January 20, 2015

Cereal vs. Space Planes

Economics for a Three-Year-Old

Teaching Kids About Opportunity Cost

Today, while grocery shopping, I had the wonderful opportunity to teach my 3 year-old about the economic principle of opportunity cost (every dollar spent is a dollar that can't be spent on something else).

Dictionary.com defines Opportunity Cost as:

the money or other benefits lost when pursuing a particular course of action instead of a mutually-exclusive alternative

Or the British Definition:

the benefit that could have been gained from an alternative use of the same resource.

Basically, if we spend money on one thing, we can not spend that money on something else, the cost is the benefit of making the alternate choice.

A few examples:
If I buy a cheeseburger for lunch, I cannot use that same money to buy ice cream for dessert.
The cost of the cheeseburger is losing the opportunity to enjoy the calming sugar rush I get when I eat ice cream.

If I get a loan for a car, the money paid in interest cannot be used to go on a vacation.
The Opportunity cost of financing the car is not being able to use that money to relax, play and see something new.

Our lesson:

As I was walking down the cereal aisle, unbeknownst to me a little hand stealthily reached out and grabbed a box of cereal, a few minutes and an aisle later, I reached to place something in the cart and glimpsed something that I didn't put there, a box of Reeses' Puffs. 
My initial reaction was to remind him that he can't just grab things and put them in the cart (something he hasn't tried to do in months), but as I was scrambling for an appropriate consequence, I paused and realized there was a much better way to handle this.
Yesterday when I was giving him his allowance he told me he wanted to use his money to buy space airplanes, Echo and Bravo from the movie Planes, which cost about $6-8.
I bent down so I was looking him right in the eye and asked him if he wanted to use his money to buy that box of cereal, he said Yes.
I then asked if he wanted to buy a new airplane, he got really excited, "Yes, a space airplane......."
Next I explained that the box of cereal cost the same amount as a new airplane (not quite accurate, but reasonably close), and asked if he would rather use his money for cereal or an airplane, he firmly replied "A space airplane!" so we walked back to the cereal aisle and he happily put the box back.

In that instant he made the decision that the benefit of a new airplane outweighed the cost of not getting a box of Reeses' Puffs.
It doesn't mean cereal would have been a bad decision, it means he's choosing something he wants more.
He doesn't know it but he just had a lesson in Opportunity Cost, Delayed Gratification, and Budgeting.

Helping children understand the principle of opportunity cost while they are young, can help them make decisions that align with their values and goals when they are older and the decisions carry more weight.

It seems overwhelming, even to someone who's spent a good amount of time studying this very concept...

I'm going to break it down into 3 steps:

1. Stop (or cut back on) buying things for your kids and instead give them the money to buy those things themselves.
Whether they do chores for they money or you give them an allowance (read my thoughts on Allowance here), kids need to have their own money so they can have opportunity to make decisions with it.
When they want something at a store, event, etc. the empowering response sounds something like:
Did you bring your money?
Do you have enough money?
Is that what you want to spend your money on?

2. Guide them, but let them make their own choices.
You might suggest:
That costs $xx.xx if you wait you could get it for less at _____.
You might want to wait and look at some other things before you decide.
Weren't you saving money for _____? Would you rather have this or _____?
That's XX weeks worth of allowance or XX jobs, is it worth it?

If my 3 year-old had decided to buy cereal, I would have let him.

3. Allow them to Make Mistakes
Nothing helps kids learn financial responsibility better than a toy that breaks after 10 minutes, 
Or a drink that disappears while a brother is still enjoying a toy, 
Or watching a sister enjoy a whole new wardrobe for the price of your one pair of designer jeans,
Or watching your sibling go to a movie on Friday night AND Ice Skating on Saturday night, when you only get to go to the movie because you spent $10 on concessions.

It doesn't mean that any of the decisions were "BAD", though they may be "SAD", OR maybe that buttery popcorn, or those jeans that look great and fit perfectly were worth it.
It's not about making decisions that please mom and dad, it's about teaching children how to make decisions that align with their values and goals. 
It's about making sure that the lost opportunity is a price they're willing to pay. 

If you found this post interesting, you might also enjoy 

I also highly recommend the book Piggybanking for more ideas on how to teach kids about money, it's a quick easy read and quite entertaining.

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