Kids typically don’t pick up basic life skills through osmosis. They have to be taught how to clean a bathroom, check the oil in their car, and manage their money. Often what they have learned about money is “ask and ye shall receive.” As you can probably guess, this bit of wisdom doesn’t lead to financial independence. A good financial education can provide a wonderful foundation for your child as he learns to manage wealth on his own.
The goal of financial education is to form financially responsible adults with positive values about money and useful financial skills. Financial training and education should begin as soon as children are old enough for pocket money, around kindergarten or first grade. There are several good programs on money management for children available in your local bookstore or on Amazon. These offer common-sense approaches and point out typical mistakes that can derail the enterprise. One such example we like to recommend is Making Allowances: A Dollars and Sense Guide to Teaching Kids About Money by Paul Lermitte with Jennifer Merritt.
Keep in mind that the biggest obstacle to the success of financial training is whether busy parents will commit the time and energy to stick with it!
The details of the plan that you decide to use can vary, but generally it should include the following elements:
1. Develop an allowance system.
An allowance system is a basic contract between you and your child that guarantees you will give her a set sum of money to cover out-of-pocket needs on a regular schedule. In return, she agrees to responsibly contribute to the family by performing basic chores. Start simply and add funds and complexity as your child demonstrates readiness. The allowance amount should be appropriate for their expenses. By adolescence, kids should be able to manage their clothing budget. By the time they reach college they should be able to handle all of their own living expenses within the budget they are given. This will give them lots of experience having to make difficult choices. Do they save money to travel on spring break or buy new clothes every month?
2. Let them control their own funds.
Resist the temptation to “help.” Let them learn from their mistakes. No bailouts! On the other hand, do not use the allowance as reward or punishment for behavior.
3. Talk with your children about money and your family financial decisions.
Show them how you decide to make substantial purchases, shop for the best product/prices, ascertain what you can afford. Be sure to provide examples of decisions that include delaying or denying purchases.
4. Use moderation in your giving.
It is not good for your children to have the most expensive and latest of everything. No teenager ever needed a $300 pair of shoes!
5. Give them something to work for and save toward, for example, an iPhone or a car.
Help them learn the habit of putting away a portion of their income (gift and earned) for a larger project. As they master the early stages they may able be handle to loans and repayments for larger purchases, though saving is a better model.
6. Help them establish the habit of giving to others.
Remember, however, it is not theirs to share if you have handed it to them. In order for them to feel the benefit of giving, it needs to come from their own pocket.
Beware the financial education you provide your children will bring up all your own issues about money. You will discover what those are as you implement a money management system for your children. Over-protectiveness will come up as you find yourself tempted to give them a “bailout” when they have overspent. Equating money and self-worth will lead you to want to give your kids expensive gifts to keep up with their schoolmates. Using money as a reward or punishment will demonstrate your own need for control.
We hope you will follow one of the excellent programs that offer detailed instruction in wealth management. While education is essential, it is not enough on its own. The deeper challenge lies in developing character, values, and a commitment to living a life of purpose. Formation of character and values within family practices plays a prominent role in limiting the negative impact of wealth on your children. This is the topic of our next blog in this series.
We originally wrote this series of three blogs on “Raising Children in a World of Wealth” for our friends at Highland Capital. Highland Capital is a wealth management firm that is dedicated to not just managing their client’s money, but also are invested in helping them live fully. Read the first blog here.
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