Two of the questions I ask every new client is “how were you raised with money?” and “if your kids were here now and we asked them that same question, how would they respond?” It’s extraordinary how few clients tell us that their parents actually taught them about money, saving, or debt.
Like many things, raising children has changed a lot over the years. Especially when it comes to raising financially responsible children. With the rise of digital banking and the decline of cash, the concept of money is even more difficult for children to understand than ever before. Especially because we no longer touch cash on a daily basis and who balances a checkbook anymore … who even HAS a checkbook?!
Harold and I have a long list of creative, yet practical, ideas for parents to help set kids up for success. Here are a few ideas for every stage:
Elementary Children
- Play store and restaurant
Playing store isn’t only a fun way for kids to use their imagination, it’s also a tool for them to learn the value of money at a young age. By exchanging money for goods, whether that be a service, product, or food, they are learning the basic concept of commerce. You can use simple products from around the house and create fake money (or use those Monopoly dollars) to shop til’ you drop.
- Incorporate your kids into shopping
Make your young ones your newest shopping buddies! Before your next trip to the store, have your child clip coupons and make a shopping list. When you’re at the store have them search for the products on their list that have coupons. They will love feeling like they’re contributing, and they will learn the value of products and how to save money along the way. When you get to the checkout, be sure to use cash so they understand the tangible value of goods.
- Open your child a savings account at your bank
Once they have an allowance, it’s time for a savings account! Help them open a children’s savings account and encourage them to make regular deposits. Explain simply that the bank pays people back for saving money in them (even though interest on bank accounts is very low today). Visit the bank for deposits and get excited when your kids’ money grows.
Middle School Children
- Instill a habit of saving
Once our kids, Bas and Finn, started earning an allowance, Harold and I taught them to put their money into 4 “buckets” – SAVE, DONATE, INVEST and SPEND. We divided their allowances into the following percentages:
SAVE – 20% of their allowance went into this bucket. This was short-term savings for something they wanted to buy, such as an X-Box that they saved together to buy.
DONATE – 10%. They chose which charities they wanted to support through the years.
INVEST – 20%. Harold and I matched their savings as a way to teach them about the match that their employer would have one day.
SPEND – Whatever was left they were free to spend.
Hint - it’s never too early to start a Roth IRA. As soon as they have any source of income, even an allowance, setting some aside in a Roth IRA can lead to increased financial security in the future.
- Showcase the value of giving
A key piece of financial responsibility is setting aside funds to donate. With each allowance, your child receives, encourage them to set aside a portion to donate to those in need. Make it an exciting occasion by letting them research various organizations and select one that means the most to them. Then set up a separate savings account, giving jar, or giving account on an app like Greenlight or FamZoo to make it easy to give regularly.
- Use games to simulate investing and spending
A simple way to get your young teens comfortable with finances is to play games like Monopoly or Pay Day. If you want to take it one step further, start teaching them about the stock market through imaginary investing. Together with your child, pretend to invest in companies that they are familiar with, such as Disney. You can make it a family competition by having each family member choose a stock to “invest” in and then watch the news each day to see how they perform.
High School Children
- Encourage teens to get a job
An allowance is great but working for another individual or company is even better. It can be as simple as doing yard work for a neighbor, but it teaches them the value of hard work in a way that models real-world finances. When they were in high school but too young to get a “real” job, Bas and Finn started “Dutch Boys Odd Jobs”. Through the years, they mowed, raked, weeded, cleaned garages and gutters, planted plants, power-washed decks, and more. They had business cards made and realized that if they did not engage in marketing, they would not get jobs or earn money. They set their rates, regretted that they were too low that first year, increased them the next year, and faced the discomfort of having to tell the prior year’s clients. They even felt the sting of losing one client. Once he was 15, Bas worked at Rita’s in Williamsburg. He liked working with the public but disliked the communal tip jar. Finn sold knives one summer.
They are currently 19 and 20 and still working while taking a gap year (Finn) and in college (Bas). They still save 20% of their earnings and it goes into their ROTH IRA’s and we still match their savings. They’ve learned about paying taxes, a valuable lesson as well.
- Teach them about the magic of compounding interest
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it”.
Warren Buffett equated compounding interest to rolling a snowball down a hill …
We can’t do any better than this video, which explains graphically both simple and compound interest.
- Give them financial responsibilities, even if small
It’s easy for kids to think that money grows on trees. We, the parents, can feel like mobile ATMs handing over cash to our kids. Our job as parents is to help our kids become meaningful members of society. Helping them learn hands-on about budgeting and what things cost is a true gift to our kids. There is no right or wrong here in terms of what you make them pay for – gas, going out, clothing, car insurance. Do what you feel is right and fits your family’s circumstances.
Young Adult Children
- Get their credit scores ready for the real world
Even if they don’t have student loans, this is a valuable time for them to start paying attention to their credit score. Teach them how to pull up their credit report for free and how to read it. Explain to them what could affect this score and brainstorm ways to improve it. Simple ways to boost this are using credit cards responsibly and paying bills on time. If they do have student loans, make sure they understand how their student loans work, including interest, and how to pay them.
- Teach them how to pay their taxes
Whether we like it or not, taxes are an inevitable part of life. It is important to get your children comfortable with the process and complexities of taxes while their finances are still fairly simple. Offer resources, like this one, to help them be prepared to file their taxes but let them do it themselves so they learn the system and terminology.
- Encourage them to start building an emergency fund
Emergencies happen and you want your children to be prepared when they do. Even though you may be there to help them out in challenging times, they shouldn’t be reliant on that. Have them start saving until they have at least 3-6 months of expenses set aside. This may be a great opportunity for you to match what they set aside to encourage continuous saving.
- Start saving in a 401l or 403b
When they get their first job, get them started saving in the 401k or 403b at their company, at least enough to get their company match, which is essentially free money.
There is one thing each of these stages has in common. Talking openly about finances is priceless and sheltering kids from financial realities does them no favors. Trust us, they will be grateful for it in the future. One of my favorite books, RaisedHealthy, Wealthy and Wise, says it best with quotes from adult children who have inherited significant estates from their parents. One states, “Thank you, thank you, thank you for requiring us to work – in the home, outside the home, in high school, and out of college. You have given us gifts that are worth more than any money we could inherit: an internally sustaining purpose and motivation in life and an understanding of the world outside the wealth we’ve known.”
Looking for a way to get the conversation started? Let your financial advisor help! We are here to help facilitate conversations and ensure your entire family has the tools they need for success in the years to come.