Most parents make exceptional efforts to train their kids in sports, academics and social activities not realizing the great effect of the neglect of early training in the disciplines of finances. A recent survey by TrueCredit.com found that about 20 percent of parents, nearly one in five, had never spoken with their kids between the ages of 4 and 18 about money basics. To raise money-smart kids, parents should start at a young age and regularly reinforce money lessons as children grow up. According to research from Cambridge University, money habits start to form by age seven. To neglect this responsibility could cost kids a fortune — literally!
Set an example
Little eyes are watching you. If you’re slapping down plastic every time you go out to dinner or to the grocery store, they will eventually notice. If, at the end of every month, you and your spouse are arguing about money, they’ll notice. Set a healthy example for them, and they’ll be much more likely to follow it when they get older. It starts at home. If you are up to your ears in credit card debt, it’s unlikely that you’ll be able to teach your kids anything useful about managing money. One of the best things you can do is let your child see that you save money too. Put money in a jar while your child is watching and tell him or her it’s your savings jar. This will show your child that saving is “normal.” Plus, since most young children want to be like their parents, seeing you do it will provide them with good habits that further inspire them to save.
Do it with them
Having patience and waiting to buy something is one of the most important lessons. This is a hard concept for people to learn of all ages. However, the ability to delay gratification can also predict how successful one will be as a grown-up. Kids need to learn that if they really want something, they should wait and save to buy it. Teaching younger kids the value of money through real life situations and examples will help them understand where money comes from, used and how it is earned. Here are a few examples of how you could approach this with your kids.
- At the Bank. — By the time your kid is a teenager, you should be able to set them up with a simple bank account. This will teach basic skills and accountability, and it will prepare them for an independent future. The ATM is also great place to start teaching kids about money. You could explain to your child that the ATM holds the money you have made by working hard and saving. It is not just a hole in the wall where money comes out. When you take money out of the ATM it is taken from your bank account and you’ll have less in your account to spend later.
• At the supermarket. — When buying items at the supermarket, you can explain to your kids how items are priced and that you can get cheaper or more expensive versions of the same product. This is also an opportunity to discuss how you can shop around for the best price. You could get them to compare prices for you and pick the cheapest one. If they want a particular brand then explain the price difference to them. When you’re shopping, talk aloud about how you’re making your financial decisions as a grown-up, asking questions like the following: Is this an essential need or a want? Should I borrow to get this? Would it cost less somewhere else? Could we go to discount store and get two of these instead of one?
• Paying bills — If you receive bills in the mail or online, this can be an opportunity to explain that electricity or your internet connection costs money. You could explain that to pay a $150 power bill it took you so many days at work to earn the money. This will help create a connection between time spent at work and money. It might also make them think twice about leaving lights and appliances on.
• Doing a budget — Involving your kids in discussions about your family budget is another way you can talk to your children about money. This helps give them the big picture about costs and spending. By explaining how much money your family has to spend every week and how this money is spent, your kids will better understand the costs of family life and how much can be saved for other things. Everything in their financial future from mortgages to investing hinges on budgeting.
Show them the Value
We need to teach kids that money is finite, and it’s important to make wise choices because once you spend the money you have, you don’t have more to spend. Here are some more lessons to teach them.
- Teach the concept of work — Teenagers have plenty of free time: fall break, summer break, winter break, spring break. If your teen needs money (and what teen doesn’t need money?) then help them find a job. Who knew that working was a great way to make money?
- Warn about the danger of credit cards — As soon as your kid turns 18, they will get hounded by credit card salesmen, especially once they’re in college. If you haven’t taught them why debt is a bad idea, they’ll become another credit card victim.
- Show how to spend within their means — We need to give children free reign to spend their savings as they’d like; they also need to stay within a budget. If your child asks for an iPhone and say they have enough saved up to buy one, educate them on the monthly costs to keep the phone; they may quickly change their mind.
- Let kids make their own purchasing mistakes — Even if you think your child is about to waste their money on a toy she’ll soon tire of, you might want to let her go ahead and buy the item anyway, because it might just teach her a lasting lesson. Let them make impulse buys, there is an opportunity cost and it teaches that money is finite. You really want them to regret some decisions because they won’t forget them.
- Encourage them to set goals — Having an item or a goal in mind can help kids learn to delay gratification, and it’s also good practice for saving for big things like retirement or a vacation as an adult.
Stress the importance of giving
Once they start making a little money, be sure you teach them about giving. They can pick a church, a charity or even someone they know who needs a little help. Eventually, they’ll see how giving doesn’t just affect the people they give to; it affects the giver as well. Talk about the concept of others who are less fortunate, or have need. This teaches compassion & generosity.
If widespread financial education were really effective, why are so many young people struggling with debt, foreclosure and low asset accumulation? Researchers looked at the states that mandated personal-finance curriculums in high school, and compared the financial health of students who graduated before the mandates to those who graduated after. Their hypothesis: If personal-finance education worked, the students who graduated after the programs were implemented would be better off financially. But the study, did find one school subject that does have an impact on students’ financial outcomes: Math. Without strong math skills, people tend to use more emotional ways to spend, save or invest their money and make worse financial mistakes in the decisions they make or fail to make.
There are at least two schools of thought on working for allowance. One is that it teaches kids to earn money, so you’re teaching them to work hard. The other side is that it’s too easy for kids to challenge the chores-for-pay system, so earning and budgeting should be separate lessons. Here is a possible solution – you can also separate chores into two sets: General Household chores where they don’t get paid. ( keeping your own personal space clean, picking up wet towels, getting up on time, brushing your teeth, making the bed) and there are Work-for-Pay chores, which are over & above your set household chores. These extra chores can be optional for the child to do. You just need to communicate clearly, and incorporate both the earning and spending teaching in your parenting.
It’s time to rethink how we teach children about money. We need to be intentional and strategic and look for teachable moments. It needs to include not only the disciplines of money, but also the character issues related to money and how we relate to others.
Jeffery Masters, President of Jeffery W. Masters & Associates 954-977-5150 Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners, a registered investment advisor. Independent Financial Partners and Jeffery W. Masters & Associates are separate entities’ from LPL Financial – Jeffery.Masters@LPL.com