Teaching children financial lessons


BROOKFIELD, Wis. – The world runs on contracts. A contract in its simplest form is an agreement between two parties that reflects promises for future behavior.

In Dr. John Whitcomb’s Capitate Your Kids, a guide to teaching teens financial independence, he suggests parents make a contract with their kids – and keep it.


“Capitate” is a financial term used in the health care industry to describe a contract in which doctors and hospitals are paid a fixed amount each month to care for a population of patients.

Although not very successful in health care, the concept can be applied successfully in another arena: teaching teens how to manage money before they head out on their own and before they make the huge financial mistakes that can affect the rest of their fives.

Pre-capitation, parents need to sit down and figure out how much money they spend on their teens (including clothes, sports equipment, haircuts, movies, etc.). The idea is to transfer control of that money to the teens themselves.

The teens’ job, then, is to make it to the end of the month. What they don’t spend, they keep. If, however, they blow it all the first week (and they undoubtedly will, at least once), they have to do without until the next payday, just like adults.

Let them learn.

Our job as parents is not to bail them out, said Whitcomb. Kids need to learn through real life experience when they’re still at home and when it’s still relatively safe for them to do so.

Because capitating children promotes a set of behaviors that span a year or longer, you can add to the seriousness of the process by making a written promise between you and your children.

The greatest value that comes from writing a contract is that each child sits down with you to plan the promises and responsibilities you both think will be involved.

A joint effort.

You get a much more meaningful level of buy-in from your children if they are part of the planning and writing. They take the responsibilities much more seriously.

If you follow that route, be careful not to send your children off to do this work on their own. Writing a contract is too new a concept. Do it together as though you were holding a brainstorming session.

You will know most of the ideas you want to include because of the lists you have made together as you planned their budgets.

Make it a big deal.

A little pomp and ritual added to the contract process can add dignity and seriousness. You can get a nice cover for your contract at the office supply store or make one with a word processor, using some fancy lettering.

Photocopy or print copies for everyone involved. Make a ceremony of everyone’s signing. Watch how proud your child is.

Officially hand over the first check or the ATM card as the finale. This signifies the child’s having arrived at the threshold of adult financial responsibility. You are treating the child like a grownup, with respect.

Opening a bank account.

The mechanics of getting a bank account opened for your child need to be addressed ahead of time.

Many banks offer special accounts that give their customers an ATM card, provided the customer maintains a minimum balance.

The adult may need to make the down payment in the account that establishes the interest-free basis for the account.

In an account that is used only for ATM withdrawals and has no check-writing privileges, banks usually require between $200 and $500 as a basis, or down payment.

With this kind of account, you can arrange for an additional amount to be transferred monthly from your checking account into that ATM account for your child’s use.

Make things clear.

Your child needs to be very clear on the fact that the money he or she is to use is very different from the base that you establish.

The base money is yours, not to be spent. This should be itemized in detail in your contract.

With the inevitable early spending behavior you will observe, offering limited funds at the beginning of the capitated program lowers your risk of financial meltdown.

It is entirely possible that the first few months will result in all the child’s money and all your baseline money being spent.

Relief is only 30 days away with the next deposit. Although that might be enough to partially repair the overdrawn amount, relief might take two or three months before the account gets back to baseline.

Monthly meetings.

Meanwhile, every month you will be sitting down together with your teen and going over the bank statement. Remember, no pain, no gain. You wanted tough lessons; this is the first of them.

The ATM card should come in duplicate, with a copy for you. You want to carefully save it, and have the PIN number tucked away as well.

Another likelihood is that the ATM card will become bent or lost. Kids’ wallets do not contain a multitude of cards that help keep the wallet rigid.

As a consequence, the card will get bent if it is alone in a wallet along with only a paper library card and a Record Club of America card.

If the ATM card is carried free and open in a teenager’s pocket, it will most likely be lost. Make sure your contract spells out who gets to pay the bank fees for replacement cards.

As best as I can tell, the average kid needs three cards by the end of the first year. Now that I’ve told you that, you don’t have to get too crazy when your child loses one.

But you can make your child wait for 10 days while you order a replacement set from the bank. You wanted tough lessons; this is No. 2.

Finally, show your child how to withdraw money from the ATM machine. This is actually quite important, as many machines “eat” a card that is not properly identified by its code.

If you have anticipated this need, your child may have had the opportunity to practice using your ATM card once or twice and is familiar with the drill.

Recognize the power of the card. This is a very potent symbol of adulthood in America. Aside from a driver’s license, it represents one of the most significant symbols of passage from childhood to adulthood in America.

Getting this card is an ego boost to your child that will make him or her very proud. Do not let it pass into your child’s hands without due notice and celebration.
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Basic elements of your contract


Responsibilities of Mom and Dad

Responsibilities of the child

The list of all categories of clothing your child is responsible for purchasing on his or her own

The amount of money you are going to turn over to the child each month

How you will deliver the money

Your own promise not to interfere yet providing transportation

The reward of getting the leftovers of any cash he or she does not spend.

Contingency elements

A few extra items are crucial to consider:

What do you do with an unexpected expense?

What happens if an expensive item is lost or stolen?

What special needs are coming up this year?

Is Uncle Mike getting married and asking your daughter to be a flower girl?

How often do you both agree to sit down together and review your collective progress?

What happens when your child loses his or her ATM card?

What happens if your son or daughter withdraws cash below the minimum balance in the account?

What happens if your son or daughter refuses to meet with you?


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