Setting kids up for financial success
“Not teaching your kids about money is like not caring whether they eat. If they enter the world without financial knowledge, they will have a much harder go of it.” ~ Donald Trump
In last week’s post, I wrote about five financial habits I learned from watching the way my parents handled their money. This week I had several conversations with parents about how best to teach children about money and I realized that the way I was raised has given me some very definite ideas. I believe very strongly that instilling your children with a strong understanding of the value of money and strategies to manage it is key in helping them build a solid financial future as adults. Here are some suggestions; let me know what you think…
Talk about money
As I mentioned in last week’s post, my parents are excellent money managers but they were raised in a generation that believed in keeping everything related to money extremely private. Consequently, I didn’t understand, until far too late, the reasoning behind the way they handled their money and so I chose to do it my own (incredibly unsuccessful) way. We forget that kids see us pay for things all the time with our magic plastic cards but they don’t necessarily see us pay the credit card bills or understand that we had to earn the money that we spent on the debit card. Talking to your kids about money raises awareness of what things cost and how hard you have to work in order to make the money to pay for them. It also creates an appreciation for what they have and an understanding that others might have more or less. As your kids get older, give them the responsibility of raising all or some of the money to pay for the brand name clothes and electronics they have to have. Not only will they appreciate the items more but the fact that they can’t afford everything will help them understand you can’t always have what you want and encourage them to make thoughtful choices about what they really want to spend their money on.
Just say no!
As parents, we want our children to have everything we didn’t and to appreciate it as much as we would in their shoes. The reality is that, in giving so much to our kids, we raise their expectations when it comes to lifestyle and make it harder for them, as young adults, to maintain a lifestyle that’s within their means.
Related article: Does giving money to kids really help them?
David Chilton commented recently that the majority of young adults in their 20s he encounters who are carrying consumer debt are doing so because of excessive spending on lifestyle expenses such as eating out, entertainment and vacations rather than on accumulating stuff. They don’t want to discontinue the habits of a lifetime even though their budget doesn’t allow them to maintain the lifestyle they were used to at home. When I was growing up, eating out was a treat that was reserved for birthdays (along with gift giving!). In today’s society, eating out only once a year might be a little extreme but why not repurpose some of the money you currently spend on indulging your kids and funnel it into a “30th birthday savings/investment account”? It’s amazing how a few dollars here and there can add up over time and it creates a win-win – you are still indulging your children but the money can be used for something more significant at a time when it will really be appreciated.
The power of saving
Unfortunately, the abundance of credit and financing options available to us make it all too easy to have exactly what we want when we want it and the idea of saving for something seems outdated. By teaching kids to save for what they want we help them understand the true value of the item they’re buying and encourage them to make good choices about what to spend their savings on. Those $90 jeans can seem awfully expensive if they cost everything you’ve saved in a couple of months and sometimes the time needed to save is all that’s needed to deter you from a purchase that was more of an impulse than a true want.
Related article: Making sense of Financial Compromise
Personal finance is a topic that isn’t really taught in schools and so we tend to follow the habits we see modeled at home. If your 18-year-old is at the bank making a deposit or withdrawal and is offered a credit card or line of credit too often they see that $1000 limit as free cash. Managing a credit card well by paying the balance in full and on time every month can help build good credit but running up a balance can hurt you. Kids have an awkward habit of following what we do more than what we say and if we don’t teach our kids the value of money and how to manage it effectively we leave them extremely vulnerable to falling into the credit trap. By teaching kids to be financially savvy we help build a solid foundation for them to launch into adulthood and create strong habits that will lead them to financial success.
What do you think? How do you teach your kids about money? How do you decide which “wants” to indulge and which to turn down? What did you learn about money management from your own parents and how have those lessons impacted what you teach your children? Let me know.