As parents, our job is to prepare our children to be self-supporting and self-sufficient productive members of society. The time to start this preparation is when they are young, when you can instill in them, good financial habits.
If you are like most parents, you want to provide for your kids. You may even want to give them things that you did not have when you were growing. Unfortunately, by providing your children all of their wants does not instill in them any financial responsibility. One way to help them be responsible is to give them an allowance to purchase the things that that they want instead of just buying it for them.
When my daughter was growing up, she would regularly come home from a shopping trip to the mall with a friend and her mother and report that her friend’s mom spent $200 or $300 on clothing just because her friend “needed” them. Instead of just buying clothes whenever, would it not be better to give your son or daughter a budget, such as $200 or $300 at the beginning of the school year. With that money, they can choose buy two pairs of designer jeans and a couple of tops or a ½ dozen pairs of non-designer pants and ten non-designer tops.
The most difficult part of this is sticking to the plan when your child makes poor choices. For example, if your daughter buys only those two pair of super tight designer jeans that barely fit in September, it is tough to not bail her out and buy more for her in December when nothing fits. Been there, done that. Why not let her use her allowance to buy non-designer jeans?
You do not necessarily want to give the kids the cash to buy clothes. They may spend it on something other than clothes or they may just sock it away because they are perfectly content wearing old, worn out, ill-fitting clothes. It may need parental involvement and participation in the clothes buying process.
You could use a similar technique with your son who wants that $45 hair styling or your daughter who wants a $70 perm. Give the kids a budget, say $20 for their haircut. If they want the deluxe styling, they can pay for it themselves. If they do not have the money, they can settle for the $20 haircut or get a job. Similarly with toiletries such as shampoo and conditioner. Supply the bargain brand. If they want the $50 shampoo, they pay the difference.
One thing that you probably hear from your kids is “everyone has or gets to _________…” You fill in the blank; cell phone data plans, video game consoles or stay up late. This is the kid’s way of learning to divide and conquer. If you are an involved parent, you probably know the parents of your children’s friends. So when the kids say this, call some of the parents and check it out. The likelihood is everybody does not have or gets to ________…
I did this with my daughter when she made such a claim; I called the parents of her friends. Not surprisingly, none of her friends did such and such. Well, I wasn’t particularly popular with my daughter, but neither was she with her friends. After that, my daughter rarely used the “everyone has or gets to” justification.
As part of a birthday or Christmas present, give the kids checks to invest. Start brokerage accounts. Let them pick the stocks, something in which they have an interest, such as Apple, Mattel or Sony. You and the kids can follow the stock and review annual reports.
Start the kids a bank account at an early age. If they have a job, take a portion of their paycheck and deposit it in savings so they are not spending their entire paycheck. How are they going to be taught good spending habits when every time they get a paycheck they go out to the mall, the movies or to a restaurant and blow it all. When they get a little older, they can start paying some of their own bills by check or debit card. Teach them how to reconcile a bank account.
You can even help teach kids financial money management skills using games. One educational and fun game is Cashflow, created by Robert Kiyosaki, the Rich Dad, Poor Dad author. Cashflow is a combination of the game of Life and Monopoly. The goal of Cashflow get out of the Rat Race by building enough investment income to cover your day to day living expenses. Cashflow instills a sense of savings and living within your means. Whether you have drawn the occupation of a janitor or a CEO, you have the ability to win the game and retire before anybody else. It doesn’t matter how much your income is as much as it does how much of your income are you saving.
Through this game, the kids learn the concepts of income, expenses, assets, liabilities and the impact children have on your expenses. Every time you have a child, your monthly expenses go up. Every time you buy a rental property or business investment, your income goes up, as does your assets. If you financed the purchase, your liabilities and monthly expenses also go up. In our family, we spent many a family evening playing Cashflow starting when our kids were 8 and 11. Now there is Cashflow for Kids for younger children.
When our daughter had her first college accounting classes, she found them challenging, but the basic concepts were familiar to her. She called and thanked us for “making her play Cashflow” because she already had a basic understanding of an income statement, a balance sheet, an asset, liability, income and expenses. Next semester, she is scheduled to graduate with a Bachelor’s of Business Administration from the University of Michigan Ross School of Business.
If you are paying for your kids college, do not pay for everything. Have your children pay for something. For example, you could say that once they are grown up, they have to pay for all their own personal items like clothes and toiletries. You would be amazed at how quickly your kids demands change when they are paying for it.
Remember when you were growing up? How did you learn? Most people learn from making mistakes. When you make a mistake or fail and then have to live with those consequences, you will often times alter your behavior so that the consequence does not happen again. However, if you always bail your kids out of those situations, then they never have any incentive for altering their behavior and being financially responsible.
I often come across adults who are financially illiterate because during their entire lives, Mommy or Daddy bailed them out. When you pay your son or daughter’s utility bill because they spent the money for a new leather jacket or designer jeans for themselves or their kids, aren’t you really enabling more bad financial behaviors? Similarly, if you always let your child come back home whenever he or she gets into some financial jam. Every time you buy a new car or appliance, is it always the same child who takes the old one? Are you really helping your children or are you assisting them to continue to be financially illiterate?
As you get older, there often becomes a point where you no longer want to handle your own financial affairs. You may want a child or other family member to take those duties over. If you have not instilled good financial skills in your children when they are young, how do you expect them to be able to then take care of you when they are older?
When your children are going to take over your finances, wouldn’t you want them to have the skills to not only take care of you but also take care of themselves? You do that by starting at an early age to teach them good financial habits.
By: Matthew M. Wallace, CPA, JD
Published edited September 14, 2014 in The Times Herald newspaper, Port Huron, Michigan as: Teach your children well about money