Personal finance is undoubtedly one of the most important, practical skills necessary to function in the modern world. Yet it seems we have done a terrible job of preparing our children to manage their money. Whether it concerns a lack of retirement savings or excess credit card debt, the news is replete with examples of Americans who have little idea of how to manage their money and plan for the future. The education system is doing little to rectify the situation, so you will have to take matters into your own hands. In order to help you in this endeavor, here are some tips to get you started on the path to teaching your children to have a healthy, lifelong relationship with money.
Be Open With Your Finances
Although we live in an increasingly open society, where few topics of conversation are out of bounds, money remains a relatively taboo subject. Despite its importance, we often find it difficult to talk about finances with our spouses, friends, and coworkers, so it’s not surprising that we often leave our own children in the dark on such matters. Unfortunately, if they don’t learn sound money lessons from you, they are likely to implicitly adopt some rather pernicious lessons from someone else. You don’t have to explain all the details of your 30-year mortgage to your nine-year-old, but you can discuss the basics of budgeting with your children as you pay your monthly bills at the kitchen table. Create an environment where your children feel comfortable asking questions about how you make and spend your money. If you shield them too much, they may have little reason for not believing that money grows on trees and there are no consequences for spending decisions.
Encourage Good Behavior
One of the real problems with teaching good money habits to our kids — or to adults, for the matter — is that they are decidedly oriented toward short-term rewards, while personal financial success often entails making short-term sacrifices for long-term gains. If you have a hard time getting exciting about a 3% yield on Treasury bond, just imagine how your kids will feel about it! Instead, try to make the rewards more immediate by, for instance, matching the money your kids agree to save in a bank account or index fund. That way, they get to experience both an immediate return on their investment while simultaneously learning the joys of long-term compounding.
On a personal note, this worked well for me when I was young. Like most teens nearing driving age, I was obsessed with cars. When I was 13 my parents made me a deal: for every dollar I earn from my paper route, they will match 100% in a “car fund.” It also helped that my brother–four years older than me–said how cool it was to have a car. For the next few years, I delivered papers with more energy and enthusiasm than a kid on a candy high. I learned the value of hard work, saving for a goal that was a few years away–an eternity for a teenager–and ended up with a decent set of wheels (at least by teenager standards).
Use Mistakes as Teachable Moments
As parents, we want to do everything possible to protect our children from harm. Often times, this means adopting the role of a benevolent dictator, continually issuing unwelcome edicts concerning vegetable consumption, dental hygiene, and math homework. However, if we are to teach our children how to become mature and responsible adults themselves, we must sometimes grant them the freedom to make mistakes. You may roll your eyes when your little one is determined to blow their entire allowance on a new toy that will undoubtedly be collecting dust in a matter of days, but some lessons are better taught through painful experience. When they inevitably demand an advance on their next allowance so they can head back to the store, explain to them the importance of making choices, nurturing patience, and saving for the future. Your children are going to make mistakes; just make sure the mistake is on a $50 video game and not a $500,000 house.
Turn Off the TV
Our world has become so commercialized that many of us fail to appreciate how ingrained it has become in every aspect of our lives. Not only are we inundated with commercials on television, but advertisements have also found their way into the shows themselves through product placements. The Internet wouldn’t exist today without highly targeted advertising designed to appeal to your specific tastes and proclivities. Even worse, advertising has become increasingly subtle and sophisticated, designed by teams of psychologists and marketing executives in order to create subconscious connections between the things we truly desire (love, freedom, meaning, etc.) with the mass-produced products they are selling. With some luck and determination, we can fight back against these influences, but our children are practically defenseless against these tactics. The best thing we can do is to limit their exposure to the media in all its forms, especially television, and teach them the ephemeral nature of consumer-driven happiness. In fact, we should probably follow the same advice for ourselves!
Let Kids Be Kids
At the end of the day, we can’t forget that they’re still just kids. There’s no need to make them aware of all the responsibilities of adult living at such a young age. The lack of such knowledge provides much of the appeal of being a kid! Besides, it could easily be a decade, if not longer, before they will actually be compelled to implement the personal financial advice that you lovingly bestow upon them. Even if they don’t forget everything you taught them, they will still probably make many of the mistakes that you did when you were just starting out in life. Human nature is not easily overcome, even with the best of teachers at your disposal. So, don’t feel pressured to inundate them with all the intricacies of money management right now. Instead, teach them lessons as best you can as opportunities arise, and perhaps even more importantly, set a good example with your own finances. With a little teaching and gentle prodding, you will be well on your way to raising a money-smart family.
For more information or to set up a consultation, contact Pathway Financial Planning at 248-567-2160 or email firstname.lastname@example.org.