Financial intelligence is one of the most important skills in today’s modern world. With it, you’re able to set yourself up for a future full of promise. Without it, you’re struggling day in and day out, with no hope of ever reaching the “American Dream”. Unfortunately, there is little to no teaching of financial skills outside of the home. Much of the information out there for you to find for yourself is misleading at best or just plain wrong at worst. Young adults starting out without a good base of financial knowledge can get themselves into trouble that can last years or even decades.
As a parent, it is your responsibility to make sure that your kids are ready to handle themselves in the financial world. Plus, if you’re hoping to build a true, multi-generational Great Family, your kids will need that knowledge to help break the “shirtsleeves to shirtsleeves in three generations” curse. Introducing the basics when your children are still young can help build a foundation for their teenage years, when you begin to let them manage their finances more fully.
Example and Context
Before digging into how to get your young children involved in the family finances, it’s important to tackle a couple issues. Many are concerned about privacy and giving your children sensitive or personal information. Others are concerned about involving kids in adult problems like debt or struggling to pay the bills, introducing unnecessary worry into their lives. Both have merit, but if you use common sense, you can involve them in a way that works. Remember to give your children some credit – you don’t need to share every little detail, but if you tell them this is family only information that shouldn’t be discussed with others, odds are they’ll treat it as such. Family secrets are fun for kids. Moreover, practicing transparency is better than hiding issues and talking in whispers. Your kids are smart, and will wonder why this is some big secret. Keeping things hidden can result in bigger issues than putting them out in the open.
With that in mind, it’s most important to realize that kids learn through example more than anything else. Your actions speak louder than your words, so make sure that you’ve got your financial act together before discussing anything with your kids. Assuming that you’ve got a solid financial understanding, begin to involve them in your process. Have them watch or participate when you are doing your budget, investing your money, or doing your net worth statement and income and expense reports. They don’t need to understand everything, nor do you need to explain everything to them. For now, just letting them watch will be helpful. Also, be smart about the language that you use, both specifically related to finances and in normal day to day life. Don’t say “We can’t afford it” if you actually can. Use a better alternative, such as “It’s not in our budget” or “We don’t plan on spending our family’s money that way.” You stop yourself from telling a lie, and this language may invite kids to ask good questions. Asking why it’s not in the budget can lead to a very useful learning opportunity.
Kids come into the world with no prior knowledge. Money in general is a foreign topic, so your kids will need context. Telling a five year old your salary won’t matter – they literally have no idea what that means and don’t know if it’s a lot or a little. Instead, begin introducing them to what things cost and why things cost what they do. Knowing that an apple costs $1.50 and a new bicycle costs $400 can help them begin to frame the world. For example, my five year old son is really into Legos. Since our friends at the Lego Company send us a new magazine each month, he obsesses over the new kits and is starting to learn how to read dollars and cents. Knowing that we pay the same amount each month to heat the house as one of the larger Lego sets helps put things into context a little bit.
Further, kids don’t really understand what you “going to work” means. For younger children who go to school or play all day, work means nothing beyond the occasional chore. You’ll need to explain the process of earning money, receiving a paycheck or running a business, and then paying your bills and saving for the future. This is where language is important. It can be confusing for kids if one day, you’re complaining about not affording something and the next going out and buying something else. That purchase may have been in your budget while the first item wasn’t, but your kids may not understand that.
Involve Them in Family Goals
Kids can be the ultimate accountability partners, particularly if you’re saving for something for the whole family. Get them involved in your goals for the family. Things like a family vacation or a new car can be excellent motivators for everyone. When you do hit a goal, make sure that they share in the success.
It’s important to let them have a say in family conversations. Bring your budget to your family meetings and begin talking about why you’ve allocated your money the way you have. This has a side benefit as well. It might help you refine your budget and make it better – if you can’t easily explain it to your kids, maybe your budget is out of whack. All of this helps build a sense of family unity. We share a special family secret – our finances are our own business. We make decisions together. We’re not afraid to work together to achieve our goals.
Remember though, they are still the kids and you have final say. Involve them, get them on board, but you make the ultimate decision.
Get Them Started
At your family meetings, teach them and explain the longer term goals for your family. Begin to broach the topics of college payment, retirement accounts, paying off the house, the F-You fund (maybe call it your Freedom Fund!). Always find ways to bring it back to them by giving specific examples. For example, have them help budget for a grocery shopping trip or pack their own lunches for school instead of buying them. Help them learn ways to earn more money for themselves and teach them the positives of having a higher income. Always appreciate and reward their efforts when they try.
With all of this personal finance education, be careful not to make them feel guilty or to overwhelm them – if you start young, you’ll have plenty of time to teach them the details. First, teach them about cash flow management – paychecks, utilities, mortgages or rent, checking accounts, savings accounts, credit cards. Then begin introducing basic investing concepts – just the basics about how investing works (making money off of money), the differences between owning a company, lending money, or buying rental properties. Encourage questions and answer them honestly. By brushing off or admonishing your kids for asking “personal” questions, you’ll cut off their curiosity.
Use teaching moments whenever they arise. A big car repair can throw the budget out of whack, unless of course you already have a savings account! A financial windfall can be an opportunity to discuss how much of it to save and for what and how much to spend and on what. Point out the normal day to day money activities that happen through life – have them pay for the groceries (with your money, obviously), talk about why and how you’re getting cash out of a machine, or explain why you’re going to the bank to make a deposit.
Let Them Manage Their Own Money!
Allowances are often debated, but being in a family means sharing at least some of the family’s resources. Chores should be expected of every family member, but withholding their allowance takes away opportunities to learn to budget and manage money. Allowances give them their first chances to actually manage the flow of money. It allows real life experience in budgeting and making their own decisions (within reason). Perhaps most importantly, even to make mistakes. Making mistakes now, when the stakes are very low, is a great teaching tool.
For our kids, we use the jar method for allowances. We have a jar for spending, a jar for saving, and a jar for giving. Each of our children also has their own wallet to carry money when they may have the opportunity to spend it. They have to put a small amount into each, but for the most part, they can divvy it up as they see fit. For the young ones, the savings jar isn’t savings like you or I would have a savings account. Instead, it’s for something that seems expensive to them, like a big Lego kit, or a new bike accessory.
Beyond a small, basic allowance, give them opportunities to do work for pay. At younger ages, this will likely be you giving larger chores that you’ll pay a certain dollar amount for. Perhaps taking everything out of the garage and sweeping it is worth $5. If they don’t want to do it, that’s fine, but it will take them longer to purchase that big toy they’ve been wanting.
Managing their own money teaches them to prioritize. There’s never enough money to go around, so you have to pick and choose what’s most important. Savings means waiting and working for something in the future, whereas spending money on small, frivolous items will take away the chance of having that big toy. Keeping track of money gives them a sense of power and control. At these young ages, control is rare, so any amount of control you give them will allow for good learning experiences.
Don’t Be Afraid!
Your kids may be young, but don’t be afraid to bring them into your family finance discussions. Without financial intelligence, kids will struggle through life as adults. Get your finances together and be a good example for them. Provide them context for anything financial – they don’t know the difference between spending $500 or $5 unless you help them. Let them have a say in your family financial goals and make sure they participate in the celebrations when you accomplish one of them. Most important, let them manage their own money, so they can make mistakes now and learn better for the future. An allowance can be a great teaching tool.