Four strategies for ensuring good money habits in your children.
By Grace S. Yung
While it is usually adults who are responsible for earning money and paying the bills, it is essential for family members of all ages to know how money works. Even at a young age, it is important for kids to understand that knowing about money—and in turn, taking the right actions with it—can make the difference between having choices versus having to struggle just to get by.
It is likely that your kids have not learned—and will not learn in the future—very much about how money works while they’re in school. Sadly, schools are not teaching students how to earn money, how to balance a checkbook, or how to save money for the future. Yet, these things are key for their financial success going forward.
According to a recent Money Matters on Campus study, kids who have been tutored on financial matters prior to graduating from high school will likely have much better attitudes regarding money later on in life. They are less apt to take on debt, while also being better able to manage the funds that go in and out of a checking account. They are also more likely to save more money overall. For parents who have kids, that’s great news.
Strategies for Ensuring Good Money Habits in Your Children
So, in this world of spiraling out-of-control spending and a roller-coaster stock market, how can you raise your children to be investment-savvy? There are a variety of ways that you can go—all of which can pay off in the long run. These include:
• Teaching Children Good Money Habits
In order to keep finances healthy, it is important for kids to understand and develop good money habits on a regular basis. This can mean showing them how to earn money, pay bills on time, and then set aside a certain amount of money regularly in order to build up savings.
Maintaining good money habits can include helping your child find ways to earn extra money, such as cutting grass, walking a neighbor’s dog, or selling items at a yard sale. You can also help them to be sure that they have enough money to purchase the things that they want—even if it means having to wait.
Here, you can also help them to understand the difference between “needs” and “wants.” Instilling this at an early age will allow your child to back away from impulse purchases that they may think are a need, when after more careful consideration may really only be a want.
Good money habits also include not spending too much for the items they purchase. Helping them to compare the prices of similar items—and then to purchase the one that costs less—can be a great way to assist them in becoming savvier at saving.
This may also entail teaching them to have patience when considering certain purchases. For instance, oftentimes when new electronics or smartphone models come to market, they are surrounded with a great deal of hype—along with a high price tag. Yet, by waiting to purchase these items, your child will likely find that they will be able to save money. They could even take the amount that they saved and put it into their savings account or an investment.
• Showing Children How to Save and Invest
While learning from books or videos can be helpful, there is literally no substitute for learning by doing. Initially, saving money in small increments can be an ideal way to begin the learning process—even if it means just putting away small amounts here and there in a piggy bank.
Once your kids are old enough, opening a bank savings account for them can be a great way to show them how to earn interest. Later on, investing can oftentimes be easier to understand if you allow them to own stock in their favorite companies, such as Walt Disney. Even if you purchase just one or two shares, doing so will provide them with the ability to watch and track the stock over time.
You may even want to set up a “matching” program. For example, like the many employers that match a certain percentage of their employees’ savings that go into employer-sponsored retirement plans, you could incentivize your child to save by matching a portion of what he or she puts into a savings account. This will not only encourage them to save, but also train them on the “employer match” concept so that as adults they will have a better understanding of its value and be more likely to participate in their company’s retirement plan.
Taking it a step further, you could even set up a Roth IRA for your child as soon as they start earning money from a job. Regardless of whether they are mowing lawns or waiting tables, anybody who earns compensation from a job—including wages, salaries, tips, and bonuses—is eligible to fund a Roth IRA up to the amount that they earned.
• Being a Good Financial Role Model
Certainly, one of the very best ways for your kids to become well-heeled in financial management is to learn from those they look up to—primarily you. Kids typically learn most of what they know at an early age from their parents—and how they handle money is no exception. In fact, according to a major financial institution’s Teens & Money Survey, more than 80 percent of teenagers stated that they learned how to manage money from their parents.
So show your kids how you pay bills on time, shop smart (by comparing prices and using coupons), and invest regularly. You can also teach them how to cut back on “non-essentials” such as eating out in order to save money for a vacation or a new car.
Although it may sound “old school,” a big part of being financially savvy is knowing how to calculate transactions in your head—even things as simple as counting change. Teaching your kids how to do this is good practice, and it will make them much more comfortable with the whole idea of handling money as they become involved in all kinds of transactions throughout their lives.
Additional Advantages for Same-Sex Parents
Raising investment-savvy kids does entail spending some additional time with your children, to teach them how money works and why it’s important to save. This is where same-sex parents may have a real advantage, since a recent University of Texas study showed that same-sex parents tend to spend more time with their kids—40 percent more time in some cases. That can be a real benefit for the children of same-sex parents as they learn the ins and outs of successful financial management.
The Bottom Line on Raising Investment-Savvy Kids
There is no age limit to how old (or young) a person needs to be before they can start learning about money. The truth is that the younger someone is when they begin learning about financial concepts, the better prepared they will be when it comes to earning, paying bills, staying out of debt, and saving and investing for the future.
Personal finance-related questions may be emailed to [email protected]
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.