A parent’s role is to help guide their children to mental and physical patterns that will benefit them throughout their life. One element of overall well-being that’s often overlooked is the need for healthy spending and saving habits. Given that a large majority of consumers struggle with financial stress, it’s a wonderful gift to set your children up for success at an early age. Here are some practical tips to get you started.
Share Your Money Values
While school curriculums are increasingly covering general finance topics, the issue of money can be extremely personal. Take this opportunity to discuss your overall perspective on the relationship between money and your lifestyle, and how your values impact your spending priorities. Teaching these lessons at home offers a chance to pass along your attitudes and beliefs – not only about budgeting and saving, but on larger topics such as how you view entrepreneurship or why charitable contributions are part of your personal spending philosophy.
Start Your Discussions Early
While you might be tempted to wait until your kids are tweens or teens and more apt to be earning their own money, you can start these principle-based lessons far earlier to help them establish healthy ideals.
In many families, kids earn money for doing chores that go above and beyond their regular tasks. Or maybe your kids receive holiday gifts from relatives. These moments present great opportunities to start discussions about spending and saving. If you’ve already established some norms — like saving up for big-ticket items or donating a percentage of their windfall – they’re more inclined to maintain that discipline when the amounts get larger and they have more autonomy. (And, let’s face it, our kids tend to be a bit more receptive to our input when they’re younger.)
Any age is fine to start talking your kids through some of your financial choices at a high level – for example, why you’re making dinner on Friday night rather than spending money to order pizza.
Give Them a Basic Framework for Allocating Their Money
One popular money management technique many financial experts suggest is the “three jar” method, where money is divided into spending, saving and giving. This works well with kids of any age and can become more complex as their needs and earning power grow.
For example, a fifth grader might use the “saving” jar to set aside funds to buy souvenirs on an upcoming family vacation, whereas a teen might start saving for future college expenses. You can even help them plan for the longer term by establishing a Roth IRA and introducing them to the concept of compounding interest. A Roth IRA can be a particularly appealing vehicle because it allows their investment earnings to grow tax-free, but there’s also no penalty should they choose to withdraw their contributions before retirement.
When deciding how much to donate to charity, many families use a 10% rule of thumb, but you can discuss what makes sense. Have your child research organizations or causes that are meaningful to them and ask them what amount would make them feel like they had an impact. You can also talk through choices about how they want to donate. Perhaps they want to regularly give money to a pet shelter, or they might prefer more hands-on involvement where they go to a pet store and purchase warm bedding or food to donate. It’s exciting to watch your kids experience the satisfaction of sacrificing to give to others.
Let Them Make Mistakes
You want to allow your kids to decide how they spend their money, within limits. But in today’s digital world, it can be harder to have insight into how kids spend their money compared with when our parents had to drive us to the store. That’s why you want to be proactive and initiate conversations about their expenditures. You also might want to establish a dollar limit, to ensure they check in before they exceed a certain amount.
It’s okay, though, to let them learn some hard lessons in smaller-stakes scenarios without bailing them out. It only takes losing their hard-earned money once to an online scam to quickly learn that not everything is as good as it seems. Letting them fail is an inevitable part of learning.
Once they start earning their own money, discuss the ground rules about what expenses will now fall on their plate. Talk about what’s fair – if you always bankrolled their sports activities, they might not be excited about spending their own funds. Maybe you agree to handle the league fees while they cover any extra or high-end equipment. Or you may decide to pay their car insurance while they are responsible for gas. You don’t want to undercut their sense of independence by paying for things they can now manage on their own.
Use Tools to Make the Process Easier
Kids live their lives online, and money management is no exception. There are some great online tools available, everything from well-regarded budgeting site Mint.com to apps that help you track chores and allowance payments.
You should also help them set up checking and savings accounts and walk them through how to conduct financial tasks, such as checking their balance online. Letting them use a debit card gives them the freedom to make financial choices and practice in using a card responsibly. A joint account makes it easier for you to have a line of sight into how they’re spending their money and keep a measure of control.
Maintain Open Lines of Communication
Like all parenting conversations, this won’t be “one and done.” Having regular discussions about how your kids are managing their money provides an important touchpoint and allows you to provide guidance on what has worked for you that can help them establish good habits. Use the perspective that you recognize their autonomy and you’re not trying to micromanage, but rather are providing insight. Communicate your expectations and reiterate that for the time being you’re keeping some guardrails up so you can step in over questionable behavior. Your goal is to help them practice making decisions.
Effectively managing money is a life skill that’s vital for success. Instilling good financial habits early on allows parents to give their children a healthy start on their journey toward financial security and independence.
It’s never too early to establish good saving and spending habits – but it’s never too late, either. If you’d like to talk to a professional financial advisor about your own money management, contact us today.
Tom is not affiliated with Cetera Advisor Networks LLC. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.