Teaching financial responsibility to children is a great way to provide them with knowledge and experience that will help them grow into financially stable adults. Our first lessons about money come from our parents and they set the frame-work for the critical lessons and behaviors to promote healthy money attitudes and habits in children. Lessons about financial responsibility must begin in the home. Most children learn about personal finance by “money see, money do.” The way parents handle money, how they talk (or don’t talk) about it, and the emotions they express or exhibit around money all become inputs to children’s eventual relationship with money. Clients across all wealth levels often ask for our thoughts on how they can teach their children, who receive so much, to be financially responsible and charitable. Naturally, each family is different, but we have some general advice for all families:
- Talk about money. Discussing money with their children provokes anxiety in many parents. They wonder how much detail they should share and whether their children will then share the family’s personal information with their friends. In fact, many families experience a frustrating, often paralyzing, Catch 22: Reveal too much, and the kids want you to spend more. Keep too much to yourself, and the kids may unnecessarily worry about money. Bottom line: details of the family’s finances should not be kept a total secret. Information forms the foundation for kids to develop a healthy relationship with money. So parents need to ascertain what level of detail they are comfortable sharing.
- Teach age-appropriate money skills. Kids need contact with money in order to feel a connection to it. In the elementary years, you can supplement the basic math skills your child learns in school by having him count out and pay for his own small purchases. If you give an allowance and your child wants to make a purchase, you can have him save for it and make the purchase with his own money. In the teenage years, you can increase the allowance and have your teen pay out of his savings for additional personal expenses.
- Adopt some version of “save, spend, and share.” Once your children begin earning money, introduce the concept of dividing their money into three pots: save, spend, and share. For example, you may direct your children to allocate 40 percent of their money to immediate wants (spending money), 50 percent to future goals (savings) and 10 percent to charity or gifts for others (giving). If they commit to saving a portion of every check during their high school and college years, your children will have a great head start on the all-important emergency account that’s so necessary when they move out on their own. They might also consider investing in a Roth IRA. And while their earnings can help your children feel the pride of making purchases on their own, you can model that it can be equally rewarding to share with others.
- Teach them that money is finite. “If you don’t have the money, you can’t spend it.” Remember to reflect this attitude through your spending habits, as well, by not charging unnecessary things to credit cards or saying things like “It’s too expensive…but I just have to buy it now!” Explain what a budget is and keep up a dialogue about how much money is available to spend when shopping together. Start young teens on a clothing budget and make them accountable for sticking to it.
- Differentiate between want and need. It’s easy for these concepts to blur for kids. Explain to younger children that you will provide their “needs”; however, older children will have to earn the money toward their “wants.” That’s especially true when we’re raising kids in a high-pressure consumer culture – one that encourages many to feel deprived if they don’t have the latest smartphone, the hottest 3D video game or the most expensive pair of sunglasses. For older kids, give them a “budget” for a component of the family vacation, such as lunches out, sightseeing or souvenirs. Invest them in the process, and you may be surprised and pleased with their creativity and financial decision-making. Make them work. Remember those “grunt” jobs we had as teens? We bagged groceries, delivered newspapers, caddied golf, worked in retail sales or food service. Today many young people don’t think about any kind of work until they graduate from college, which is too late. We learned a great deal from those experiences – allow your children to have that same privilege. Nothing teaches you about how time relates to money like holding a job.
Helping your children learn simple money lessons early on can go a long way toward fostering their financial success in the future. In our next blog, we will discuss age-appropriate money skills to lay out money milestones as children reach different ages.