Helping Children Become Financially Responsible Adults

Kathy Longo, CFP®, CAP®, CDFA Monday, 28 August 2017

Helping Children Become Financially Responsible Adults

Adults are faced with challenges (and advantages) that can date back to our experiences as children, particularly when it comes to money values. Our long-term financial perspectives are strongly influenced by money conversations and experiences with parents. However, even kids that grow up in the same household can end up with very different money values. For example, my 12-year-old son is a “spender” and money seems to burn a hole in his pocket, while my 11-year-old daughter is a “saver” who always seems to have cash in her piggy bank (or other hiding places her brother doesn’t know about yet). On the other hand, our “spender” son pooled all of his birthday money a year ago to buy stock in Apple through a great website called stockpile.com and has resisted the opportunity to cash out whether the stock has gone up or down (fortunately for him, mostly up over the past year ). 

But how do people learn lessons in money management and financial decision making? We all have a money story and each of ours is different. This money story likely begins in childhood and has shaped who we are as adults. Some people have repeated the money habits of their parents, and they have faced financial setbacks or successes depending upon the outcome of their financial choices. Many people have also learned from their parents’ financial mistakes and made financial decisions based on those lessons. Or, as experienced in my family, people can grow up in the same environment and develop very different money values. Whatever the results, our upbringing has created deep roots that impact financial choices.

But how do people learn lessons in money management and financial decision making? We all have a money story and each of ours is different. This money story likely begins in childhood and has shaped who we are as adults. Some people have repeated the money habits of their parents, and they have faced financial setbacks or successes depending upon the outcome of their financial choices. Many people have also learned from their parents’ financial mistakes and made financial decisions based on those lessons. Or, as experienced in my family, people can grow up in the same environment and develop very different money values. Whatever the results, our upbringing has created deep roots that impact financial choices.

As a parent, you are hardwired to do what you think is best for your child. In many cases, lessons in money management and financial literacy tend to fall by the wayside as parents are busy during the day then spend much of their family time getting to activities, preparing meals, or completing other tasks. Despite our hectic schedules, however, it is important to create learning opportunities for your children about money decisions to build a solid foundation for their choices in life. An approach that we have used is to help our kids put money into share, save, and spend categories as a way to understand the purpose of money. Although we can’t necessarily control what money values our children will have in their adult years, parents can actively influence positive attitudes about money conversations and provide education that doesn’t happen in school.

Financial Education Starts at Home

Parents who model healthy financial habits are more likely to successfully instill similar habits in their impressionable children than those who take a “do as I say, not as I do” approach to financial education. Children learn financial attitudes by observing and absorbing their parents’ financial behaviors. If their parents spend recklessly, children may learn to view money as an unlimited commodity to be treated frivolously. Those who exercise financial restraint and emphasize the value of financial prudence are better equipped to pass those attitudes and habits on to their children.

Teach Early and Often

As children’s first and most important teachers, parents have a unique opportunity to exhibit healthy behaviors for their children at all stages of their development. Every day brings natural learning opportunities for parents to introduce and explain financial concepts to their kids. Taking advantage of these opportunities as they arise is crucial – those moments not taken may not necessarily come around again. Your children will only be young and impressionable for a finite amount of time. Instilling solid financial habits starts early and continues throughout your child’s early twenties. Each stage in development is unique and so are the financial lessons that can be taught and learned. For example, at a young age our oldest daughter designed and created her own credit cards at home to buy things she wanted, which was a great opportunity to explain that credit cards are a form of borrowing money so using a credit card to make purchases isn’t free (and needs to be approved with a credit score check). She was upset that it wasn’t so easy to get a credit card despite her creativity. 

Natural Teaching Tools

Chores and allowances are great tools to show children how saving money over impulse buying is intimately connected to eventually obtaining things that they truly want. Money earned through work should be treated respectfully and the decision to spend should be taken seriously. There is an important physical aspect to money when kids can see it in a location, either through an app or in a piggy bank. These are bedrock financial concepts that must be learned for your child to eventually build financial independence as an adult.

