By the time they finish high school, many kids still lack a basic understanding of general financial concepts including knowledge of how and why to save money, how a checking account works, what credit is and why it is important, and a basic understanding of stocks and bonds. Teaching children financial responsibility is a lifelong process.
As parents, educating children about the fundamentals of personal finance, which is the foundation from which they ultimately develop and master financial independence, is critical.
It’s a process that ideally begins early in life and as they grow, expands to include discussions about the purpose of money, what wealth is, the importance of doing meaningful work, and the value of a strong work ethic, with the ultimate goal of raising individuals who are able to successfully make their own financial decisions.
Here are some of the pitfalls to consider as you embark upon this formative effort as well as some of the valuable teaching moments you won’t want to let slip by.
Pitfalls Along the Way
Raising financially savvy and responsible children is not always straightforward. As parents, even the best of intentions can lead to unintended consequences along the way while trying to instill money lessons, including:
Using money to influence behavior
It can almost be instinctual to offer your child money in exchange for a desired behavior or performance, such as promising money if your child earns good grades, performs well in school, or in an extracurricular activity. There are various points of view about whether this is a good idea. But there is at least one less desirable consequence with this approach – it can discourage independent action and decision making.
While some believe money helps motivate a child to achieve a goal (helping them to feel compensated for hard work), it can also be viewed as using money to reward kids for things they should want to do anyway. And what happens to that motivation when the monetary reward isn’t there? The potential outcomes include loss of motivation for achievement, or children growing to feel entitled to the money or putting too much focus on the money rather than the actual act.
While occasional financial rewards may be fine and, as parents, you want to be supportive of your children, it is important to remember support does not always have to be given in monetary terms. You can balance this approach with offering emotional and psychological support, which may have a more positive and meaningful long-term impact on the development of a child’s independence.
Confusing financial support with emotional and psychological support
Emotional and psychological support can be equally, if not more effective when trying to raise financially responsible and independent children.
Intangible rewards such as verbal praise or non-verbal things like hugs, or a high five, can be more empowering for a child in terms of developing hard-working and ambitious people. These emotional rewards can also be far more enriching for the parent-child relationship, bringing you closer.
When to Help a Child Financially
For families who have the ability to help children financially, it is important to think carefully about your beliefs surrounding the purpose of wealth and whether you are actually enforcing those beliefs when giving your child money.
You will also want to consider whether giving your child money encourages their ultimate financial independence or furthers their long-term dependence on you to survive, and which of these results you are trying to achieve. A Pew Research study found that 65 percent of U.S. adults between the ages of 18 and 29 said they had received financial help from a parent in the preceding 12 months.
If you prefer that your children grow less reliant on you as they get older, it is important to have a clear idea of when to help them financially and when it may not be best to do so. Because ultimately, while you want to help, you also want to raise children who are fully able to stand on their own. Achieving this balance requires being strategic about when you provide financial assistance.
As an example, it is a good idea to have young adults be responsible for paying bills of their own that fluctuate because doing so requires them to think about prices and budgeting. Examples include credit cards, gas, Wi-Fi, or cell phone bills. Parents can instead focus on assisting with fixed expenses such as rent and insurance and perhaps set a limit for how much they are willing to help with these expenses, allowing the child to ultimately make the choice of what place to rent or car to buy based on these limitations.
When your children are young adults, you might also consider giving them a lump sum of money to help cover such things as rent, utilities, and groceries, which requires them to pay the bills from the money themselves, budgeting along the way to make it last. At the same time, if your child wants extra money for entertainment or things, this approach requires that he or she work to earn the extra money on their own.
True Teaching Moments
There are some incredibly valuable teaching moments in our child’s lives, opportunities to both help them financially but also teach them about the value of money and how to use it wisely and thoughtfully. Here are some of the top examples to keep in mind.
Assistance in higher education
As your child begins to compare colleges, be sure to speak with them about considering how much each school will ultimately cost. This discussion should include tuition, room and board, and other associated expenses.
Naturally, you won’t want to let the price tag discourage your child entirely. Instead, talk about the value of a particular college degree and how much they might earn not only by choosing a certain field of study but also the impact of choosing a good school that comes with a strong, lifelong network of peers who can prove helpful professionally.
These discussions are also a good time to delve into how much you plan to contribute to your child’s college education and how much they will be expected to contribute, so that a child understands their role and that they too bear some financial responsibility. You might even consider having these conversations as early as ninth grade.
Assistance in purchasing a first home
Many parents want to help their children purchase a first home, ensuring that they have a safe, comfortable place to live. Having the means to help your grown children buy a house or an apartment is a wonderful thing.
Helping a child purchase a first home is also an opportunity to impart valuable money lessons. It is an opportunity to talk about shopping for a property and doing so within a budget as well as to teach young adults about the many unexpected costs that come with homeownership and how to plan for these unexpected costs.
There are also many valuable financial benefits associated with homeownership to teach your child about, including owning property expected to appreciate in value versus paying rent, the tax benefits of being a property owner, and the associated potential of establishing a good credit history, all of which are important to explain and discuss so that your children understand these critical financial concepts moving forward.
Assistance in starting a business
Starting a business is a traditional way to build wealth and helping your child begin this journey is another important educational opportunity you won’t want to overlook. What’s more, teaching this skill can actually begin quite early.
For instance, rather than your child spending summers watching TV, or playing video games, you might help them start a summer business, which can be a memorable way to encourage creativity and confidence. Beyond the traditional lemonade stand, a child can pet sit, babysit, rake leaves, tutor, or use their creativity to make items to sell to others.
No matter what their age, it’s important to talk to your child about choosing a business they are passionate about, helping to ensure they don’t lose interest in it.
Even for older children who may need financial assistance in starting a business, you can use this opportunity to teach your child the need to set goals, make a plan, and understand the concept of money management in the business context. They will also need to be aware of any legal requirements of starting a business as well as the necessity of paying taxes on what they earn – all of which are teachable financial moments, and ones that, once understood, help develop financial independence in your child.
Assistance in starting a family
Finally, the financial realities of starting a family are significant and there is much to teach your child about how to juggle this responsibility successfully. From the cost of childcare to healthcare, housing, and saving for their own children’s schooling and college education, there are many money-related topics to consider and cover when the time arrives.
There are also changes in taxes that come with an expanding family and perhaps housing changes, as they size up to accommodate their growing brood. All along the way, there are important discussions and financial education opportunities, to help your child be successful, independent individuals, who are able to make decisions and achieve the results they want. One last takeaway, a University of Arizona study found that setting higher parental expectations throughout a child’s life and providing a well-grounded financial education can ultimately promote a more successful shift to young adulthood. The earlier you set expectations and limits as a parent and implement the lessons we have covered here, the easier the transition to financial independence may be for children.