How do you teach your children the proper values and responsibility as it relates to money? Although this is not part of traditional financial planning, I get this question often with clients that have children.
Parents want their children to be self-sufficient and financially literate, but many are unsure of how to achieve these goals. They often look to me for help or education programs to help raise financially fit kids. When I was a child, very few families were very wealthy. Consequently, we learned the value of money quickly and every day. Today, many parents have high incomes (when your household income is over $75,000 that places you in the top 7% of income earners) and lavish their kids with everything they demand. At the same time, they are picking the kids up in high priced autos that, just a generation ago, one spent on a new home. The parents tell the kids to be more prudent with their money, but, the children are watching their parent’s actions.
Parents should begin discussing and educating their children about money at an early age. I have had clients come to the office with a child ready to go to college in 2 years, and the child has never had any responsibility for money. A child should be able to make good decisions about money before 10 years old.
Unfortunately, a report conducted by Strategy One, polled 1,100 American teens and found 62% believe they are prepared to handle adult financial responsibilities after high school. Yet, in the same survey only 41% knew how to budget, 34% knew how to pay bills, and 26% understood how credit card interest and fees work.
The Early Years
When children are in elementary school, parents should point out the advantages of starting to save and invest early. Around age 5 is a perfect time to provide an allowance so the child can make some of his/her own decisions. The parent should use trips to the grocery store to teach the child. If the child has money to use they can participate in the spending process.
After the child learns to spend, then, the next step is money management. The allowance should be distributed among different colored jars; spending, saving/investing, charitable giving and a fourth for education. This is a way for children to learn and see what their money can do for them. This helps families show their value system and for the kids to learn that money is not just for spending. The children can learn they can get whatever they want, but it takes time and discipline.
Parents should keep children and young adults aware of their financial situation so they can learn from their parents’ actions. Parents should discuss through large purchases with their spouse or another family member within earshot of the child. Keep in mind parents, although the kids may not be picking up their messy rooms, they are picking up their parents’ money thoughts and messages. Parents can and should teach their kids to be good consumers. In so doing parents will solidify their own skills.
In the Middle Ages
Around junior high school age is where investing should come into the education process. Kids could start setting money aside in, say, a custodial account. Maybe the incentive is for the parent to tell the child if they invest properly and make money, then, it is theirs to keep. If they invest poorly it is okay, but, they must write out what the learned from the experience. At this age some interesting stocks for the young teens may be in McDonalds, Coca Cola or Adidas. These stocks would have a connection for the child. As you go through the annual report with them the child begins to notice more and more. Disney is another stock children can get, relate to, and become excited about. Parents must emphasize to a child that it is okay to make a mistake when investing the first time. Above all the kids must learn that investments are volatile.
The Later Teen Years
As the child becomes a high school senior, send them to the website www.feedthepig.com for tips on how to save money and to receive a weekly email. In addition, there are courses that would be helpful like AIG’s “Kids Investing for Dollars and Sense” (KIDS). It has work sheets and internet based activities that parents can review with their children.
Parents, along with their financial advisor, should begin conversations with the child about what a 529 Plan is and the impact on their life. This is the time a serious discussion of debt, how to keep a budget, and why it is important to stick to it.
As the college years are coming to a close, this period is a time to emphasize that money is not just about spending. Explain what and how a 401K plan works. Share with them that $100/month saved from age 25 to 65, earning the stock market average rate of return will produce $1.2 million for retirement. (Don’t you wish your parents taught you that little gem?)
A Few Closing Thoughts …
- As a young child, my Dad made me read … The Richest Man in Babylon by George Clason. It was a turning point for me in money management. I encourage all my clients to read the book and have their children do the same. If the kids are young, then the parents should help them read and understand the great principles in this great book.
- I work with each client to set them up a “Family Empowered Bank”. This is not a chartered bank, but rather a place where we accumulate and store financial assets, human assets, and wisdom assets. These assets are to be shared with all family members. You see it does you NO good to “dump fish” on the kids … better you teach them “how to fish” with everything you have learned in life. A great financial tool used in the family bank is that as the kids request and want money or things – DO NOT GIVE them the money … lend it to them from the family bank at a reasonable interest rate. Have them pay it back out of allowance or from wages. This exercise will teach them about debt early in life and responsibility.
- Here are a couple of websites that provide information on money camps and instructions for kids on money.
I encourage you to discipline your children with money early, or, later live in regret.