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7 Steps to Teach Your Child Good Financial Habits

7 Steps to Teach Your Child Good Financial Habits
June 26
01:15 2018

It’s the time of year when many parents have watched their children graduate from high school. While no doubt proud of their offspring’s achievements, in the back of their heads, all parents wonder about one thing: does my child have good financial habits. As they embark for the first time into that brave new world of adulthood, they’ll also be venturing into the terra incognito of money. Are they prepared?

It’s a challenge for parents to teach their children everything they need to know to ready them for their lives ahead. A good, practical, common sense financial education often falls far to the back of the priority list (though sometimes for good reasons). It shouldn’t. “If there’s one huge gift we as parents can give our kids,” says Jessica Ludvigsen, Sr. Vice President of Retail Banking at Axiom Bank in Orlando, Florida, “it’s the knowledge they need to grow up to be financially stable adults.”

Teaching your children good financial habits comes down to these seven steps:

Step #1 – Start with Basic Concepts

Before they can learn anything, children need to become aware that they need to learn. This means giving them a sense for the fundamental words of finance and what those words mean. “The best way is to break it down to basic areas they can understand such as Working, Giving, Saving, and Spending,” says Kalen Omo, owner of Kalen Omo Financial Coaching in Tucson, Arizona.

But don’t wait too long. The quicker you expose your children to these concepts, the quicker they’ll pick up on why they’re important. “Raising children to be financially independent and have great fundamentals is something that should be taught from an early age,” says Jake Serfas, lead financial strategist with OWRS in the District of Columbia. “Understanding the value of a dollar and what it takes to earn money is of vital importance.”

And remember, this doesn’t have to be rocket science – yet. Leave the math for later. Use favorite playtime characters and activities to begin to immerse your child into the language and thinking behind money. “Teach children money lessons early using story time then provide children with age appropriate responsibility for their finances,” says Lori Nadglowski, of Laurel Wealth Management in Tampa, Florida. “A great book for story time and appropriate for early elementary students is Bunny Money by Rosemary Wells.”

Finally, sometimes the best was to teach children is to get them excited about going to a new place. Since a bank may play a central part of their financial life, getting them used to going in and out of the bank with you can be helpful. They’ll soon be wanting a bank account of their own. Tell them – and show them – how bank accounts work. “Before teens can truly master money matters,” says Ludvigsen, “they should understand how money moves around. They need a solid rundown on the basics, from checking and savings accounts to bank fees, to how debit cards work and what it means to ‘bounce’ a check.”

Step #2 – Lead by Example

The bank isn’t the only place to show them. Nearly everything you do represents a “show them” opportunity. Indeed, it might make sense to make focusing on your own outward activity as a primary objective. Christopher V. Kimball of Christopher V. Kimball Financial Services LLC in Lakewood, Washington, says, “First: Lead by example. Do you overspend? Misuse Credit cards? Buy impulsively? Modify your behavior first so your child can follow your lead.”

Don’t be afraid of making mistakes. Even bad examples – and how you calmly respond to them – will impress your children, no matter how young they are. “From an early age, your kids will pay much more attention to what you do rather than what you say — and that goes for money matters as well,” says Dave Ramsey, CEO of Ramsey Solutions, Nashville, Tennessee. “Nobody’s perfect, but model good money principles and intentionally create teachable moments about money. Teach them that work matters, money is finite – give, save, and spend in that order, and avoid debt like the plague.”

Still, it’s better to let your actions do the talking. “Actions speak louder than words,” Kathleen Burns Kingsbury, Author of Breaking Money Silence® and Founder of KBK Wealth Connection in Waitsfield, Vermont. “Role model good saving and spending habits and encourage open and honest dialogue about money from an early age.”

Just remember that your children will mimic everything you do. Even your older children. “Children are like sponges and soak up everything you say or do,” says Jeff Motske, president of Trilogy Financial in Southern California. “Be mindful of how you talk about money and credit cards to make sure you’re conveying the messages you want to your children.”

Step #3 – Show Them the Money: Start an Allowance

Your actions and your talk merely demonstrate what to do with money. Sooner or later, children will need to get their hands dirty. Sooner or later, your kids will need to get an allowance. Norma LaFonte, co-author of the book Money Monster or Money Master? Teach Your Kids the Basics of Money and Have Them Love Every Minute from Moose Jaw, Saskatchewan, says, “Parents need to start a dialogue with kids about money from a young age, by putting money in their hands. Create a time and place to talk about money and to engage with them on a regular basis. We call this Allowance Hour.”

Of course, it might make better sense to tie that allowance to some useful chore or activity. “I don’t like to give my children an ‘allowance’,” says Motske. “Instead, my children have earned a ‘Pay Day.’ Money can be earned from selecting jobs with a fixed value from a list or from a predetermined set of chores, all of which go beyond being respectful, obedient and other core expectations.”

