Raising financially savvy children in the modern world can be a real challenge. Their lives are full of material desires and marketing from an early age, their parents often commit financial mistakes themselves and they often do not see any reason to be concerned about money when their needs and most of their desires are met.
How can a concerned parent pass on smart financial lessons from an early age that manage to get around these difficulties?
First, the best thing you can do to raise financially savvy children is to practice good financial habits yourself. You can’t expect to teach your children a lesson you do not follow yourself. Have a clear household budget, spend less than you earn, get rid of debt, work toward large financial goals and explain what you are doing to your children. Set the example and your children will follow.
Here are five additional key strategies that will further those key lessons:
Have a consistent allowance policy. There are good arguments on both sides of the question of whether or not to give an allowance to your children. Some argue that an allowance is an opportunity to teach children the cycle of money management, while others argue that it boils down to paying children for household chores they should do anyway. I fall into the former camp, so my wife and I give our children a small allowance each week that’s not connected to household chores and responsibilities (which are handled with other penalties if they’re not done).
Regardless what you decide, be consistent. It’s hard for an allowance to teach useful lessons if you change the policy constantly. Once you’ve decided on a policy, stick with it for at least a year so your children can see the full benefits and drawbacks. We’ll touch on these more in a bit.
When they receive or earn money, make them put aside some for the future. It is a financial disaster if adults spend every dollar that comes in as soon as they receive it. Children should never think that such rapid spending is normal or good behavior. Instead, you should establish that saving at least some of the money you earn is normal. When you have money, you save part of that money for the future. In our house, we have our children save for medium-term personal goals as well as the long-term goal of college. Medium-term goals usually take the form of expensive toys or hobby kits and the money is saved in a jar in our kitchen, while long-term savings is usually done in a savings account. Our children are required to put aside a portion of every dollar they get – from their allowance and gifts – toward both of these savings.
Encourage entrepreneurial opportunities, and serve as the “banker” for small ones. It is valuable for children to learn they need to work in order to have better things in life, so it’s a good idea to encourage your children to embark on an entrepreneurial venture from an early age. One successful way to do this is to have a “job board” in your house that includes tasks that go far beyond normal household chores, along with a small reward for completing them. Children can then take on tasks as they choose and earn a bit of additional spending money.
Another approach is to encourage your children to start their own microbusiness, like a lemonade stand. This gives them the opportunity to see that in order to earn money, you have to invest money. We usually “sell” our children some of the basic resources at a low price, like charging a quarter for cups and a quarter for a gallon of lemonade, and then they have to sell like crazy to get the money back and earn a return on their business.
For teenagers, introduce the realities of your finances one piece at a time. As your children begin to climb into adulthood, teach them how adult finances actually work – working for income, paying bills, budgeting, saving for retirement and so on. The best way to start is to introduce them to bills that are relevant to them, like the Internet bill or the cellphone bill. Show them the bill and talk about what it means and how that amount has to be paid each and every month in order to have that service.
Another approach is to show them a copy of your family monthly budget, with line items explaining each and every bill that you pay as well as where the remaining money goes (savings, eating out, entertainment, etc.). You don’t have to get into the specifics of every dollar, but this kind of big picture shows your child that you have to spend less than you earn in order to build any sort of strong financial future.
The biggest key of all? Communication. If you aren’t communicating financial ideas to your children, none of the above strategies mean anything. Talk about money with your kids. Explain why you spend less than you earn and why you’re saving for retirement. Explain some of the spending options you have and why that means you can’t afford a new computer or a great vacation every year. Talk to them with maturity and grace, as if they were an adult, and they’ll listen.