All parents hope their children will grow up to become independent, financially savvy adults.
Unfortunately, many don’t turn out that way. Americans of all ages are hopelessly behind the curve when it comes to handling money responsibly. It can create lifelong stress and struggles with debt.
Fortunately, there are things you can do now to teach your children to handle money the right way. With any luck, your lessons will work so well that Junior will become rich enough to take care of you in your old age.
Following are several lessons to teach your kids to boost their financial intelligence.
1. Patience pays off
When Rod Griffin was a child, he wanted a dirt bike. It took him two years of saving, but at age 12 he achieved his goal — much to his mother’s chagrin.
Flash forward many years, and Griffin — who is now senior director of public education for the credit reporting agency Experian — decided to teach his own young grandchildren a lesson about the need to be patient when saving.
One day, Griffin’s grandchildren found a quarter stuffed into the seat of his car. They wanted to use it to buy ice cream. So, Griffin encouraged them to save the quarter and to continue to look for more money until they had enough for their sweet treat.
Occasionally, Grandpa hid more money in the seats. As the grandchildren found the coins, they kept track of how much they discovered until they had enough for a cone.
2. Financially successful people live below their means
Financial success is usually the result of years of self-control. A big part of that discipline involves living within or below your means. If every dollar that comes into your life has to go out, there’s little hope for getting ahead.
Remind your children to keep their overhead lower than their income, and to pocket the difference. And urge them not to let every bump in income become a boost in lifestyle.
The value of this becomes obvious when they constantly blow their allowance, and then you refuse to budge on something they really want.
3. Debt is a form of slavery
Runaway debt can create havoc in your life. What happens if you lose your job or get an illness that health insurance does not cover? How much stress would you feel in that situation?
Debt, especially unsecured consumer debt, is a form of slavery. The debtor is beholden to the creditor because each day the debt remains unpaid, interest charges pile up. Over time, it’s easy to see how the unchecked use of credit can erode wealth and foreclose opportunities.
But how do you teach this lesson before it does real damage? In the real world, banks don’t hand out free money, and neither should you. So try giving them a credit card.
Before your heart starts palpitating, understand that we are not talking about a real credit card. Instead, make up an index card that has a spending limit written on it — for example, $40.
When your child really wants something — but hasn’t saved enough in allowance to pay for it — ask them to use the “credit card” to get it. Again, make sure the child pays you back with interest. And as with a real credit card, make sure the interest payments continue to accumulate the longer the debt goes unpaid.
Keep a running tally on paper so it’s easy for the child to follow how the debt is stacking up. And when they start complaining it’s unfair, explain how that is the point.
4. It’s better to lend than borrow
You can also let them “turn the tables” on you as a way to teach them that it’s much better to be the lender than the borrower. Every now and again, borrow money from your kids and pay them back with interest.
If you borrow $5 at 10% interest, you will eventually pay them back $5.50. Explain that the 50 cents is like paying rent to use the money.
Don’t be surprised if they catch on fast. Tiffany “The Budgetnista” Aliche, author of “The One-Week Budget,” says her father used this approach, and it wasn’t long before Aliche’s sister was haggling with Dad in an attempt to charge a higher interest rate.
5. Save aggressively early, and you won’t have to save so much overall
Saving is a long-term proposition. No matter how modest the amount, starting the savings habit early pays off. A broader time horizon means more years to:
- Benefit from compounding interest
- Experience upswings in the market
- Recover from downturns in the market
- Refine your investment style
This can be a hard lesson for a child to follow, since by definition the time horizon they’ve experienced is pretty narrow. But it’s worth trying to walk them through the math.
6. Pay yourself first
Learning to pay yourself first is an important part of financial security. Direct a healthy portion of your income into an IRA, 401(k) plan or savings account before your paycheck even hits your account. Otherwise, you’ll have to constantly fight the temptation to spend every dollar.
Tell your children how to automate savings and make that an unwavering part of their routine. Doing so puts the twin forces of time and compounding interest on their side.
One idea is to open a savings or investment account for them — a future college fund or money toward their first car — and keep them updated on the numbers over time.
7. Forget about impressing the Joneses
It’s easy to access some of the trappings of wealth in our society, but it’s difficult to actually afford them. Buying new cars, big houses and designer handbags might impress others, but these goods often mask high debt and a precarious relationship with credit.
Don’t confuse easy access to credit with real wealth. Although it doesn’t seem nearly as sexy, real wealth is usually the product of responsible spending, maximizing the value of every dollar and trading glitz for modesty and security.
You’ve learned that lesson over a lifetime. Try to pass on the wisdom to the next generation. One opportunity might be when your child or grandchildren is inevitably embarrassed you don’t have the newest car or phone.
8. Everybody’s selling something — and you don’t have to buy it
If you don’t teach your family about money, the TV will. And looking to popular culture for cues on how to manage your money is a bad idea.
In real life, there is no shortage of companies trying to get you to spend — from credit card lenders increasing your credit limit to banks steering you toward the largest mortgage for which you qualify.
It’s important to learn early to avoid get-rich-quick schemes, and to tune out people who tell you that purchasing the nicest clothes, the flashiest cars and the hottest stocks will make you rich and happy.
Tell them to remember that they are in charge of making money and they decide how it gets used.
Steer your kids or grandchildren toward reading websites like this one, and learning from the experiences — and mistakes — of others. To rise above the financial clutter, children need to become students of personal finance and critically assess the information that’s at their fingertips.
9. Clear financial goals succeed
Financial goals can be too broad — such as “buy a house,” “save for retirement” or “keep paying our bills.” To succeed financially, goals need a big dose of specificity.
For example, it’s fine to shoot for buying a home. But what kind of house suits your needs and lifestyle? What size of down payment would leave you with a comfortable mortgage?
People who can answer these questions in detail will have better-defined goals that, in turn, can motivate them to make better financial decisions.
10. Sometimes you have to learn the hard way
Sometimes, a painful lesson is the best teacher.
When Rebecca Lusk was a child and her family went on vacation, her parents put her daily spending money in envelopes. She was free to spend the money in any way she chose.
On the first vacation, she spent all her money on the first day. She was sorry later in the week, as she found other things that she wanted to buy — and that she preferred to the items she purchased earlier
On the next vacation, Lusk changed her strategy. She created a budget and reviewed her spending options more carefully. At the end of the trip, she even had some money left over.
Now a young adult, Lusk rates her money management skills as “pretty good,” and says she sets financial goals and weighs every purchase carefully.
“Money is a precious thing,” Lusk says. “You work for it.”