This past weekend I was barbequing with a group of friends, all dads of teenagers and younger, and one of the subjects talked about was how to teach our kids about money. We complained about how the subject is rarely taught in schools but agreed that it's our responsibility to give these tools to our kids. Teachers have enough on their plates already anyway.
We also talked about how technological advancement is bringing rapid change to so much in our lives, including personal finance, that it's more important than ever to arm our kids with the proper tools. In a fast-moving financial world where money is often a concept (and a changing one at that – think Bitcoin) versus something real, cash in your pocket, it's got to be hard for kids to learn about something they can't feel or see. Or maybe it's just hard for parents.
According to a study from T.Rowe Price, a mutual fund company, 74% of parents feel squeamish about discussing finances with their kids. 42% avoid the topic altogether and 28% lie to their kids about it. While the latter is unfortunate in many ways, it's understandable that many parents have a hard time discussing money-related topics. After all, behavioral science has shown how our relationship with money is often flawed, so it's natural to want to shield our kids from that. But the sad reality is that in doing so we're likely perpetuating the problem.
The group of dads I was with seemed to be addressing the topic although the methods used were all over the map. Some of the dads gave cash allowances, either as compensation for chores or as a hand out. Others helped their kids set up kiddie-businesses like car washing. And others involved their kids in household shopping, even requiring the kids to cook weekly meals and giving them the money needed to buy ingredients.
The group also discussed ways to do this in an increasingly cashless society. Several dads talked about ensuring kids use cash for transactions, instead of debit cards or other electronic means, to simplify their understanding of an already challenging topic.
But the group was talking more about tactics than longer-term strategy. And the conversation started getting hazy when we turned to the core money principles we were trying to impart to our kids. Were we trying to teach them that hard work earns a paycheck, that stuff costs money and you better be prepared, or about managing a budget and weighing opportunity cost?
Being a financial planner who normally works with adults, I wanted to consider some of the core principles involved and see what others have to say about the subject. After reviewing several lists of how-tos available on the web, here are some principles to keep in mind as you teach your kids about money (all are easier said than done, by the way).
Setting a healthy example – Our feelings about money are often set at an early age and have little to do with dollars and cents. Kids easily attach emotions to money long before they understand the details and these emotions typically last into adulthood. So, start the education early and be aware of how your actions and attitudes toward money are being soaked up by your children.
Demonstrating opportunity cost – Making one decision inevitably impacts our ability to make another. Talk with your kids about impulse buys and how hard it can be to weigh decisions and potential outcomes. Invite them into your decision-making process at the grocery store, website, or car dealership. Make it real and not just another lecture.
Budgeting and saving are virtues – Managing our personal finances is a huge responsibility, no doubt about it, but it's worth the effort. In fact, it's one of the keys to personal happiness. How so? Have you ever met a happy person who's up to their eyeballs in debt?
Understanding credit and interest expense – Our culture seems full of willing credit victims who perpetually lose the battle with credit card companies. If we can help our kids with the first three principles, they should be able to defend themselves against the onslaught of credit offers they'll receive as adults and hopefully make more informed decisions about borrowing.
Teaching our kids about money is hard, but there's no excuse for not trying. The longer we wait, the worse it will likely be for them (and us) later. Whatever methods we use, so long as we try to impart core principles like these we should be able to set our kids up to make better financial decisions when it matters.
While there are lots of websites about this topic, here's a link to the T.Rowe Price site that has some good nuggets of information.
Have questions? Ask me. I can help.
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