I don’t know about your house, but we are counting down the days until summer. Ah, summer. The time of year that school and its trappings fall off the calendar, along with structure, discipline, a schedule… Hmmm. Maybe instead of letting all discipline go out the window, summer can be an ideal time to teach your kids how to be smart about money.
I believe that somewhere along the line, parents stopped teaching their kids about money and imparting solid rules of thumb to their children. I know this because we work with some families that have very high incomes, very high lifestyles, and are essentially living paycheck to paycheck, completely unprepared for life’s ups and downs. The old standby guidelines of spending less than you make, not “keeping up with the Joneses,” and using your credit card for convenience as opposed to debt, have not been as widely passed down as they once were. At the same time, social media tells all of us that we should be on vacation most of the time, and live a perfectly beautiful life the rest of the time.
As a financial planner, I see first hand how much a financial education instilled at a young age changes a human’s life. Young people can practice making decisions about their money to build a foundation, equipping them with an understanding of the value of money in living the life they want. But - as with most things - they need perspective and a framework of how to make decisions about money.
As you consider how to raise a child to become a financially prudent adult, you might first share with them the purpose of money for you, your family, and for those who are less fortunate. Remember that you are trying to teach them not to be kids with money, but (eventually) to be adults with money. The hope, of course, is that they are not so bewildered when they inevitably take charge of their own money decisions, and that the ages-old rules of thumb below become their natural instinct.
Earn your money – Tie your children’s allowance to specific things they do, which you and they define as their “job” in your house. During the school year, this might be just doing homework, bring prepared for test and projects, and getting good grades. In the summer, allowance can be tied to house and yard maintenance, finishing a project like cleaning a closet, or completing a big creative project like writing a book, learning an instrument, etc. Help them to understand that there is a reward for doing extra work, but also emphasize that basic house responsibilities (i.e. keeping your room clean and clearing your dinner plate) are not tasks that will be compensated with money.
Save for the future – As soon as kids start earning money, set rules about designating how much they can spend and how much they need to put aside for other purposes. This will help them to get the discipline to save, and also will prepare them for how taxes work in the real world. As an example, we use this system in our house: For every $10 our kids earn, they get to spend $6, save $2 for college, save $1 to donate to a charity, and save $1 to do something nice for someone else.
Understand cash flow - On vacation, rather than being simply a generous benefactor or piggy bank, let your kids know that they need to work for the money to spend on souvenirs or activities, they need to budget how much to take on the trip, and they need to decide how to spend their funds. If they spend it all in the beginning of the trip, DO NOT give them any more money. This is a very important exercise in making decisions with money, learning cash flow, and prioritizing how to spend money. It is much better for them to make a “mistake” and learn from it at this young age than to make an adult-sized mistake when they are on their own.
We also have our kids participate (nominally) in paying for large expense items that they really want, like summer camp and future phones. This “skin in the game” strategy helps them to understand that these expenses are higher than other expenses, and that they are a luxury as opposed to a necessity.
No debt – Don’t let kids borrow money from you for a big purchase. There are plenty of parents who allow their kids to spend their own money on extravagant discretionary items like trendy shoes and clothes, computer gadgets, etc. I highly support the idea of letting kids spend their money on what they want, as long as the kids save the money for the purchase. What I see commonly is that a child wants something, asks Mom or Dad for the money to buy it now, and promises to pay them back- meaning that parents become the “credit card” by loaning them money to spend before they earn it. Unfortunately this teaches instant gratification and using debt to buy goods, as opposed to the better longer term lesson of having your kids save money to be able to afford these things when the opportunity comes up.
Respect your money – Tell your kids how much things cost, and how you make decisions about your money. Many parents don’t share money details with their children, so of course their kids think that new cars and vacations magically appear. Instead, tell kids that you decided to go on a driving vacation instead of a flying vacation because that way you can also get them new clothes, or another trip, or a sports camp. Also, tell your kids how you make money decisions: “We don’t stay in a fancy hotel because we don’t think there’s value in spending money that way. We would rather take a longer trip, stay in interesting little cabins, and drive to see the landscape of our country.” And if you like to stay in fancy hotels or fly first class, tell them the value in spending that money and that your family is fortunate to be able to make those choices.
Talking about how you make money decisions will reinforce the values of your family, and will also provide an opportunity to talk about how you as parents make decisions about your work. For example, you might share with your kids that both spouses work not only because your careers are gratifying, but also because it affords your family with a lifestyle that you want to live.
As you begin to talk to your kids about money, you may run into some awkward conversations and some unexpected questions, especially if you didn’t grow up in a house that talked openly about money. Remember that kids know little about money until you teach them, so high level answers will commonly suffice, especially when they’re young.
And if you have any funny or poignant stories you want to share with us about your kids and money, please email us at [email protected].