One of my greatest a-ha’s as a financial advisor has been recognizing how early our money habits form. We often think they are developed as teens at the earliest, but more often than not, we learn them in early childhood from observing our parents. Add in the fact that money is frequently a taboo topic in our homes, you now have a recipe for debt and poor money habits and beliefs.
Too often, I see young people leave home ill-prepared to make good decisions with their money, leading to serious financial problems. This may have been avoided — if we took the time to teach our kids essential money skills. We, as parents, do so much to give our kids a good life and to help them succeed when they leave home. But if they lack financial confidence, we make it hard for them to truly create the life they want for themselves. The good news is there is an easy fix to this problem: we have to stop just giving to our kids, but also teaching them essential skills too.
If your children can master these lessons before they leave home, they will have a healthy relationship with money and the tools they need to make smart money decisions ongoing.
Goal-setting or giving your money purpose is one of the first lessons I taught my daughters, and it’s one every parent needs to teach their children. Why? Because they form our financial foundation and guide our money decisions.
We all want to live a good life, but most people don’t take the time to define what their good life looks like. Very few people in this world can say “yes” to everything they want, which is why we need to know what we truly want, so we spend our money on the things that actually make us happy.
Goals are the best defense against mindless spending, which is a major culprit behind consumer debt. We spend mindlessly because we don’t have anything more important to save our money for. Our goals arm us with a reason to say “no” when we find something we want, but don’t need, because we’re working towards something far more important than a temporary want.
Survival Skill Tip: Teach your kids to ask themselves, “Does this bring me closer or further away from my goals?”
My father taught me to make value-based decisions based upon my goals and beliefs. And I have taught my girls to do the same. Goals definitely act as a guiding light but so do your beliefs. Sometimes people will question those beliefs because they have a different set of values, which in turn may make you doubt your own. Values are going to differ from person-to-person. Respect the difference but know and be confident in your values.
Money is emotional. Our fears, frustrations, anger and even joy can all cause us to spend money whether we can afford to or not. We tell ourselves “we deserve it” to justify our spending and get in the habit of comforting ourselves or celebrating with often random purchases. There is no shame in feeling what we feel, but we must also stop silencing those emotions through spending. To instead have the skills and ability to deal with our emotions without the aid of a credit card. We want to be in control of our money decisions, not our emotions.
Survival Skill Tip: Teach your kids to ask themselves, “Am I feeding an emotion or do I truly want this?” If they are not feeding an emotion to then ask themselves, “Is this worth delaying goal achievement?” If not, then they are able to walk away without feeling deprived, which is one of those pesky emotions that get many people in trouble.
Once upon a time, it was actually much harder to live beyond your means, but thanks to credit cards, these days it’s very easy to buy whatever you desire. There is also a dangerous acceptance that credit card debt is normal and okay. It may be all too common but that doesn’t mean it’s safe or something we should accept. Instead you need to demonstrate to your children how to live a good life within your means.
It begins by having goals and knowing what matters most. Too often we spend money on things that ultimately mean little to us and end up being a waste of our resources. We need to be laser-focused on the things that will create our best life and save for those things. Because how you use your money matters far more than how much money you have. Make sure your kids understand and embrace that philosophy.
Survival Skill Tip: Kids are always observing us and we need to be positive financial role models. Don’t complain about others having more or what you lack. Express gratitude for things you do have and excitement for the things you’re working towards.
This is a lesson that can be difficult to master because it is very easy to make every want seem like a need, especially when our money emotions are in control. Then to further complicate matters, there are things we need, such as food, but the kind of food we eat and buy is heavily influenced by our wants. We may need groceries, but want potato chips, soda, candy bars and ice cream. We need to help our children find a way to smartly balance their wants and needs.
One way I do this is by incorporating values. Being healthy is one of our core family values, and it’s something we regularly discuss with the girls. Because being healthy is something we value deeply, we will pay a premium on some items. And on other items we don’t. This can be mystifying to kids, so you need to take the time to explain how you determine what you buy, whether it’s a want or a need or a need/want. Grocery stores are a great place to demonstrate this and I encourage you to do this regularly with your kids.
Survival Skill Tip: Wanting is normal, so don’t make your kids feel bad for wanting things. We will always find things we desire. Instead help your kids determine what to do when they find something they want. How to prioritize it against other goals to see if it is something they even truly want.
One reason parents hesitate to talk to their kids about money is they believe it’s a grown-up concern and don’t want their kids to worry about money. I understand, but completely avoiding the topic of money isn’t the right answer either. A lack of money experience sets kids up to fail. Kids should have basic money management skills by the time they leave home:
Kid should be budget savvy by the time they leave home and not view them as being restrictive or a pain. When budgets are done right, they actually give you freedom. You know how much discretionary money you have, and can decide how to spend it manner that gives you the most joy. Tracking your spending gives you a clear picture on how you spend your money, which is really important if you find yourself struggling to live within your means.
Kids don’t typically have much experience paying bills when they still live at home. Thus, we need to make sure they grasp the importance of paying bills on-time and the impact of not doing so. Sit down with them and go over the bills they will start paying on their own once they leave home. Find some system for them to track due dates, such as automatic bill pay, calendar reminders, etc.
Explain to them what happens when they pay their bills late from fees to lowering their credit score to higher interest rates to being turned down for loans. This may not initially mean much to them so ask them if they would like to rent an apartment, buy a home, buy a car … all things that could be denied due to a low credit score.
I remember being taught how to write a check and balance my checkbook. These days we write fewer checks but your children should still know how to write one and be able to balance their accounts. To understand what happens if they overdraw their checking account.
I know this may seem like a lot, but this is just the first half of the essential money lessons every child needs to learn. I’ll share the remaining list with you on Wednesday.
What essential money skill did your parents teach you? What do you wish they would have taught you?
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SHANNON RYAN, CFP®
Sometimes when we're young we think we know it all and forget all our parents taught us. At least that happened to me somewhat. But in the end the foundations of what my parents taught me (give, save, budget) won out and I was able to get back on track.
As I'm raising my boys now I'm working hard to instill good financial discipline as best as I can.