Dollars are Made Out of Pennies

I've talked a lot in previous posts about setting priorities, and teaching our children to set priorities or defer gratification. How does that translate into dollars and cents in every day life? How do you get a child (or even many adults) to grasp that skipping a Starbucks Frappuccino or a Snapple can pay for a PS3 game? Sometimes things are easier to understand if you break them into pieces. A big project seems undo-able until you break it down into tasks and milestones. The same is true about prioritizing and saving for an expenditure.

Let's start at the beginning. Dollars are made out of pennies. This is at the core of how money works, but to many it's intangible, especially if they usually pay with invisible money. How does saving 25 cents now translate into that $50 game later? The answer, of course, is to save a quarter here and a dollar there until, over time, you have the $50. Now we're starting to talk about math a child can understand. So, the Frappuccino vs. PS3 game choice isn't a one time trade off, it's a many times trade off. How many times? If the Frappuccino costs about $4, and the game costs about $50 then the answer is more than 10 times. That may sound like a lot of times, but it doesn't have to be the only trade off. More trade offs gets you to $50 faster. I know, this isn't rocket science. Still, I'm always surprised to learn how many people don't get it.

I once read a column in the Wall Street Journal where the author talked about playing "the soda game" with his kids. It's a great idea. Here's how it works. You're at a restaurant. You give your kids a choice: they can order soda or you'll give them whatever the soda costs. Suddenly that $3.00 investment in soda is theirs instead of yours. Most kids (but not all) will happily take the cash in hand. A good lesson, but doesn't work for everyone because there's still the element of "other people's money".

Here's a story my father told me when I was a kid that really makes the point about trade offs and deferred gratification. When he was a little boy, his Aunt and Uncle owned a Five and Dime Store a few towns away. His uncle told his Aunt that she could keep all the change in the drawer at the end of each day for whatever she wanted to buy. She saved the change, and bought a house. Like I said, dollars are made out of pennies.

Do you have examples of trade offs you make? I'd love to hear them.