How and when should you begin teaching your children about the value of money? Starting early can make a big impact over multiple generations.
As a financial advisor, I work with families to build their wealth and protect their savings. Like most things in life, protecting ourselves starts with education and putting together a plan – one that includes the goals of the entire family with implications for future generations.
For my family, sharing education about money started well before I became an advisor: It started at home. It was sparked by a financial lesson I learned when I was a child. During the summer of 1971, my family returned from a vacation in Canada to find our house a mess, with broken lamps on the floor and an empty spot where our television had been. Since that day, I vowed to safeguard my family’s savings.
Fifty years later, that protective nature I had as an eight-year-old has served me well both as a financial advisor and a parent. My wife, Debbie, and I are extremely proud of having raised three financially independent children. When reflecting on the journey, there was not any one action but a series of steps, stories and, at times, chances we took in teaching our children to become financially independent. Here are some of the most valuable lessons I learned along the way:
1. Give your children an allowance that is not tied to doing chores.
Debbie and I wanted to teach our children about money from a young age. While it would have been nice to have a cleaner house in the process, we wanted to keep the focus on money lessons. Each child had three envelopes: “save,” “spend,” and “share”. The money was theirs to do what they wanted. While it was hard to watch my daughter put $20 into a “Feed the Animals” donation box at PetSmart, this was a chance for her to practice money habits without major consequence. Someday, when the stakes would be higher, my children would understand that they have the same options to weigh.
2. Trust them with money decisions.
We first came up with a plan to entrust our children with money decisions when it was time for back-to-school shopping. As our children grew older and developed their own tastes, shopping for school supplies was not only expensive, but it also became much harder. When they entered middle school, Debbie would take a portion of the money that we had saved for this purpose and give it to our children in cash. We would take them to JCPenney’s and send them off on their own to make their purchases.
Because physical cash is harder to part with than using a credit card, we felt it would be a good way to learn. When the cash is gone, it’s gone, no more spending. And it worked a lot better than we thought. They purchased the clothes they wanted, compared prices and sometimes had a little bit of cash left. When your children have skin in the game when making money decisions, the lessons are more likely to last their lifetime.
3. Work with them to create a budget.
The process of budgeting for each of our children evolved over time, starting with our envelope system and eventually moving to Microsoft Excel. Our children expanded the envelope system as they grew older and took on additional financial responsibility. Even as their budgets grew, they all had one objective in common: Cash must be coming in and be enough to pay their bills, with the No. 1 priority being paying themselves first by contributing to their savings.
Before each of our children moved out, they approached us, asking for an extra set of eyes to go over their budget. This helped them determine how much they could afford in monthly rent, utilities, groceries and other living expenses. Throughout their lives, we helped them put together new budgets as their financial needs changed.
4. Encourage them to work part time to cover expenses.
Once our children reached age 18, we thought it was important that they start taking on more financial responsibility. By that age, all three of our children wanted a cell phone and to drive, and we decided that required them to work part time. At age 18, they were each responsible for their own cell phone plans (they could reimburse us or pick their own). At age 19, they were each required to pay for their own car insurance. We helped them research insurance providers with good rates along with good customer service for young drivers.
5. Pass on lessons about building credit.
As we purchased different homes or newer cars, we would explain to our children how having excellent credit makes these decisions easier and more affordable. Once they reached age 18, we encouraged them to apply for a credit card with a $500 limit and to pay the balance off in full every month. If you had to pay interest, you should not have purchased the item.
For their first cars, we encouraged all three to take out loans with our local credit union to build up their credit score. A timely payment history of around 24 months on a car loan has a very positive impact on a credit score. We also helped them set up autopay on their loans from their checking accounts. Our children are now in their late 20s or early 30s, and each has a credit score above 750. (Of course, we may have overstressed this lesson because now they worry if their credit score drops five points!)
6. Help them become vigilant about protecting their savings.
One time, our daughter woke up in the middle of the night to her phone notifications going off. She received emails each time her debit card was used for a transaction, and in a matter of minutes, someone had made three purchases. She had the wits about her to grab her debit card and call the number on the back, reporting the fraudulent purchases and canceling her card without financial harm. We provided these tips to our children to keep their money safe:
- Review your online bank account statements at least weekly.
- Set up dual-factor authentication with your bank accounts.
- Review your credit at least once per year.
- Use passwords that are hard to guess.
7. Show them why developing values and leaving a legacy matter.
There was another lesson I took away from the incident when thieves broke into my family’s home as a young child. Although they took off with several cherished possessions, including $5 from my turtle bank, they missed my secret hiding place. In my dresser drawer, I kept an old metal Band-Aid container where I stored my valuables. Despite their looting of my childhood bedroom, the container still held three newly minted 1971 Eisenhower silver dollars that my grandfather had given to me earlier that year.
A few years ago, I sat down with my family, showed them the three silver dollars and told the story behind them. With some emotion, I gave each of my children one of the silver dollars, passing them on like a runner passing on a baton as they plan and protect their own financial futures.
If you have any questions about educating your children on financial matters, leaving a legacy or simply want to share your own story, please reach out.
Written by Brian Zdrowak, CPA, CFP® at Buckingham Strategic Partners.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article. R-23-6493