwise. On the other hand, I constantly hear stories from other families about how they it “somehow just worked out.” Any advice or suggestions?

Much like you, my wife and I have two children – ages four and two – and another one due to arrive within the next few months. The issue of escalating child care costs is one that we’ve dealt with many times throughout our child-rearing process and, through it all, we’ve come to some conclusions about that very occurrence.

First of all, the idea that it “just worked out” is a bit misleading. What often happens in that situation is that people go through a period of re-prioritizing after the child (or children) arrives, and it’s often a shift that happens without a lot of conscious thought. You choose to eat at home more because it’s easier to corral children there. You don’t go out as often as you used to because of the cost of babysitting. Over time, these shifts just seem completely ordinary – parents adopt a new normal along the way and often feel like it “just worked out.” Our memories often work to make things seem smoother than they actually were.

At some point if you continue to have children, the cost of child care will likely eventually meet or exceed the net cash benefit of one of your jobs. If you have three preschool-aged children (as we will soon), your weekly costs are immense. If you, at the same time, figure up the true take-home of one of the people in the household – after taxes, commuting costs, vehicle upkeep, wardrobe upkeep, and son on – you’ll often see that working outside the home is a financial net negative. Add on top of that the financial benefits of not working (even less reason to eat out, more organized grocery shopping, etc.) and you create a compelling case for one partner to leave the employment scene for a period of time.

What if you can’t afford to do this because you’ll be burying your career path? At this point, it’s really a values thing – your career is more valuable to you than more progeny. It’s one of those value comparisons where there is no real right or wrong answer – however, because it’s such an emotional one, people often convince themselves that one answer or the other is absolutely right for them and thus absolutely right for everyone. It’s not. You have to decide for yourself what you value.

If you decide that more children are the real priority here, then plan for it. That may involve selling the house and moving elsewhere – even to another part of the country. It may involve selling a vehicle. It may involve leaving a job. If your children are your priority, then sacrifice those life elements that aren’t directly benefiting the children.

If you decide that your continued career trajectory is the priority for you, take precautions to not have another child.

Your situation – much like our own – is basically asking you to choose between the two paths. Choosing one path doesn’t necessarily mean abandoning the other one, but it does mean postponing it to a later point in your life and it may mean that you’re unable to pick it back up again.

It seems to me from the email that you’re having a hard time choosing between the two. Right now is the time to sit down, talk with each other frankly about it, and make a choice. Is it career maintenance as the top priority or is it more children?

Give the decision time. Also, perhaps most importantly of all, give each other respect here. There is no right or wrong way to feel about the question and if you disagree, that’s okay. You both have reasonable perspectives on the issue.

You don’t have to make a decision tomorrow on this, but whichever way you choose, it doesn’t hurt to take a serious look at your spending and find ways to minimize it now. Build an emergency fund. Learn to live on a little less. No matter which path you end up choosing, doing that now will help you with the ramifications of that choice.

Good luck.

My two children are extremely blessed in many ways. Perhaps their greatest blessing is that they’ve surrounded by a family that loves them dearly and truly cares about their future in a deep, fundamental way – and I’m not merely talking about myself. I’m talking about their grandparents, their aunts and uncles, even some of their cousins. They are surrounded by a cadre of people who love them, care for them, and truly want them to have a wonderful life.

Because so many people care so much for these two children, they’re often the recipient of gifts. Yes, their birthdays and Christmases are full of presents, but it even goes beyond that. Their grandparents often buy them spontaneous gifts. Their cousins sometimes literally give them their old toys and clothes. We even do it ourselves, though our influence is often in the form of books for their bookshelves.

This has a challenging side effect – the kids have accumulated an awful lot of stuff. Their toy boxes are overfilled. Their bookshelves are stuffed with books.

Several problems are made evident by this. First, it’s difficult to keep all of this stuff in order, simply because of the clutter problem. Second, it encourages our children to be overstimulated because as soon as they even have an inkling of being less interested in a particular item, they can just bounce onto another one. Third, they’re often much less enthusiastic about the wonderful gifts that their grandparents give them because they already have so many.

