Teaching My Kids About Money
My kids ages range between 5 and 8 and lately they have been asking more questions about money. They are showing a real interest in how they can earn money, what they will spend it on and how we as a family handle money. As a financial planner, I know how intimately involved money is in every part of our lives and I genuinely think that my wife and I have the opportunity to set our kids up for a happier, easier life by building a strong financial foundation in childhood.
During my own childhood I remember learning some valuable lessons about money. But, there are other financial lessons that my parents didn't discuss that would have been helpful when I started working. As a young teenager, my step-father taught me about stocks and mutual funds and how money can work for me. This early exposure to investments helped me take advantage of compounding growth for a longer time and led me to pursue a career as a financial planner. I am so thankful for learning this at a very young age.
One area that I wish I would have learned about earlier in life was creating a budget and making wise spending choices. I look back at the money that was wasted and wonder what my accounts could be worth now. I also would have liked my parents to be upfront and honest about their personal finances like what they did right, what they did wrong and creating good habits. There is a lot of wisdom that could have been passed along but that opportunity was missed.
With my own experiences and knowledge I plan to do things different with my children but at the start my goal is to keep it low-key. Have basic conversations about money, answer their questions honestly but make sure they understand that the information stays between us. I want them to have the opportunity to make their own financial choices in a low pressure environment so they can learn from experience and start getting comfortable with having and using money.
Here are five points I am emphasizing to myself when teaching my girls about basic money skills.
1. Modeling good behavior
Our kids watch and absorb everything we do. The good and the bad, it all gets recorded in their brains and most of it gets repeated at some point.
So when it comes to money, my first goal is simply to be a good example. We talk about choices we have to make, needs versus wants, tithing, saving and spending. They hear my wife and I talk about money and how we want to make good decisions that put us in the best financial position possible. I know it is making an impact because there has been times when we go into a store that one of the older girls says, "We don't really need that," or "If we spend money on that then we can't buy this."
2. Talking about money when it comes up
I really don’t want to be the guy who lectures his kids about money all the time, but I do try to talk about it when it comes up. More than anything, I want my kids to know that it’s something they can be comfortable asking me about, and it’s also an opportunity to start framing financial decisions in a healthy way.
Next time you are in a store and your child asks to buy something try to acknowledge their interest in the item but let them know that it is not on your list to purchase. This will help reinforce that we decided ahead of time what we wanted to buy and that we’re going to stick with those decisions. Having a consistent message and response is the most important rule.
3. Giving an allowance
We have tried paying them when they help do one-time jobs but I want them to be more consistent and have regular responsibilities. So, we plan on starting to give them a weekly allowance but with a twist. We want to incentivize them to not spend the money they earn immediately and delay gratification. My plan is to give them an option of taking the money now or wait until the end of the month and receive a bonus/interest earnings.
We will help them create goals (maybe they want to save up for specific item but it will take a few months to get it), give money to church, etc. The point is to not look for ways to spend it as fast as possible.
4. Allowing them to invest
When our youngest daughter earns some money or the Tooth Fairy visits her she always brings me the money and says, "Put it in my account." I smile and give her a hug because it shows me she is listening and starting good habits.
I have started to explain to them where I put their "savings" and why I invest their money. They don't fully understand the concept but they know that the clothes, shoes, electronics and movies they enjoy are created and sold by corporations. They know that they are owners, though ever small, in those same companies and that when they make money their account grows.
Their births coincide with the start of the current bull market so we haven't had to talk about long declines in their account balance. Eventually, it will happen and this will be a great teaching opportunity to stay calm, remain patient, and take advantage of being able to buy stocks when they are on sale.
5. Allowing them to take on debt
Eventually I’m going to let my kids borrow money from me and pay it back with interest.
Earlier I noted that we will help them create goals and save their allowance for a larger purchase. I plan to teach them about borrowing, interest and paying it back. Maybe, they really want a new tablet and have saved up half o the amount needed. Well, maybe they can borrow the half from me and pay me back over the course of the next year with interest.
Just like with investing, my goal here is to give my kids experience with debt and start to understand its purpose. They can experience the convenience of having access to more money than they’ve saved, along with the struggle of having to pay me back out of their allowance every single week.
These are some practical ways you can help your children develop an appreciation for the importance of sound money management. This may be one of the most valuable gifts you give to your children.