Teach Your Children Well (About Money)
Money’s not the kind of thing most of us can afford to let our kids experiment with. Put yours on the path to not being freeloaders with these strategies.
Our kids are clueless and we're definitely part of the problem
Part of the deal with being a parent is teaching your kids how to move and survive in the world. Finances are a part of that bargain, but a lot of parents struggle with how to teach their children about money. Fully half of parents are reluctant to talk to their kids about money or financial topics, according to T. Rowe Price’s most recent Parents, Kids & Money survey. Here’s another kind of scary stat: According to T. Rowe 33% of kids think their teachers at school know more about money than their parents do — clearly it's time to step it up, parents!
How far down the money rabbit hole you go is up to you, but here are some entry points:
Easy: Give them an allowance or salary. There are many opinions on how to do this optimally, but there are benefits to giving your child an allowance. The truth remains that your teens can’t learn to manage money if they never have money to manage. Use whatever metric you want to provide an age-appropriate allowance every week. You must be consistent with this, so withdraw the cash you’ll need for several weeks at a time. (Because the biggest stumbling block here might be that no one carries cash anymore.) Decide what expenses they’ll cover with this money. “Is it things like food and transportation?” says Robin Taub, CPA, CA, author of A Parent’s Guide to Raising Money Smart Kids. “Going out with their friends? What are you paying for, and what are they paying for?”
Advanced: Give them a budget. Calculate how much money you spend on your children in as many categories as you’d like (clothes, gas, phone, recreation), and give them that cash so they can manage the expenses themselves. This is best done less frequently—once a month or every two weeks, say, like a salary—so they can learn to handle bigger chunks of money. This requires that you not only help them understand their budget, but that you understand your own so you can give them a realistic amount to work with. It’s also critical that you don’t bail them out if they blow this opportunity once or twice.
Easy: Help them open a checking account. Many banks will allow you to open an account for a teen if you already have an account there. Teach them how to check their balance, how to deposit and withdraw money, and get them a debit card they can use for certain expenses.
Advanced: Help them open an investing account. This might be as simple as helping them put money into a money market account that earns a little interest, or—if they’re earning money from a part-time job or odd jobs throughout the year—you could open a Roth IRA for them, and show them the basics of index funds.
Easy: Narrate your financial decisions. Your teens are watching you manage your own money life, so explain what you’re doing. When you buy something because it’s on sale or because it’s a cheaper alternative, point it out. Talk about coupons, about comparing prices, about sales tax. If you don’t buy something because you feel it’s too expensive, talk about your decision. If you’re saving for a vacation or for their college fund, discuss your progress, and how you’re making it happen. The more you can set an example for them, the better equipped they’ll be to make their own money decisions. “Take that extra 10 seconds to talk about why you made that choice,” says Michael Micheletti, director of corporate communications for debt resolution company Freedom Debt Relief. “Why did you choose to get the generic version of the Ziploc bags and not the Ziploc bags themselves? That’s something that could be applied to a 4-year-old, a 14-year-old or a 24-year-old.”
Advanced: Talk to them about taxes. One in five kids have heard their parents talking about taxes when they thought the kids weren’t listening, according to T. Rowe Price. Taxes — and the other things that get taken out of a paycheck—are a fact of life and will affect what your teen brings home from every job they hold for the rest of their lives. Take out one of your paychecks (or examine one of theirs) and explain what’s being withheld (Medicare, Social Security, taxes) and why.
Easy: Teach them to allocate their money. If you give them an allowance, do it in small, dividable bills so they can break it up into categories like spend, save, and donate. Help them learn to pay themselves first by putting, say, 20% of all money they receive in the save jar, envelope, or account. Teaching kids to save money early can have a significant positive impact on their financial literacy. Help them learn to help others by putting some percentage of all money received into a donate jar, envelope, or account. “When the money reaches a certain threshold, let your child make a suggestion for how they want to allocate it,” says Tim Steffen, CPA, CFP and director of advanced planning for Baird Wealth Solutions Group in Milwaukee, WI.
Advanced: Teach them about interest by matching them. Show them the power of compound interest by matching their donations to their savings. For instance, you might match 50% of the money in their savings fund each month, incentivizing them to keep money saved and showing them how quickly earnings can add up. You might also consider matching their “donate” money so they can feel they’re making more of an impact.
Easy: Talk to them about credit and how it works. Your kids have probably watched you swipe your credit card for most purchases since they were born, but have you ever talked to them about what’s happening? Discuss how credit fits into your overall money management strategy—charging certain purchases each month and paying them off at the end of each cycle. Let them see your credit card statements and have them watch as you make the payment each month to pay it off in full (hopefully). Point out the interest rate on your account and explain what would happen if you didn’t make a payment (late charges) or if you didn’t pay in full (interest charged). “If you do that, you’ve done about 90% more than the average parent,” says Susan Beacham, CEO and co-founder of financial education company Money Savvy Generation.
Advanced: Add them as an authorized user on one of your credit cards.This will not only help them start establishing a credit history, but it will allow them to experiment with how to use credit responsibly, under your watchful eye. On some cards (American Express, for example), you can set a different spending limit for an authorized user, which can be helpful. Talk to them about who will be paying their portion of the bill each month. If that’s you, discuss what kind of charges are allowed. (Gas? Yes. Dinner for all their friends? Um, no.)