Giving Your Children the Financial Skills They Need

How we grew up heavily influences how we handle our finances as adults. When we have children of our own, it becomes our turn to carry the torch. Since our job as parents is ultimately to raise self-sufficient adults, teaching them how to handle money is one of the smartest – and kindest – things we can do to set them on a path toward professional success and personal happiness.

As is the case with most parenting quandaries, there is no one, slam-dunk way to raise financially responsible kids. This can either feel freeing or overwhelming. Wouldn’t it be nice if there were a simple how-to guide you could follow and – voilà! – your kid works hard, saves his earnings, avoids bad debt, and invests wisely?

The good news: while there’s no single way to raise children who are self-motivated and financially responsible, there are several parenting principles that that can shape your child – and they have nothing to do with household income.

From Diapers to Dollars

When is it appropriate to begin talking to your children about money?  A generation or two ago, discussing financial matters with children was considered taboo. Times have changed. Most financial experts agree that introducing the subject of money to your preschool or kindergarten age child can set the stage for financial literacy.

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Children this young have little to no concept that their toys, toothpaste, bananas, and scooter all cost money. Begin by casually inserting this idea into your daily conversations with your preschooler. A simple trip to the grocery store can illustrate that each apple, box of raisins, or whatever food they enjoy, costs a certain amount of money. Every once in a while, pay cash and let them see you hand off dollars and coins to the cashier. For a kid, observing this transaction can transform money from a purely theoretical concept into a concrete thing you exchange for something you want.  

Where does money come from?  Kids see that on most days, daddy and/or mommy do some mysterious activity called “work.”  Explain to them what this means – that you perform your job for many reasons, but primarily in order to earn money to buy the items your family needs: food, clothing, and shelter.

Many of today’s parents have adopted a pared-down ‘bucket’ system. While there are many iterations of this, the basics are when a child either earns or is given money, he must divide it into three components: spend, save, and give. The exact percentage that goes into each bucket is up to you to decide (we suggest simply dividing the total into thirds) but this system instills early on the ideas of delayed gratification and charity, while still allowing the fun and learning experience of making consumer choices. 

The Allowance Debate

To give or not to give?  Many parents of school-aged kids struggle with this dilemma.

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There are three main camps within the allowance debate. The first holds that children should not be paid for doing the daily tasks that are expected of them. After all, no one pays you for taking out the trash or doing laundry. Insisting that your child contribute to the family by tackling simple chores such as keeping a tidy room instills a sense of teamwork and gratitude for everyone’s efforts. Should he complete bigger, “extra” tasks such as walking the dog or washing the car, he may be rewarded with money or by non-monetary means such as extra screen time or doing some other enjoyable activity.

On the opposite spectrum of the allowance debate, kids receive an allowance if they complete a set of assigned chores. The thinking here is that children will make the connection between work and money if they have to ‘earn’ it. Once they make their weekly pay, they still must divide it among the three buckets. An allowance is an opportunity to make money in a way that reflects adult life.

The third choice – a philosophy I wholeheartedly do not recommend – would be to simply set an amount of money your child automatically receives each week. This scenario takes out the chore debate while also providing room for them to learn how to allocate and save. That said, some studies show that giving kids a regular, unconditional allowance does more harm than good, as it literally teaches kids that they can get money for nothing.

When it comes to an allowance, the most important thing is to be clear and consistent – this helps children learn to make plans for anticipated income.

As your children mature, the issues change, and there are ever more opportunities to observe and shape their fiscal behavior. By now, you know your kid’s tendencies. Perhaps your daughter is a natural spendthrift who saves up for the items she wants, but your son’s buddies have the latest tech gadgets and he can’t resist splurging. It can be especially difficult as a tween or teen to have the maturity to resist wanting the latest clothes or games.

Material items can be exciting in the moment, but unwise consumer spending is, in reality, a byproduct of a deeper desire to feel good about ourselves (I’m just as cool as they are), even if the long-term impact will make us feel worse (I can’t afford to retire). The credit card companies know this, which is why college campuses are riddled with their marketing voodoo.

Real Life Tips for Raising a Financially Savvy Kid

The Don’ts

  1. Avoid being frivolous with your money – yes, even if you earned it and it’s your right to do as you please with it.
  2. Resist buying point of purchase items, like the tempting candy and magazines at the grocery store checkout. This sets an example that spontaneous purchasing decisions are routine.
  3. Don’t bail them out – it limits their own accountability around money. Allow your kids to work out their own financial problems. If you help them, their money missteps will only become bigger as they mature.
  4. Many parents who both work try to make up for the lack of time they are around their children by buying them a lot of things. Unfortunately, this is the exact opposite of what kids need. Even 30 minutes of quality time a day is better than trying to “buy love.”
  5. Don’t let them have everything they ask for.

The Do’s

  1. Talk about money. Look for chances big and small to be honest about what’s financially possible for your family and what’s not. Let middle-school kids see how much the weekly grocery store budget is and have them help you shop. Start talking about college finances during high school.
  2. Take your child to the bank, or at the very least let him or her hold a check before depositing it in the ATM, and then explain it’s money and it’s going into savings.
  3. Discuss your consumer choices with your kid. If you drive a Honda Accord instead of a Lexus, make it clear you spend less on the car so your family can have money for other things.
  4. Bring the children with you to the Goodwill, and explain some families aren’t as fortunate so we share things we don’t use anymore.
  5. Encourage your children to seek out a job when they are teenagers, even it’s volunteering.

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Encouraging financial literacy is an enormous gift – one you have the power to give no matter your current income level. By following the strategies above and embarking on your own quest for healthy financial habits, you can become the role model your children need to see.