By: Scott Walloch CPA, CFP®, HKFS Financial Planning Consultant
Teach children about money now, or be ready to help
As a parent of three children in a digital and on-demand world, it quickly became apparent to me that teaching kids about money is more important than ever. We live in a world where children see parents swipe a credit card and a box arrives on the front porch with their favorite toy in just a matter of days. Young adults are incurring record levels of student loans while attending college with no idea of the impact their monthly payment will have on their budget or a plan to pay them off. The examples we set for our children when it comes to finance and the time we take to educate them about money is essential to their future success. Parents who do not take the time to discuss money with their children may find themselves co-signing loans, paying off student debt or welcoming their adult child back into their homes after college. Part of our responsibilities as loving parents is teaching kids about personal finance and helping them learn the essential lessons along the way.
Budgeting for children
Even before your children can count, they already have an idea of money. They see it can buy ice cream, toys, food, and admission to movies and amusement parks. What they don’t see are your regular expenses such as a mortgage, utilities, bills and other living expenses. But, there is a multitude of systems and techniques you can employ at a young age with your children to help them learn and understand money.
I will give my wife credit for installing the first lesson of a budget for my oldest son. First, we decided to give him an allowance for helping around the house. We wanted to reward him for his efforts and help him to learn the exchange of money for work. My wife then created three jars labeled as spend, save and donate for my son to budget his money. Each time my son received his allowance or money from his grandparents, my wife would help him spread the money among the three jars. Looking back over recent years, it has been wonderful to see my son manage his money for spending, saving and donating.
This first lesson in managing money is also a great opportunity to open a savings account for your child and take them along to the bank so they can see the process. My son now asks me to show him his savings account balance on the computer, engaging him and helping him learn ownership over his budget from a young age.
Learning as they grow
Most school curriculums do not provide dedicated money management skills like handling credit cards, checking accounts and establishing a budget. But, in these formative years, kids who are receiving allowances or getting small part-time jobs are getting their first exposure to earning their own money. As a kid, I mowed lawns in my neighborhood and would come home with a nice amount of cash I was ready to spend on baseball cards. I remember my mom asking me for the cash and would then have me divide it into spending, savings and lawnmower/equipment repair buckets. As a teenager, I did not like it each time we went through this exercise; however, it taught me very quickly to save. In fact, a good portion of this money was used to cover my portion of my college expenses. It was a very proud moment when I graduated from college with no student loans. These part-time jobs like lawn care, babysitting, dog walking, etc. are easy for tweens and teens and are a great way to help your kids get their feet wet with work and budgeting their earnings.
As your children begin to take on more serious jobs and earn income from employers, take the time to show them what happens to their paycheck with taxes. This is especially crucial as they go into college or out on their own. Many young adults do not realize how much taxes take a bite out of their paycheck, and it can be easy for them to run into credit card debt because they didn’t budget properly for the impact taxes would have on their income. Assist them with developing monthly and weekly budgets based on their net pay including listing out all expenses such as rent, food, car loan payment, etc. to see how quickly their paycheck can be used up. Fortunately for young adults today, there are many online tools that can help monitor spending and savings and make budgeting easier.
As you go through the budget process, don’t forget to teach them from the beginning to pay themselves first. Have them set up an automatic transfer of their paycheck go directly into personal savings and/or a retirement account (i.e. IRA, 401(k)). Keeping the money out of sight will allow for savings to begin building immediately. It can be a harsh realization to look up after 10 years of work and not have anything saved to your name. Including your children in on your own financial planning meeting with an (HKFS) financial advisor shows you are leading by example when it comes to saving and planning for the future. With a balanced budget in place and regular monitoring, you will see your child take on a greater level of responsibility.
Mastering the tools
Establishing budgeting skills early prepares your children to master money tools they will use like a checking account and credit card. The teenage years are a good time to open your child’s first checking account and teach them how to make deposits, write checks, use a debit card and balance their checking account each month. The simple act of balancing each month will help identify any issues and catch any fraudulent expenses teaching them diligence and responsibility for their finances.
A slow approach is best with credit cards. As a parent, you will need to co-sign for a card for any child under age 21. Start with a low limit on the credit card (e.g. $300) to avoid future debt issues. Helping your child understand the impact of not paying off a credit card balance monthly and the interest expense is critical in these early stages. It’s easy for anyone to get buried in high-interest rate credit card debt quickly and have no real means of paying it off, especially young adults. If the credit card lesson scares you, start with a prepaid card that will not allow for charges once the money has been spent.
As society moves further away from handling physical money, budgeting and finance education become more and more crucial at younger ages when minds are most open and formative. Fortunately, technology provides a multitude of opportunities for young adults to learn and manage their finances. In the years I have been advising clients, those who spend most of their income rather than save it have a very difficult time breaking this habit in their adult years. Taking the time to educate and work with your children will give them a variety of options in the future to be good stewards with their money. As a parent, I want to see my kids have financial flexibility and freedom, versus working to pay off credit cards and loans their entire career. Financial education starts early and establishes a set of crucial life-long skills that can keep children out of the debt trap so many adults face today.