With so many things that we parents have to teach our children, from using the potty to being a good and decent citizen, it’s no wonder that financial lessons sometimes get pushed aside in favor of more immediate needs in raising our kids.
While my spouse and I were in the throes of child rearing we didn’t think much about providing an intentional or structured set of lessons around personal finance. But, even so, we did manage to raise our sons to be financially capable adults.
Even if you can’t squeeze in time for specific financial lessons, there are things you can do that increase your odds of ending up with financially literate adult offspring.
Here are a few that worked for us.
Set an example of living below your means.
If you consistently live within or below your income, your children will eventually catch on.
They will hear you talking about how much is left for groceries, or how to get the electric bill paid this month. They will feel the pain when you tell them no. No, we can’t get you that splendid new electronic toy your friends have. No, we can’t get season passes to the amusement park. No, we won’t put that on the credit card and pay for it later.
They will become as adept as you are in finding alternative, lower cost entertainment and travel options.
And they will see that you put money aside in savings.
Encourage them to save.
Take them to the bank and let them see you make your deposits. Buy them a piggy bank and help them remember to feed it when they can.
Let them see your excitement as your own accounts grow and get excited with them as their savings increase.
Help them figure out what to save for and show them that you have goals for your own savings.
Saving towards a goal and them fulfilling that goal is very satisfying to a child. Endless saving serves no purpose to a small child – they don’t see the benefit. If they never get to manage the money they save, it is meaningless.
Point out how compound interest is making savings grow.
When your child shows an interest in math (and yes they probably will at some point!), take an hour and together work through some compound interest examples – on paper, so he or she can see how the interest makes the money grow.
Also, point out any interest and compounding that happens in your (or their) accounts – maybe even pay them interest on the money in their piggy bank.
Let them open their own bank account.
Take them into the bank. Sit with them while the bank personnel opens an account for them. Help them count out the money from their piggy bank to put into the account.
Make sure they have money to learn to manage.
We paid our boys a weekly allowance. When they got old enough to actually be of help, I hired them to do jobs that I would normally pay an outsider to do (in our case this was cleaning the house once a week).
Show them how to make money from others as well. Both of our boys had lawn mowing jobs in summer and snow shoveling jobs in winter.
Encourage them to save at least part of their earnings and make deposits to their savings account.
Do not enable dependent behavior.
We expected our sons to leave the nest once they were through with school, and they did. Although we were generous with gifts, when we noticed that the gifts were getting in the way (enabling financial dependence) – we stopped giving (with a warning that it was going to happen).
Some of the financial lessons we tried only worked halfway. Some of these seemed to be dependent on the personality and age of the kid at the time.
Teach them to take advantage of the time value of saving.
When the kids were old enough to hold down real jobs, outside them home, we matched their earnings but only if they opened up an IRA with them.
As long as we controlled access to the IRA’s, this worked for both sons, but once they had access to the funds, one son just paid the penalty and took the money out.
Be careful with sudden money.
Inheritances or large gifts of money can be hazardous to a young person’s ambitions. If you anticipate that your children will become recipients of such a prize, start preparing them so they will be ready to handle the influx – or arrange to withhold it until they are old enough to manage it. College students are usually not mature enough to handle a windfall. One of ours was in school when he received an inheritance, the other was 5 years older and out on his own. The older boy held on to his, the college student was disrupted.
Credit cards require maturity.
If you use your credit card for most purchases, make sure your children see you paying them off each month! Otherwise, they may end up viewing the card as free money.
I don’t believe there are any adequate training wheels for credit cards. Although some feel that letting the child use a prepaid card helps them learn, I disagree (unless of course the child used their own savings to fund the card).
Many of us went off to college and received scads of credit cards just as we were experiencing our first taste of semi independent living. Of course we misused those cards!