Teaching your kids about money
By Casey Smith, President, Wiser® Wealth Management
My wife and I were standing at our back window one early morning looking at our grass that seemed to have grown overnight. As we were observing, my wife said, “is that Kate’s new doll in the yard? Look, there is Ethan’s baseball glove! They just don’t seem to take care of their stuff.” I said, “It’s like they don’t understand that we work hard to provide them these things!” This was our aha parenting moment to start searching for new ways to prevent our children from being entitled. Ultimately, we want them to understand that success and the “things” we desire come from hard work, and are not just given to them. Children need to understand this early so when they become young adults they make better decisions.
Some of the best success stories come from individuals rising out of adversity. My children may thankfully not have the opportunity to arise from a situation that would be labeled as such. This is even more reason for me to provide the best possible guidance when it comes to teaching them about personal finance.
As the owner of a financial services company, I see how many parents are able to guide their children to be productive, successful adults. But, I also see that financially successful parents do not automatically make successful children. There is a recipe of sorts that is applied through parenting that makes the child successful. Over the last fifteen years, I have at times stopped giving financial advice and asked for some of my own. I’ve interviewed families about what they thought made their children turn out well and even marry well. Teaching them about money was one of the topics.
There appears to be two common strategies that parents deploy to teach their children about money. I have labeled them the Enterprise and Entrepreneurship strategies.
For many Americans, we go to school, graduate and get a job. We may move from one job to another but other than bonuses and pay raises, our income is fairly fixed. In this situation, we have to learn to live within our paychecks. Parents that live in this model will naturally gravitate towards teaching their children in the same manner. The child will get a weekly allowance and these funds can be spent at the child’s discretion. Chores, like taking out the trash, making the bed, vacuuming or yard work are a part of being a member of the household and are not compensated directly. The Enterprise model is fairly common and can be used to teach children how to manage their weekly allowance. While this may be a suitable model for some, I wanted my children to understand that money is not just handed to them for being good household citizens.
In the Entrepreneurship strategy, money is earned based on the amount of work performed. The more chores or tasks completed, the greater the payday. The concept here is to tie work to income. While there is certainly work related to the previous Enterprise model, it is tied to being a good citizen. Here, the kids are responsible for turning in a chore sheet each Friday for “payday.” There are some daily tasks they are not paid for, like making the bed and personal care. If there is any complaining during the execution of the chores, they are not allowed to mark their chore chart.
In addition, when opportunities arise we try to teach our children how business works. Recently, at a family yard sale, my wife made cookies for the kids to sell. They sold 20 cookies for a dollar each. When I told them they had to pay their Mother seven dollars for her material cost, they were a little shocked. It was a great lesson on how business works. As they get older, the tasks and lessons on running a business will become more advanced.
In both scenarios, children receive money, usually weekly. For budgeting, we take from Dave Ramsey’s envelope philosophy. We have three envelopes marked with save, give and spend. Ten percent is put in the give folder. This is to be given to church or an organization that helps others. Twenty percent is saved. When they get older, we would like them to set a goal of something for which they want to save. The goal in teaching delayed gratification is to long-term keep their revolving credit card debt down or eliminated. There are no interest free loans from Mom and Dad or five easy payments of $19.99!
The spending folder is for just that, spending on candy at The Home Depot check out, toys at Target or anything else that might catch their eye. If they do not have enough money, or they left it at home, then they simply cannot purchase it. This rule has helped cut down on the begging at any store with a toy aisle. Outside of birthdays and holidays, we purchase only the basic needs of a nine and seven year old. They will earn their wants through their work.
There is a trend that I call advanced budgeting for teens. Once a month, Mom, Dad and teen sit down and work out a monthly household budget. The teenager sees the incoming funds and expected expenses and then helps manage the implementation of the budget for the month. This will repeat each month, maybe for a few years. I will admit I was shocked when I first heard this. I don’t think my parents even had a budget much less would think to include me on one. For affluent families where the child will be inheriting a trust fund, maybe as soon as graduation, this is a great idea. For families that want their child to do as I say and not what I do, this could be more challenging. Either way, the child should be well educated in cash flow management by the time they graduate from high school.
Our young clients who consistently save and budget well generally have parents that did not save well and they see the effects. We also see parents that had sound financial money management techniques who have children that don’t have the first clue about money management. Because schools and colleges are not offering classes in sound fiscal responsibility, we must start our children out on the right path, even if we did not take the right path ourselves. Financial stress can cause health issues, relationship strains and overall stress. Helping your child understand that money is not just handed out, it is earned and then how to manage the funds once received will set a strong foundation for their financial health.
Casey Smith is owner and president of Wiser® Wealth Management, a wealth management firm based in Marietta, GA. Wiser® Wealth Management helps clients identify, understand, and commit to a long-term planning and investment objective that is realistic and appropriate. The investment and planning solutions are based on putting the client first by operating as a fee-only firm and accepting fiduciary responsibility. For more information, visit www.wiserinvestor.com.