Parents are a child’s first and most important teachers. Natural learning opportunities arise daily to teach children lessons in health, safety, manners and morals: eat your vegetables, don’t touch the hot stove, always say “please” and “thank you”, and treat others the way you wish to be treated. All are essential truisms for leading a productive and satisfying life. Just as learning and living these lessons will help forge a path to a successful and happy existence, instilling solid financial values early and often can set children on a healthy financial path and help avoid common but painful financial pitfalls later on in adulthood.
Teaching children the importance of prudent money management is a lesson that is sometimes neglected by even the most caring and astute parents. Among the many crucial lessons children learn at home from their parents, basic financial literacy is often overlooked. Sometimes parents skip this lesson because they themselves struggle with understanding core financial concepts. If parents, as natural family teachers, fail to take the lead by modeling unhealthy attitudes towards money and its true value, children may grow up gaining independence in every aspect of life except when it comes to their money. Achieving a certain level of financial independence is essential to being successful as an adult. Parents can attain much peace of mind by educating themselves on basic financial literacy and passing that knowledge down to their impressionable children.
If children don’t learn the importance of saving money over spending frivolously, they may enter early adulthood with unhealthy spending habits. Eventually this can lead to difficulty paying bills and managing their income, and increasing levels of debt. Ultimately they may become a financial burden to their parents for long periods of time. Laying a solid foundation of positive financial habits while a child is young is much easier than bailing out a struggling twenty-something with a lifetime of bad spending and poor savings habits.
Children tend to follow the lead set by their parents, and taking advantage of the natural learning opportunities that arise to promote financial health is an ideal way to instill this core value. Setting an example of prudent financial leadership for children will benefit both parents and children alike. Parents who struggle with poor spending habits will improve both their own lot and preserve their child’s financial future by turning babits into healthy actions and attitudes that can be modeled by their impressionable child.
FINANCIAL EDUCATION 101: THE EARLY YEARS
Since parents provide for almost everything during the childhood years, some children may think that money really does grow on trees! Money is an abstract concept that eludes many children. The idea that there simply may not be enough money to purchase something might be lost on some kids. Teach your children where money comes from. Explain how Mom and Dad work and earn money for the jobs they do. Think about implementing some sort of allowance for kids to follow as an example. You may want to consider splitting up their allowance and dollars earned into different buckets: some dollars go to savings, some to go helping others, and the rest can be their spending money. Understanding where money comes from and that there isn’t an endless supply of it is key to fostering healthy views about work and money in children. Hopefully over time, children will learn how to avoid impulse purchases and instead save steadily and patiently for something that they really want to buy. The earlier you start introducing financial restraint into your child’s life, the earlier these seeds of positive reinforcement will grow.
THE (HOPEFULLY) NOT SO TERRIBLE TEENS
Any parent who has lived with a teenager can attest to how their toys get much more expensive as they enter high school. Less pricey juvenile toys are out, and adult-sized expenses are in. Cars, clothes, athletic equipment/fees are all expensive hallmarks of the teenage experience. Along with more costly purchases and expenses come opportunities for teenagers to work more, contribute more and save more. Working a part time job as a full-time student engaged in a variety of extra-curricular activities can be challenging. However, seeing first-hand the benefits of saving money and exercising purchasing restraint can help teens look past impulsive purchases and embrace saving money for things that they truly want and value.
We all learn from our mistakes, and teenagers learn best if they are given opportunities to learn from theirs. Although it can be difficult for parents to let their teens make some decisions on their own that may result in some financial discomfort, viewing these times as teachable moments with potentially productive end results may be helpful over the long term.
With higher education becoming more and more expensive, student loans have become a common part of the college experience for many students. Completing financial aid paperwork can be confusing and time consuming. Parents who navigate this process with their teenagers find that their kids have better understanding of loans and interest rates and the importance of paying back their loans in a steady and timely manner. Setting up a plan to pay back student loans also greatly increases a success in repayment, so start having that discussion early on in a student’s first year. It’s never too soon to start talking about prudent financial decisions with any college student.
It may also be a good idea to stress the idea of a summer job to help with their discretionary spending during the school year in college. Have some discussions with your child about how you both want their spending money to be structured. If your college student earns money working as a camp counselor, is he/she responsible enough to divide that lump sum across the entire school year and know what their “budget” is each month? Or, would it help them if you sent them their monthly budget from their hard-earned dollars at the beginning of each month?
Once young adults finish their education, they often move out and take their first tentative steps from a college graduate into the world of adulthood. This is an exciting time, but keep an eye on your kids: they have a new degree but no real life experience. More and more children are deciding to live with their parents throughout their twenties. If this ends up being the case in your family, can your son or daughter pay you rent? Are they maxing out their company retirement plan? Living at home offers your child a very low cost of living and it is your job to make sure they make the most of it by saving and being fiscally responsible. Help your child create an emergency fund for themselves. Three to six months of living expenses set aside for emergencies is suggested. This money should only be used in the event of losing a job, uncovered medical costs, or costly car repairs. Keeping this rainy day fund strictly for adult-world reasons (sorry, pizza delivery is not covered) will help make unexpected expenses a bit more bearable.
THE LEARNING NEVER STOPS
Many new graduates never had to plan out a budget before while living on their own, though they may have had a glimpse of it in college. A household budget is a simple but essential tool for graduates living independently for the first time. They may not know how to devise a budget or where to look for guidance. Parents can share their own household budget as a way of “breaking down” expenses and having a visual representation of their many expenses. Many recent grads may have scant knowledge of the myriad of expenses they are now responsible for paying: heat, hot water, electricity, cell phone bill—all of these things add up! Helping grads understand the realities of their financial situation goes a long way to helping them stay financially afloat. Help them take a look at their company retirement plans and other benefits packages, research credit cards that might be available to recent graduates with little credit history, help them set up checking and savings accounts and begin creating that emergency fund. All of these things will help your kids take steps in the right direction to achieve financial independence.