Step #4 – Got an Allowance? Create a Budget

Once they’ve got their hands on some money, they’ll need to know what to do with it. Specifically, they’ll need to know a system for deciding what to do with it. We adults call that a budget. Teaching your child how to create a spending plan – a budget – is your next step. “Start early,” says Carol Khouri, a financial consultant at Wingate Wealth Advisors in Lexington, Massachusetts. “Educate your child by creating a budget. If they receive an allowance have them budget for items they wish to purchase. If they work, it is helpful to teach them how to set up spending ‘buckets.’”

As before you can lead by example. “The single most important thing parents can do to teach their children good financial habits is to have regular, open, and honest conversations about the family budget,” says Joshua Escalante Troesh, Founder of Purposeful Strategic Partners in Rancho Cucamonga, California. “If a child asks for an expensive new toy or clothes, instead of saying ‘we can’t afford it,’ respond by reviewing the family budget and where the money should go instead.”

Step #5 – Got a Budget? Enforce Good Spending Habits

A budget should guide the child towards appropriate purchasing decisions. “It is never too early to instill healthy habits as it relates to finances,” says Adam Waitkevich, president and founder of Coppertree, LLC in Westborough Massachusetts. “Parents may want to provide a modest allowance (earned or given) and have kids utilize that allowance for discretionary purchases (as opposed to buying them what they ask for). This is a simple way to illustrate the need to save (for larger, more expensive items) as well as to make trade-offs (put off spending today for tomorrow). The allowance total is not the most important item, but rather the values and habits that can be applied later in life when the dollars are much larger.”

The flipside of spending is saving. Sometimes you need to save before you can spend. The earlier kids learn this, the more satisfied they will become. This deferred gratification may be difficult for your child to learn – until that “rainy day” need arises. “While you may have encouraged your kids to save money for big purchases, many teens still don’t understand all the ‘whys’ behind saving,” says Ludvigsen. “They’ve never had to pay for things such as unexpected car repairs or monthly expenses like a utility bill.”

Putting off until tomorrow what you might spend today will yield happy surprises when the child discovers saving can lead to greater purchases down the road. “When they ask for a toy or other item when you’re out shopping,” says Motske, “tell them to put it on their ‘List.’ This could be for their birthday or next big holiday that you celebrate. Rather than saying ‘no’ outright, you’re diffusing the situation by teaching them that you sometimes have to wait to get what you want. As they get older, you can also teach them how to work towards earning the desired item or using their own money.”

Step #6 – Got a Habit for Spending? Reveal the Truth About Debt

Really big purchases can excite kids. They can also lead to debt. And debt can lead to problems. Problems aren’t good. Kids need to be exposed to these potential problems as soon as they can understand – and hopefully well before those problems can become real. “Once your children turn 18, they will start to receive solicitations for credit cards,” says Motske. “Be sure to explain how credit cards work. Remind them that this isn’t free money and that if they choose to make the minimum payment, their purchases could end up costing them twice what was originally charged.”

“Debt” is a difficult concept. Here’s a way one financial pro made it easier for his child to understand. “I find children do not have a good concept of ‘credit’ and how it applies to life,” says Pedro Silva, a financial adviser at Provo Financial Services in Shrewsbury, Massachusetts. “They see parents take out a credit card, but are often not fully educated on loans or borrowing for businesses. As I drive around with my own daughter, we often discuss how the businesses we see might borrow money to open a new location or buy new equipment. If it related to a business that is interesting, such as an ice cream stand, it can be an informational and interesting conversation.”

Step #7 – The Greatest Lesson of Them All: The Power of Compounding

The real prize, though, comes courtesy of following Ben Franklin’s advice. Show your kids that a penny saved is really a penny earned by encouraging them to save from their very first paycheck. “‘Pay yourself first’ doesn’t mean splurging on a shopping spree or an expensive restaurant,” says Ludvigsen. “‘Paying yourself first’ is the financial concept of automatically routing money into a savings account before allotting funds for other expenses. Regular, consistent contributions are key to building short-term savings (new car, vacation, etc.) as well as a rainy-day fund and a ‘nest egg’ for the future.”

Once you convince them to save and they see the perpetual motion machine known as “compounding,” your job is done. “Here’s an eye-opener sure to impress your teen or even pre-teen,” says Scott Puritz, Managing Director at Rebalance in Bethesda, Maryland. “Explain that every dollar they save today is worth $32 by the time they retire. The reason is compounding, most easily explained using the Rule of 72. It works like this: If you know what rate your money will earn in a year, just divide that number into 72. The result is how long it takes your savings to double. So, at 7.2%, an investment of $100 turns into $200 in 10 years. Over the following decade, that same $200 effortlessly becomes $400. Then it doubles again to $800 — with no extra weeds pulled and no more dogs walked. Eventually, it telescopes out to 32 times the money! The biggest advantage young investors have is time. Compounding is a powerful — and profitable — formula they can learn early on and use throughout their lives.”

There you have it. Seven straight-forward steps sure to lead your child on the path to financial maturity.

Christopher Carosa is a keynote speaker, journalist, and the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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