When I was a late teen, my family went through some difficult financial times. I was beginning my sophomore year at Boston University unsure how tuition would be paid. My father’s business took a rapid downturn with the New England economy in the late 1980s, and his plan to cover my higher education expense was no longer an option.
I learned a lot from those years and believe sharing my experience has helped many of my clients avoid the mistakes my father and others made. It is important to prepare your children to survive and succeed on their own and function independently, as my siblings and I did, just in case the plans you have for your children don’t materialize.
One of the most important things to do with children is to talk to them about money. With four kids at home from ages 13 down to 3, I am constantly asked to buy things, especially online virtual things. Rather than always refusing their requests, I try to limit this type of spending and hope to teach the kids something in the process.
Many experts recommend the principle of delayed gratification. Rather than simply refusing my kids frequent requests for V-bucks on the popular online game Fortnite, for example, I might offer to buy some before an upcoming trip, so they will have them to use on a long drive or flight. Hopefully, this delayed purchase is understood by the kids and at least helps them learn to wait to get something of value.
For more expensive purchases it is recommended to wait at least a day to make sure the item is still wanted before making the purchase. In general, it’s important to teach children why you say no to some things they want now in order to enjoy better things in the future. We shouldn’t only tell a child “no” but should also explain the reason. When one of my children complains that an item they want is only $10, I let them know that $10 requests on a daily basis add up to over $3,000 per year and with four children that could pay for a very nice trip for the whole family! This helps put the actual value of money in perspective.
Parents should let children make some mistakes with their money. When a child has accumulated some money from birthday or holiday gifts or from a periodic allowance, it is fine to let them make a mistake with their purchase decision. By spending small amounts on a cheap toy that breaks or something that ends up not getting used, they will hopefully learn to make better choices in the future when they are faced with much larger purchasing decisions.
The key here is to let children make some financial decisions on their own, with limited parental guidance. After observing their buying activity, it may be wise to ask kids questions about their experiences with the purchases and let their own answers better inform them. For example, I’m waiting for feedback from my daughter about her recent purchase of highly overpriced designer sneakers to observe if there is any regret.
A weekly or monthly allowance is a great time-tested way to teach children about money and budgeting. Some experts suggest giving an amount equal to a child’s age starting as young as three. So, a three-year-old would get $3 per week to spend on whatever they wanted. They could save up to buy a toy or use the $3 to buy a treat at the grocery store. An unresolved debate among parents is whether an allowance should be tied to doing chores or getting certain grades in school. Most experts agree that it is a mistake to give an allowance for behaviors that are expected of children like being nice to siblings or putting their toys away.
My daughter recently got a raise in her weekly allowance to $20 per week now that she is 13. I decided to give my kids allowances starting at age 10 with $10 per week. For this allowance, they have a list of responsibilities that they need to follow which includes items like keeping their room clean, doing all their homework, and other seemingly simple things that are expected. If they don’t clean their room on occasion that is fine but if it happens consistently then they will lose that week’s allowance. The hope is that each child will learn that getting an allowance, as with a future work paycheck, comes with responsibilities that need to be met.
It is a good practice to supplement the allowance with extra money for chores that might be outside the usual list of responsibilities. Extra money for washing the family car or babysitting younger siblings are a few examples of bonuses that may be given to a child looking to make a little extra money for something they want or to add to their savings. This practice reinforces the fact that money is earned, and that children, as well as adults, have the opportunity to earn more if they choose to apply themselves.
Since each of our kids was born, we have piggy banks in their rooms and have added birthday and holiday cash gifts to them. Being a financial and investment manager, it has always bothered me a little to leave any amount of money sitting in cash, even though the opportunity lost in the piggy banks isn’t huge since they just hold small amounts.
I make it a point to talk to my children about what I do for a living, and it warmed my heart recently when my seven-year-old son asked me if we could take the money in his piggy bank and invest it to earn interest. With interest rates on savings accounts up significantly in the past year, I thought this would be a good opportunity for my son. We opened the piggy bank and all the bills and coins added up to $498. We took $450 of that and opened an online savings account which is currently paying almost 2%. Although he will only earn just under $10 in a year in interest at this rate, he will be learning a valuable savings lesson, and hopefully will be motivated to add to the account as he gets future gifts during birthdays and holidays.
My thirteen-year-old daughter recently celebrated her Bat Mitzvah and decided to take a majority of the money she got as gifts from family and invest that money into stocks for long-term growth. This was another proud moment for this financial professional father!
For those parents that are also business owners, it is good to talk to kids about business and, without necessarily getting into specifics, the basic finance behind running the business. I explain that my clients pay me an ongoing fee to manage their money and advise them on financial decisions and that is my revenue or income. My business employs a handful of people, pays rent in our office, pays taxes, and has other expenses, and the difference between the revenue and these expenses is the business income or profit. After paying taxes on that income, all the money left over is ours. Understanding what it actually takes to generate net income to live on and invest is very important.
It is good for children, especially as they enter the teenage years and start to think about their future, to think about how they will one day support themselves. Will they be employees and work hard to get annual raises or will they start a business and work to grow that business and draw income from the profits of the business?
A few years ago, my daughter learned to make slime at home. This a mixture of shaving cream, glue, and other things. She then packaged it in zip lock bags and sold the mix to other kids at school. I was so proud of her for starting a business so young. Though her “profits” were only in the hundreds, it was a great experience. There were no business expenses to her as the supplies for the slime were underwritten by dad, but I didn’t complain. This short-term business experience is an invaluable lesson.
When I was young I mowed lawns and did some gardening for neighbors to make money. I didn’t consider it a business while I was doing it, but looking back it was certainly a small business, and I learned from it.
Raising kids is complicated and very few states require personal finance courses be taught in school. Parents need to start young teaching their children in daily situations and in terms that they can understand. From the most basic conversation that ATMs don’t hand out free money to the more complicated discussion about investing a teenager’s summer earnings into a Roth IRA, there is a lot of material to cover.
Raising a child that becomes financially independent does a lot of good for that child. It also does a lot of good for the parents as their financial plan remains intact since their child no longer depends on them beyond the college years.
Many books have been written on this topic and I believe that many of our schools could offer more ways to help prepare our children for their futures through improved personal financial education. I plan to share more ideas about best practices for parents in future articles.