The Opportunity Cost of Money
Every decision brings with it an opportunity cost – the opportunity cost is the thing that you cannot have or cannot do at the same time. The decision you ultimately make brings along with it a tributary of consequences.
Opportunity cost is an important concept for both you and your children to understand. I learnt the theory of opportunity cost when I was about 14 in economics and an economics test revealed that I didn’t fully understand it. When I did “get it” I thought it was a very profound concept.
Opportunity Cost of Money
If you spend MWK10,000 on one thing, that money is gone and cannot be spent on anything else. One of the easiest ways to teach kids the concept of opportunity cost is to give them a fixed amount pocket money.
I didn’t receive pocket money as a child except when we went on holiday. On the first day of the holiday my dad would give me and my sisters a fixed amount of money and that was it. That money had to last the duration of the holiday, if it ran out that was it, no more shopping; food and accommodation was (obviously) covered by the parents.
Having a fixed amount of money forces you to budget. Kids don’t have access to banks and credit facilities so if you emphasize that they won’t get any more money when the pocket money runs out your child will take that seriously and make astute decisions.
These are the thoughts that will probably be running through your child’s mind: a) I can either spend this money on one big thing that I really like or lots of things that I like so-so – basically, quantity over quality.
Testing the boundaries. Children will naturally test the boundaries. If your child comes to you and says they need more money and you don’t make them justify the request then that’s what they will continue to do. You will be robbing them of lessons on how to budget and this lack of knowledge will impact them as adults.
What is the right amount of pocket money?
If your child needs money for daily needs such as a school lunch, transport and so on, you can either give them money every day or give them a few days worth of money and see how well they manage it.
When you give a child money tell them what the money is for and how you expect them to manage it. The child doesn’t have to do what you say, they can make their own decisions and in so doing they learn what they need to learn.
Say you give your child what they need for the day and they handle that responsibly, you can then reward them by giving them the responsibility of several days worth of money. In doing so you show that you trust them and they in turn will try to maintain that trust by budgeting the extra cash you provide well. If through their own folly they misspend their money then the consequence may be, for instance, that they can’t buy a school lunch but must make and take lunch from home! That may be adequate punishment to make them spend more wisely.
If your child has all their meals at home, you buy all their clothes and take them to and from school then there is little reason to give them money. This is why I didn’t get pocket money. You may nevertheless choose to give them a little bit of money to manage or tell them to ask you for money when they need something.
Whatever path you choose make sure there are plenty of lessons along the way.
“Failure is only the opportunity to begin again more intelligently.” Henry Ford
For 2 years until early 2014 I wrote a weekly personal finance and business column for Malawi's leading media house, The Times Group. The target is middle-class, working African women.
This is a reproduction of the articles that appeared in the weekend edition of Malawi News.