The solution is obvious: reduce the toy count. But how do you do this without upsetting the children?

My goals are very straightforward.

First, I want to reduce clutter. Dealing with clutter means more money sunk into stuff and more time spent cleaning it up. That means less money for the things that are important (like a less stressful career, deeply meaningful experiences, and so on) and less time for them as well.

Second, I want my children to enjoy life with less stuff around them. I do not want them to feel that lots of stuff is the norm.

On a smaller note, I want my children to increase their attention span. With a huge number of toys easily at their disposal, it’s very easy for them to just jump from toy to toy. By strongly reducing the availability of such items, the opportunity to jump around is less.

Here’s my solution for this problem.

First, I’m taking an inventory of which toys they like and play with frequently – and which ones they do not. I’ve actually been making a list of the toys that each child plays with over a multi-week period. If toys are on this list, they’re probably going to be kept. Toys that are not on this list are going to be targeted for removal.

Second, I’ll talk about the process with them. I’m going to ask them what their favorite toys are. I’m going to also tell them that I’m going to take some of the toys that they never play with and give them to other boys and girls that don’t have many toys to play with. Believe it or not, this works very well with our children, even the two year old.

Third, I’ll take advantage of a period when they’re visiting grandparents to reorganize and minimize their toys. When they return from their grandparents, I will have removed many of the toys from their sight, minimizing the clutter. What will remain are the toys I’ve identified as their favorite ones. The toybox will be only about half full (if that) instead of overflowing. The bookshelves will be filtered a bit (though I’m not as interested in reducing their book count).

Finally, I’ll keep the excised toys in storage for a short period, then either yard sale many of them or take them to Goodwill. The reason I’ll keep them in (hidden) storage for a short period is so that if I discover that I removed a toy accidentally that the children really value, I can retrieve it.

One thing I won’t do is discourage family members from giving them gifts. I understand that this is done as an expression of love for children that they don’t get to see as often as they’d like. Instead, I simply want to create a situation where these toys and gifts are deeply appreciated.

For a long time, we did some toy rotations so that the children would always have something new to play with. In my eyes, that doesn’t really achieve the goals I listed above. We still have a lot of stuff. It still doesn’t subtly teach patience and attention to the children.

Any thoughts on this plan?

As I’ve mentioned before, we give our children a small allowance each week. Our daughter, who is only two, puts all of her money into a single-slot piggy bank and is allowed to fully spend it as she chooses. Our son gets more money for his allowance (for now), but has a Money Savvy Pig, where he splits his allowance into four equal parts: money to freely spend, money to save for an item he wants, money for an annual charitable gift, and money for investing for the long term.

The idea here, though, is that each of them has a few quarters to spend each week on whatever they would like. Most of the time, they spend it on reasonable kid things – they both have a strong affection for M&Ms, for example, and often buy M&Ms with their quarters.

This week, however, was different. We were dining at a restaurant that had one of those carnival-esque “claw” machines near the exit, where you use a stick to maneuver a claw around, then hit a button to have the claw drop into a pit of stuffed animals or other toys. Almost always, the claw is unable to pick any of the items up, so you simply lose the money you put in there.

We’ve warned our kids about these machines in the past. “If you put your money in there, you’ll just lose it and not get anything for it.” “Those machines are rip-offs.”

However, we are also committed to letting our children make their own choices about their free-spending money. Thus, as we were leaving with our children, they asked if they could use their spending money in the claw machine. After a quick warning about the nature of the machine, we allowed them to, assuming it would teach them a quick, simple lesson about disappointment and how things like this actually work.

Of course, my two year old daughter won a stuffed animal on her first try.

Of course, my four year old son won a stuffed animal on his second try.

Obviously, the lesson learned from this situation is the opposite of what we hoped they would take from it. My son, in fact, has already told us that this is now his favorite restaurant and he can’t wait to go back to get another stuffed animal, implying (of course) that it’s trivial to get a stuffed animal from such a machine.

