Teaching toddlers about money is different than teaching teenagers, but some core principles of financial education persist from age to age. That is, I believe the lessons appropriate for each age group should be structured to support a set of key tenets that remain constant no matter how old or young your child may be.
Skin in the game
Who really cares if an expenditure was a good value or a waste of money? Someone who worked hard to get that money, that’s who. Our kids don’t have to work in coal mines or farms — or at all, in most cases. Nonetheless, having “skin in the game” in some manner makes money a far more valuable resource and ups the ante when choosing how to spend it.
It could be a matching system to encourage saving; for every dollar the child saves toward a specific, approved purchase, perhaps you contribute a dollar — or ten dollars. Maybe it’s about extra chores, desired behaviors, grades or eliminating bad habits. Maybe it’s the kid’s responsibility to save or earn all the money before you’ll say yes to the purchase (or privilege).
Whatever it is, having some skin in the game means the decision will be more meaningful and the accomplishment more rewarding for your child. And if turns out not to have been a such wise decision after all, that lesson will be far more memorable than if the mistake was entirely funded with someone else’s money.
Money is a scarce resource. You know it, but your kids don’t. The best way to impart this truth is to provide children with the opportunity to manage their own money and carefully set the level of funding. The key is to make sure that your child’s “income” at every stage is adequate to meet all needs but only some wants, at least in the short term.
This sets the stage for kids to start distinguishing between wants and needs, setting financial priorities and making longer-term financial plans that involve saving. It’s a difficult lesson but one we must all learn if we are to manage money wisely in a world where money does not, in fact, grow on trees.
Money and the marshmallow test
Delayed gratification sucks. Unfortunately, when we aren’t willing to delay the gratification of desires that involve money, we run into trouble. Delaying gratification allows us to reap the benefits of compound interest rather than suffering the financial pain of being on the other side of that equation. It allows us to save for the car, house, vacation and retirement lifestyle we want rather than the one we’ll have to settle for if we can’t learn to control our impulse spending.
As parents, we have a duty to make this truth apparent to our children. Incentive systems are a great tool for teaching children to delay gratification. If your child wants something enough to save toward it, consider providing matching funds to ensure the waiting period is a reasonable one — because no amount of self-control is enough if the rewards of delayed gratification aren’t close enough to seem real.
It’s also best to help children avoid an all-or-nothing approach to saving for specific goals. He’ll be more likely to stick with squirreling away a portion of his spending money toward that new Nintendo system than he will if he tries to save it all, giving up movies and candy and everything else for weeks or months.
Spending is essential
Some kids are good at saving. While saving is wonderful, it’s very important that children do spend some money from time to time. Going through the difficult process of deciding what to spend those accumulated assets on and then actually shelling out the money and living with the results is crucial.
If kids consistently save without spending they are only getting comfortable with that one aspect of financial management. Learning how to handle the decisions, the anxiety, the rush of avarice, the regrets and all the other feelings that swirl around spending is a big part of financial education.
Until they’ve gone through this process over and over, they haven’t really learned to manage money. Be supportive and gentle as you walk them through the process of making thoughtful spending decisions, but don’t let them avoid it altogether.
Your money, your lesson
Learning some lessons the hard way helps kids gain financial skill as well as confidence while the stakes are low. It isn’t easy watching your children make decisions you believe they’ll regret. Spending your allowance on garbage you’ll just throw away tomorrow? We want to stop them, to help them avoid the pain of realizing they made a mistake … but we shouldn’t.
When we let them fail now, we equip them for financial success later. Our kids MUST have the opportunity to make decisions and experience the consequences, even when those consequences are lousy. They’re learning what happens when they handle money in different ways.
Of course, we can share our advice and insight if kids are open to hearing it. But ultimately, unless it’s an area where we really do need to be involved (college, cars, potential financial exploitation, etc.) the decision has to be theirs. Their money, their choices, their lessons.
Part of the team
Kids only deal with a limited amount of money, and there are important financial concepts they have no exposure to unless we show them. Show them the mortgage statement, so they can see interest and debt repayment in action. Talk about insurance and let them compare the rates you pay versus the payout amounts. Discuss the cost of your new vehicle and the shape of the depreciation curve as its value drops.
Weaving this kind of information into regular interactions encourages kids to ask about concepts they don’t understand. It also allows you to touch on fundamental values of financial management like avoidance of debt wherever possible and saving as an automatic, ongoing activity. Your children should also see how these financial principles work within the household.
Kids should participate in family meetings, contribute to household budget conversations and be involved in some of the spending decisions — in an age-appropriate manner. I’m not suggesting your kids should have as much financial say as the adults, by any means. But to help them move towards self-sufficiency and a establish a comfortable relationship with money, kids benefit from real-world observations and the opportunity to participate in financial analysis and decisions within the context of your family’s household finance management system.
This article is excerpted and adapted from Financial Education Resources for Parents, a guide I created to help parents raise financially savvy kids. To receive a copy of this comprehensive resource, click here.
Meredith C. Moore, Registered Representative, offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, A Licensed Insurance Agency. 1125 Cambridge Square, Suite C, Alpharetta, GA 30009 (770) 587–0281. Financial Adviser offering investment advisory services through Eagle Strategies LLC, A Registered Investment Adviser. NYLIFE Securities LLC and Eagle Strategies LLC are New York Life Companies. Artisan Financial Strategies, LLC, is not owned or operated by NYLIFE Securities LLC or its affiliates. Neither Artisan Financial Strategies, LLC, nor its advisors provide tax, legal or accounting advice. This is provided for general informational purposes only.