We believe families are becoming increasingly focused on the need to teach their children about smart money habits. Personal Finance is rarely offered as a high school course, so many individuals enter adulthood without any formal guidance on how to manage their personal finances.
We are starting to see more high schools that are offering life skills or personal finance classes, but many of these could be optional and may be overlooked by students. We have seen that colleges may offer courses in personal finance, but once again, these are normally elective courses and may not required by a majority of the degrees.
Role of Allowance in Building Financial Discipline
One of the most common ways to impose smart money habits is to provide children with an allowance. We feel it is important that this allowance should be payment for household chores or good grades and not just an automatic payment. This creates the drive needed to earn money and shows the children that working hard has the potential to yield financial rewards.
Next, this allowance should be used by children to purchase toys, treats, or other desirables. Forcing the children to use their allowance, instills the idea of savings and gives them a goal to work towards.
Children will not learn how to save money if their parents consistently buy them the things they want, and they are not forced to save towards that goal. This balance of spending vs. savings is one of the most important lessons they can learn.
Introducing Children to the Concept of Taxes and Work
An allowance also introduces the opportunity to teach about taxes, as a portion of the allowance may be withheld from them. Once children are of age, parents can consider stopping the allowance and forcing their children to get a job.
Getting a job (while maintaining grades) is a great way for children to really value their money since they have to work for it instead of spending that time with their friends.
Engaging Kids in Investing
Another idea that can create an interest in wealth is to purchase a stock that your child is emotionally attached to. By buying a company they are familiar with, they keep them engaged in the investment and are more willing to watch it grow. By buying Nike, Microsoft, Apple, etc. children may be very excited to be a partial owner of these big names.
Their one share may appreciate over time, and this may help them to learn the importance of investing. This also opens the door to help teach them the benefit of compounding interest.
Be a Good Financial Role Model
Lastly, it is important to instill appropriate emotional reactions to money. This may be the hardest part for parents to get their children to understand.
We believe this starts with the parents modeling responsible money behavior and emotions. Children learn a substantial amount by observing their parents and family, so it is important to be a good role model.
Impulse buying every item you see will teach your children that it is okay to spend randomly and ignore budget goals. By focusing on savings and smart purchases, children will learn that there is an appropriate time and place to spend money.
We also believe it is hard to educate children on comparing their belongings to another family. This is a very tough topic since every family is in a different financial situation. These conversations can be used to teach children that quality is not always important, and their older clothes or older car are still sufficient. This topic can circle back to savings vs. spending and financial priorities.
Teaching Kids About Money – Summarized
- Our clients have been asking about how to teach future generations about wealth management, so it appears the desire to teach children smart money habits has been increasing over the past handful of years.
- We believe every child learns differently, so the selected option for one family may not work for everyone.
- We believe it is important to be a good role model for children since early habits can grow into lifelong behaviors.
Speak With a Trusted Advisor
If you have any questions about your investment portfolio, retirement planning, tax strategies, our 401(k) recommendation service, or other general questions, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.
We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Zachary A. Bachner, CFP®
with contributions from Robert Wink, Kenneth Wink, and James Wink
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