Financial author Dave Ramsay says “Teach your kids how to handle money or they will live in your basement forever.”
Experience, they say, is the best teacher.
While this is often true, the biggest life lessons are NOT best learned by experience. No parent wants his or her teenage daughter to learn the facts of life by becoming pregnant, for example.
“Dale” was never permitted to blow money as a child. His parents gave him money but insisted on approving all purchases. They thought they needed to protect him from himself.
Ironically, his parents’ control of Dale’s spending (with no consideration of the long-term consequences) had the opposite of their desired result. Dale was in his mid-30s when his parents died, leaving him $100,000.
Lacking money skills, Dale blew through his windfall within months. It cost him his house and nearly destroyed his marriage.
Teaching money skills is one of the best lessons that parents can give their kids. This lesson is one best learned by experience.
In his book Allowances: Dollars and Sense, financial planner Paul Lermitte says that you must let your children handle money from an early age. Let them make little mistakes so they acquire the skills to avoid big ones later.
Children need to practise spending, banking and saving. They need to learn what it feels like to blow money on something frivolous and not have funds for something they really want. Don’t replace money lost to bad decisions, Lermitte says. Doing so teaches your kids that mom and dad will bail them out of trouble and creates financial dependencies.
I recall when my daughter wanted some cheap toy. I knew it would soon be history, but let her buy it. As expected, the toy broke. By letting her fail when the stakes were small, she learned an important money lesson. At 28, she is now an excellent money manager.
Lermitte outlines a system to teach kids about money. These are some of the dangers parents face if they have no system for teaching healthy money attitudes and habits.
- Financial dependency–your kids may become financially irresponsible, have poor money skills, fall deeply into debt and remain financially dependent on you.
- Debt–your kids may suffer paralyzing credit-card debt and have no experience or skills setting financial goals, saving, budgeting and spending.
- Family conflict–families and marriages often fail due to financial problems. Kids need strong principles and the skills to avoid the tension and arguments over money that can destroy relationships.
Lermitte recommends that parents begin to talk to children about money and family finances starting at age 5 or 6, as much as they can understand. Let them see their parents talking about purchases, and that you will decline to buy something that may not be a wise purchase.
Don’t restrict your children’s spending of THEIR money. If Dale’s parents had let him blow a few dollars, he may not have squandered his inheritance.
Help your kids establish a consistent savings plan and a spending plan. Lermitte advises splitting a child’s allowance into two parts. The first is a modest allowance the child may spend freely. It should be mandatory to save the second part for the future, permitting your child to make small mistakes with the unencumbered part of the allowance. Allowances should never be tied to chores or any achievement, the author adds.
I’ve had clients bail their adult kids out of money troubles, creating lousy money managers and those destructive financial dependencies of which Lermitte warns. This can be damaging to both the child’s and the parents’ financial health.
I recall one client who had been asked by a daughter for thousands of dollars for a car. Despite my warning, he gave her the money from his RRSP (ouch!). Not only did he pay more than $4,000 in taxes, but the RRSP withdrawal reduced his retirement income by nearly a couple thousand dollars a year. Predictably, a few months later she was back at the Bank of Dad for another “loan.” I doubt either will ever be repaid.
Refusing to bail a child out of a financial bind, as Lermitte writes in Allowances: Dollars and Sense, helps you to raise financially independent children. If you want to give gift money to kids later, do so because you want to and can afford to, but please don’t enable and reward their lousy money management.
It’s hard to see our kids agonize over money troubles, but these financial lessons are essential for their long-term financial well being.
Practise tough love.