Where do we go from here? My wife and I talked about it and came up with the following conclusions that we feel are in line with the money lessons we want to teach our kids.

If they wish to try again with their “free spending” money, we won’t stop them. How you choose to spend money – and what you get out of it – is a constant lesson in itself. Putting restrictions on the portion of their allowance that they’re allowed to spend freely (at least at this point) defeats the learning (even if sometimes the learning isn’t perfect).

We’ll still advise them of potential poor spending choices. Of course, just because they’re allowed to freely spend doesn’t mean we don’t offer suggestions to them about what’s a good spending choice and what’s a bad spending choice. We try to avoid drawing conclusions, but we do try to provide information. We focus on saying things like, “If you put your money in this machine and it doesn’t win a toy, that money is simply gone – you’ll get nothing for it.”

We won’t “avoid” such machines in the future. One topic was whether or not we should actively strive to avoid “claw” machines for a while until they forget that they won. Of course, doing so simply delays the inevitable lesson that they’ll have to learn from such machines, so we decided not to avoid such machines.

We will never recompensate them for their lost money in such machines. When they try again and inevitably lose, we will allow them to feel the sting of disappointment and not undo that sting by reimbursing their money, as we’ve observed other parents do in the past. They have the freedom to spend their money as they choose, and they also have the freedom to lose it and to grow from the lessons they learn.

Still, I have to say I was honestly amazed when my two year old daughter moved the claw around jerkily for a few seconds, smashed the button, and was rewarded with a cute little stuffed animal. I honestly believe I could have played the machine for an hour and not won a single thing.

As I discussed yesterday in a pair of articles (this one and this one), I dream of a future where my children and I are completely financially independent from one another. I’m not dependent on them, nor are they dependent on me.

The real question that both articles strive to answer, though, is where should I put my money to ensure the best possible outcome for both me and my children? Retirement savings? College savings? Splitting it up?

In my eyes, the issue really comes down to the job every parent is charged with: raising a functional, critically thinking, independent child. If you are truly able to succeed in this regard throughout their childhood, you’re going to raise a child that doesn’t really need your help at all to succeed in the world.

In other words, if you take the time to really focus on parenting your kids in a way that makes them functionally independent and critically thinking adults, you don’t need to save for their education. They’ll be able to make their own way in the world without your financial support. Thus, you can channel almost all of your long-term savings into retirement savings so that you’re not a burden to them in whatever they wind up doing in life.

How do you do that?

Over the last five years, I’ve read a pile of books on the psychological needs of children and young adults, everything from Mindset and Born to Buy to The Read-Aloud Handbook and Raising Financially Fit Kids. I’ve come up with three basic conclusions.

First of all, praise children on their hard work, not their natural gifts. Focus on when they improve their results, not on when they simply succeed because of their talents.

Second, give them room to explore independently. Don’t hover. Don’t be paranoid about kidnapping. Send them out in the yard to explore things on their own, then when they’re done, ask them about it. The more independent exploration they do, the more resourceful they’ll become.

Finally, put them into challenging situations. Don’t protect them from failure. One of the most valuable childhood lessons is learning how to fail. What do you do next? You pick yourself back up and try again. If you go through childhood without knowing how to do this, adulthood becomes much, much harder.

If you are constantly conscious of these three things, you’re going to naturally mold your children to be self-reliant and independent. Those traits will serve them very well in whatever they choose to do in life, and because of that, you don’t need to hand them their education.

They’ll be able to make it themselves.

A final reason to save for retirement: if you do choose to help, retirement savings are usually flexible enough to allow you to help. You can often take out loans to help with education purposes from a 401(k), and you can take back your Roth contributions whenever you’d like to spend as you wish. If you decide that financial help is really needed, you can provide it with retirement savings.

So fund the 401(k) and the Roth IRA and don’t worry as much about the 529. Instead, focus your parental energies on being a parent that raises an independent and curious child.

Good luck.