All parents want to see their children become successful adults. Academically this means taking the time to help them with their studies, paying for tutors, college, and possibly post-graduate schooling. It also includes many hours at sporting events, dance recitals, and other extra-curricular activities. Unfortunately, many parents forget to teach their children the basics of money.
Understanding how to manage personal finances is a critical, learned life skill. From early childhood through early adulthood, parents have the ability to provide guidance on all things financial.
As a parent you have many opportunities to influence your children’s relationship with money. By following some basic principles and using some of life’s moments as teaching moments, you can give your children the gift of a solid financial foundation. When you make a habit of teaching your children about money matters, they will understand the value of money, appreciate what money can and cannot do for them, and be on the path to a lifetime of financial independence.
Let’s start with ten fundamental principles you can follow as you teach your children about money:
- Set a good example for your children – Make sure that you have the proper money management skills and are making good decisions in your own financial life.
- Make money conversations a part of everyday life –Be open with your children about the value of money. It is important that children know that you work to earn money, are responsible for paying bills with the money you earn, and often have to make difficult decisions about your money.
- Be open about family finances – Do not hide family finances behind closed doors. Allowing children to hear you speak openly about budget choices, goals, investing, and credit makes them comfortable talking to you about their financial decisions.
- Talk to boys and girls in the same way – The era of dad as the family’s breadwinner and chief financial officer and mom and dad never talking about money are gone. Teach your sons and daughters the same lessons and set the same financial expectations for them.
- Use an allowance as a tool for understanding – An important tool in teaching basic budgeting and saving skills. While the parents will provide guidance, allowing your child to manage this money will help their skills grow.
- Open a savings account, then a checking account when appropriate – Explain to children how compound interest works along with showing them through their own savings account. Once they are ready, open a checking account with a debit card.
- Instill good credit habits – While the first car purchase is a good place to start, it may be better to teach younger children how credit works with the “Bank of Mom & Dad.” After successfully managing their “Mom & Dad” account, you might consider following up with a joint credit card during the teen years.
- Teach children about investing – This should start at an early age. For younger children this could be saving for a “big” purchase. Over time, however, this should lead to actual investing.
- Allow your children to make money mistakes –Bailing out your child from a bad decision will teach the wrong lesson. Allow them to make mistakes early in life with small financial decisions.
- Teach your children to set financial goals – Showing your child how to set aside a portion of an allowance or money they have worked for in order to purchase a larger item is a great aide in learning how to reach a financial goal.
At Magellan Financial, Inc. we believe money management skills are best learned and practiced over time, since dealing with money and finances is a lifelong journey. There are a number of key, life milestones that can be used as part of the learning experience – first allowances, purchase of a car, going to college, and moving out on your own. What could be better than using a significant moments in everyone’s life as a learning opportunity?
A big moment in a child’s life is the day he or she receives the independence of having their “own” money. By giving your child an allowance, you have the opportunity to introduce him or her to the skills involved in money management and budgeting. When you start is a personal decision, but many parents begin sometime between the ages of 5 and 10 years old. Whenever you start, make the amount you are giving appropriate to child’s age, and you should consider increasing the amount as your child gets older.
It is essential to set clear expectations for your child. This would be the time to explain budgeting, introduce the concept of savings, and define how the money will be used. Every family is different, with some using household chores as a way to add a work element to the allowance or giving the child the ability to increase the amount received for additional work around the house.
Regardless of the specifics, you must support your child in the decision-making process and allow them to make poor decisions. And when they do make a poor financial decision, avoid rescuing them, as a bailout will send the wrong message.
During the teen years most children will take on some form of employment. For some, the initial job may be babysitting or odd jobs around the neighborhood, while others may work part time in the summer at Dorney Park. The specifics are not important. What is important is the opportunity your child has to develop independence both personally as well as financially.
The first job is where he or she can begin to learn responsibility and work ethic. Before starting that first job, your child should understand that work comes with expectations from the employer. It doesn’t matter if the job entails washing dishes or seating people in a restaurant; what matters is showing up for work on time, doing what is expected of them, respecting their supervisor, and becoming a part of the team.
The first job is also the first opportunity they will have to manage an income, pay taxes, and save for future. Do you remember the surprise when you received your first paycheck and you realized that $5.00 per hour didn’t really put $5.00 per hour in your pocket? Use this as a learning experience.
Buying a Car
Getting a driver’s license is a big moment in most people’s lives. For a teenager this is a moment of new freedom, but also new responsibilities. As a parent you have the opportunity to teach some very important money lessons.
Even before your child takes the driver’s exam, you should have a conversation about the day-to-day cost of auto ownership (or usership if he or she will be driving one of your vehicles). Gas isn’t free and insurance isn’t cheap. While every family handles the costs differently, you should make sure your child has an understanding of these costs and which of these costs will be their responsibility.
If you plan on purchasing a car for your child, or they plan on purchasing one on their own, you have the opportunity to teach about value and the value of research. Do you purchase a new or previously-owned vehicle? How much money are you willing or able to spend? What car gives the best financial “bang for the buck?” And even if you intend on paying cash for a vehicle, you have the opportunity to discuss financing and how it compares to a cash purchase.
For parents, planning for college should start soon after birth with a savings plan for a portion of your children’s college expenses. It is never too early to begin saving. For the child, the planning starts in the later high school years, beginning with the research process for both a school and a career.
As a parent you can use this time to teach your child about decision making process as well as value. With the rising costs of an education it is important to make a decision that will give your child the best chance of success, while not overburdening anyone with large amounts of debt. By expecting your children to be in the loop on financial aid as well as understanding the loan rates/terms they can gain an understanding of the value of money.
Once at college, children develop greater independence, both personally and financially. In many cases, this will be the child’s first experience living away from home. Before they leave for freshman orientation, have a conversation about the student’s financial obligations as well as a review of everyday living costs. And if they don’t have a savings account and a checking account, its a good idea to make sure they have one before leaving home.
Finally, the moment of parental success – the day your child moves out of your house and are “on their own.” If you have been following the plan, your child should be ready for the real independence and financial responsibility of adulthood. Over time you have instilled the fundamental principles of money management. They have learned how to save and invest; they know the value of money and what it takes to earn it; they know how to budget; they have established credit and know how to use credit correctly.
As a parent you have many opportunities to influence your children’s relationship with money. By following some basic principles and using some of life’s moments as teaching moments, you can give your children the gift of a solid financial foundation. When done correctly, your children will understand the value of money, appreciate what money can and cannot do for them, and be on the path to a lifetime of success.
*Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
Additional information is available upon request.
For more information, Magellan Financial, Inc. can be contacted at 610-437-5650 or via email.