Financial Responsibility Starts at Home

Teaching your children about financial responsibility is one of the most important gifts they can receive. While it can not only set them up to become financially independent, it also teaches them important life values such as self-discipline, strong work ethic, and delayed gratification. But despite the increasing complexity of today’s financial world, traditional schooling doesn’t provide much practical financial education. While college students can study topics like investments, accounting, and economics, classes that provide a complete framework for becoming a financially competent adult are still very rare. 

Because of this, many lack basic financial literacy. Studies on Americans’ finances show that most have no savings, live well above their means, and carry substantial debt. This is a daunting reality. Children tend to pick up their parents’ financial habits. If we truly want to help our kids and future generations to become financially responsible, this education and behavior has to start at home. 

Often, people don’t realize how truly impactful a healthy or unhealthy financial situation can be on their lives. What it really comes down to is being able to fully enjoy life without any real worries about finances. Below are some starting points to raise a financially responsible child.

Talk about money

Many parents don’t discuss money and finances at all with their children. Starting these conversations early on is crucial. One of the most important values taught should be the significance of saving; it is the most critical building block to any successful financial plan. If you can help your children understand why saving money is important, many of the following concepts will come much more easily. It’s not about how much you make, it’s about how much you save. 

As your children get older, you can build on this. Discussing needs versus wants can help teach the essentials. Discuss the most essential expenses (food and shelter) in comparison to the less necessary, but more desirable luxuries (latest gadgets, expensive clothing, etc.). Do not try to keep up with the Joneses – they are often living paycheck to paycheck! As Warren Buffett said “If you keep buying things you don’t need, you’ll soon have to sell the things you do need.” 

Decide on tradeoffs 

Of course we want to provide our children with everything they desire, but there are serious consequences to doing this. A child used to getting what they want may not be able to effectively exercise control over their spending as an adult. One strategy that can help is teaching children about trade-offs. They should learn that everything has a cost and they will need to decide if it’s really worth it to them. If they want something, they must be willing to sacrifice something else. 

Discuss budgets 

Discuss with your children how much things cost – big or small – and make it an activity. For younger children under 10, give them an allowance for each chore they help out with around the house, and explain why they’re doing it. Keep the money they’ve earned visible to them, such as in a jar or give them view-only access to their account online. For preadolescents, set a budget for your grocery store outing and have them help you stick to it. For young adults, include them on bigger expenses such as vacation planning. Provide them with a total budget and have them put together an itinerary by selecting combinations of airfare, hotel, and daily activities. In this exercise, they would learn how to budget while weighing trade-offs and wants versus needs. 

Savings, Charity, and Taxes

It is never too early to give your children a framework for managing their money responsibly. As soon as your kids start receiving money (allowance, birthday gifts, etc.), you can teach them about saving, taxes, and charity. In the younger years, you can provide four “buckets” for all money received: 15% for long-term savings, 15% for a charity of their choice, and 15% for taxes, and the remainder for the child’s discretionary spending. You can explain how taxes are used in the real world, but instead in their situation, this would be more like a “family tax”. The “tax” proceeds would go to an activity that the family will do together and benefit from. With the discretionary funds, your children should be able to do as they choose (within the boundaries of your normal household rules, of course). While it’s important to teach about budgeting and trade-offs, it’s equally important to show that they can reward themselves after they have ‘paid themselves first’. 

Investments

As your children grow older, it is beneficial to start discussing investments. This can be a complex subject to broach, but you can start with the fundamental idea of putting time or money into something now in order to get a pay-off later. Even very young kids can relate to the analogy of planting a seed in order to have flowers or fruit later. As children grow older, you can introduce them to the concept of compound interest. As Albert Einstein described compound interest, those who understand it earn it, and those who don’t pay it. This is a fundamental lesson that all children should be taught. And the best way to illustrate this is by showing them! A compound interest calculator will show $15 per month invested at an eight percent rate of return per year will equal $2,762 in 10 years. This concept is magic to kids. Encourage them to try different combinations, providing further self-motivation.

Instill a healthy dose of skepticism 

In order to become smart, savvy consumers, kids need to learn not to believe everything they see and hear. Advertisements and commercials are designed solely to motivate people to buy and consume. We are all constantly bombarded with images of what we supposedly need to buy. This can sometimes result in a never-ending desire for material goods, which can also lead to many unhealthy behaviors. Instead, try teaching your kids the value of wanting less. If they don’t learn the value of enough, it may be difficult to appreciate the small things in life. 

In addition, there are unfortunately some people who take financial advantage of others. More so, this group of financial abusers sometimes includes friends and family. As difficult as it may be, teach your children the power of just saying “no” – to set boundaries for their finances. 

Summary

Parents want to give their children all the tools to succeed in life. One of those essential tools is financial competence and responsibility. Because these lessons are not taught in schools, parents usually become the role models – either good or bad – for their child’s financial behavior. There are many exercises to engage your children on financial responsibility such as tradeoffs and learning the art of budgeting. Ultimately these skills will result in patience, modesty and delayed gratification, among many other benefits.