Instilling Good Financial Habits for Your Children
Instilling your children with good financial habits will increase their likelihood of success, just as is the case with many other types of habits. In this post, I’ll provide you with eight things you can do to help your kids become financially literate adults. All but one of these ideas are based on my experiences growing up or those I provided for my children.
1. Open a Bank Account
We opened savings accounts for our children with money they received when they were born. As they got older (probably around 5), we made them aware of their savings accounts and had them put at least some of the money they received as gifts into their accounts. By having a bank account, your children will learn the habit of saving money and will see that not all money needs to be spent as soon as it is received.
In addition, if interest rates ever increase, they will begin to see the benefits of compound interest, as described in my post on that topic. When I was young (a long time ago), my savings account paid 4% to 5% interest every year and I recall being excited when the balance of my account increased from the interest payments.
I’m fairly certain my first savings account had just my name on it. I think savings accounts can’t be opened in the name of only a minor any more. For this purpose, I suggest a joint account as part of the purpose of the account is to teach your children to save and spend money wisely. Check out my post on different types of accounts you can open for your children.
2. Give a Small Allowance
Once your children are old enough to understand how money is used, probably around 7 or 8, I suggest giving them a small allowance. I know there are many people who think an allowance sends the message that money can be gotten for free. Other people pay the allowance only on the completion of certain chores. At young ages, I didn’t worry about my children becoming entitled. I think that children should learn to do chores for the good of the family, without the punishment of losing their allowance, so didn’t tie allowance to chores. These are all very personal decisions and there are no right or wrong approaches.
I learned a lot from my allowance. I remember being in the second or third grade and getting 30 cents a week. Of that, a dime went to dues for Brownies, a dime went in the collection plate at Sunday school and, every so often, my mother would take me to the bank to deposit the accumulated pile of dimes that I didn’t spend. From this process, I learned the responsibility of meeting my financial commitments (Brownie dues), the importance of giving (church) and the habit of saving. In hindsight, I wasn’t nearly as good with those lessons as my parents.
3. Have family dinner every night
There are so many things your children can learn from the idle chatter at dinner.
· They might hear you talk about things that didn’t go well at work. By continuing to go to work, you are demonstrating to them that work isn’t always fun. If young people have unrealistic expectations regarding their jobs, they are more likely to skip from one job or project to the next without being successful.
· They might hear you talk about how expensive something is. If, in addition, you chose not to buy it because it is too expensive, it teaches your children that they need to consider their financial position before making purchases.
· They might hear you talk about a situation that didn’t go well and how you resolved it. Learning how to successfully resolve issues is an important skill in being successful in the business world.
· They might hear you talk about other financial matters. While you don’t want to cause your children worry if finances are tight, it will be helpful for them to hear you talk about financial issues – mortgages, car loans, other costs of home or car ownership, credit cards, saving, investing and so on. While they may not understand everything you say, you’ll be surprised by what they absorb.
I realize that families are busy, especially as children get older and start participating in after-school and evening activities. We made a family dinner a priority, even though both kids played soccer and hockey, among other activities. I suspect we ate dinner as a family at least five nights a week, even if it was spaghetti, tacos or shrimp scampi because I could get them on the table within 15 minutes of walking in the door.
4. Open a brokerage account or play stock market game
Many young people are unfamiliar with investing and so tend to avoid taking risks. As discussed in this post from @InvestedWallet, one of the biggest mistakes young people can make is not investing at all or being too conservative in their investments. When your children are pre-teens or teenagers, you can either open a brokerage account with a small amount of money (no more than you can afford to give them and have them possibly lose) or play the stock market game (which costs nothing but time). The stock market game is the same as allowing your children to actually invest, but they are using fictitious money.
In either case, you can provide basic information to your children about stocks, mutual funds, index funds or any other financial instrument with which you are comfortable. You can also talk about how to choose investments. There are lots of good resources about these topics. (I plan a series at some point in the future with introductions to these financial instruments.)
Let your children invest in three or four stocks or mutual funds. If they pick stocks in individual companies, I suggest that they pick companies they know. It makes it much more engaging for them.
Have them monitor the values of their actual or fictitious portfolios. I suggest having them check the value no more often than once a week and possibly only once a month. Let them see how their investments have done. If one or more of the stocks does really well or really poorly, have them check the news (try Yahoo Finance or the company or mutual fund web site, among other sources) to see what happened.
We did this activity with our children, though didn’t follow through as well as we might have. One child picked Microsoft and the other picked Apple, so that created interesting discussions between them. Also, one of our kids picked a company that went bankrupt! That certainly taught a lesson about the risks of investing in individual companies.
5. Increase allowance and expand costs paid by kids
As your children get older, increase the amount of their allowance, if you can afford to, or find them opportunities to earn money – paper route, babysitting, mowing lawns. Concurrently increase the expenses for which they are responsible.
I recall that one of the first expansions of my expense responsibilities (probably in 6th or 7th grade) was to buy presents for my friends’ and family members’ birthdays and Christmas. About the same time, I had to start paying for all of my own entertainment – my stamp collection, movie admissions, crossword puzzle books.
The next step was in high school when I first had to start buying my own clothes and then gas for the car when I got my license. I ended up being one of the worst dressed kids in high school between a complete lack of fashion sense and my desire to save money. However, between saved allowance, babysitting money and summer jobs, I graduated from high school with close to $10,000 in the bank (in the 1970s when that was a LOT of money).
By introducing new responsibilities in increments, it gives your children the opportunity to focus on just a few things at a time rather than being completely overwhelmed when you cut the ties.
6. Teach them to cook
Teach them to cook??? That sounds about as closely related to financial literacy as having dinner together as a family! One of the easiest ways to save money is to eat at home or bring your lunch to work, rather than eating in restaurants. My post on balancing your budget includes links to several articles that talk about how much money people have saved by eating at home.
My husband took on the responsibility for teaching our kids to cook, though they come to me when they need recipes now. The only problem with this approach was that I had to clean the kitchen when they were done. Learning to cook can be very messy!
I’m fairly certain we were somewhat successful in helping our kids save money by not eating out. Our daughter cooks something every Sunday and divvies it up into five containers for lunches at work. Our son loves to grill and can even make a white sauce (for homemade mac and cheese or creamed chipped beef on toast).
7. Get a secured credit card
When your child is in his or her mid-to-late teens, you’ll want to start teaching them about credit cards and building credit. See this post for more information.
A secured credit card allows your child to start building credit, but without the ability to charge more than he or she can afford to pay. When opened, the account requires a security deposit that is higher than the limit on the credit card, often 110% of the credit limit. For example, if you get a card with a $500 credit limit, you’ll need to give the issuer a security deposit of $550. This deposit will be returned when you close the account. In the meantime, your child can learn to make charges and pay their bill.
8. Make sure kids understand finances of owning a car as soon as they get their permit
A car is often the first major item people own. When I got my license, I planned to buy a car but didn’t understand that, in addition to paying for the car, there were a lot of related expenses other than gas. By the time my parents worked with me to figure out my budget, it was $200. Even in the mid-1970s, you couldn’t get much car for $200.
Once your children start to drive, be sure to talk to them about those costs, even if you pay for them. The most expensive of these costs is insurance (especially for people under 25 or with accidents). Other important expenses are routine maintenance and repairs, the latter of which can be very expensive. As you pay for these expenses whether for a car you let your child borrow or they own, be sure to include your young driver in the process. It helps them understand what I didn’t.