By the time children are in elementary school, they should grasp the financial basics of spending and saving. One mistake to avoid is when parents act like a bank by loaning money against future allowances to a child who wants to buy something that costs more than they have saved. Although many parents are happy to advance a loan, they rarely have the discipline to demand repayment, much less charge interest. As so many young adults taking their first tentative adult steps can attest, the discipline involved with repayment of loans (college loans and credit cards especially) can be elusive if one did not receive a real-life financial education during their early years.

By the middle school years, kids should have been introduced to the key concepts of saving, budgeting, investing, taxes, and inflation. While a few rare schools offer formal education on these topics, most children need to learn them at home or risk not learning them at all. Again, parents are the best and first line of defense to ensure children receive thoughtful and prudent guidance on these abstract concepts with tangible, real-life consequences. A simple glance at your news feed will often give you current events that illustrate how these concepts impact daily life and provide a teachable moment in a child’s financial education. In addition to conversations and learning lessons, there are apps like iAllowance, Bankaroo, and Piggybot that have recei ved great reviews from parents and children alike because they introduce key money concepts in a way that families can share.

Putting Lessons into Action

As children grow into their teen years, the prices for their major expenses skyrocket. Since teens have more opportunities to work and increase their earnings, they have ample opportunities to learn real life lessons in finance. This is a great opportunity to truly understand the difference between “need” and “want”, particularly when a budget is in place. The eternal dream of most every teen is owning a car. However, the personal freedom that comes from having your own car comes with financial obligations: the financial burden of saving money to purchase and own an automobile. Buying a car provides many real-life lessons on key financial concepts including saving money and/or obtaining a loan for initial purchase, paying for expensive repairs, keeping up with scheduled maintenance, the daily reminder of gas costs, and the ongoing expense for car insurance. Teens have ample opportunities to experience for themselves the importance of saving over spe nding, restraint over recklessness, and prudence over impulse. 

Managing Debt in Early Adulthood

As children progress through their college years, additional financial lessons are available like not taking on any more debt than needed. College loans are a necessity for many students, for example, and provide real-life lessons about the importance of understanding interest and repayment. College students are also inundated with opportunities to open credit card accounts to cover discretionary spending, frequently resulting in a significant debt burden to confront at graduation. There is also a learning opportunity in the college application process by discussing the earnings potential of various college degrees along with the value of one school compared to another relative to tuition expenses. It’s far easier to teach a child natural lessons in financial responsibility than to bail out a struggling twenty-something recent college grad who is burdened with confusing and debilitating debt.  

Financial Literacy

Although we have an obligation to model proper financial behavior and capitalize on money learning opportunities for our children, many parents struggle with understanding key financial concepts. Parents should view their own ongoing financial education – and their ability to pass that knowledge on to their children – as an essential investment in their child’s future. Financial wellness is one of the greatest gifts a parent can impart to their child, and unfortunately the education system can’t always be relied on to teach these lessons. We encourage parents to create an atmosphere that is conducive to money conversations with your children because it will have a significant impact on the life of your child, while fostering an environment that will help them pass those lessons along to the next generation.

For more information on teaching your children powerful financial lessons, you can also read this related article.

About the Author

Kathy Longo, CFP®, CAP®, CDFA

Kathy Longo, CFP®, CAP®, CDFA

Kathy Longo brings over 25 years of expertise and experience to Flourish Wealth Management. Kathy is wholly dedicated to improving the life of each client and finds joy in making complex matters simple and easy to understand. She excels at asking the right questions, uncovering new possibilities and implementing the most advantageous strategies for success. Playing such a pivotal role in her clients’ lives remains an honor and a privilege. After earning a degree in Financial Planning and Counseling from Purdue University, she began her career at a small firm in Palatine, Illinois where she worked directly with clients while learning to build a viable, client-centric business. Over the years, she gained extensive knowledge and wisdom working as a wealth manager, financial planner, firm manager and business owner at notable, various sized companies in both Chicago and Minneapolis.

 

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