The Fatherly Guide To: Teaching Kids Healthy Financial Habits
Delaware Fatherhood and Family Coalition - Saturday, January 15, 2022
The Fatherly Guide To: Teaching Kids Healthy Financial Habits
WHY FINANCIAL LITERACY MATTERS
Every parent’s dream is for their child to grow into a healthy, happy adult. As it turns out, an essential part of achieving outcomes is teaching them how to have a positive relationship with money—living within their means, saving a portion of what they make, and investing prudently.
Talking to Your Kids About Money
Money management is one of the most basic life skills that a child can learn, but kids are too often left feeling their way in the dark. In part, that’s because financial education is a subject that many schools gloss over or skip altogether.
Only nine states require at least one semester of financial education coursework at the high school level, according to the nonprofit Next Gen Personal Finance. So it’s not surprising that 76 percent of Gen Z respondents to a 2019 study said they wished their school would have offered a fin-ed class.
That puts an even bigger onus on parents to help kids learn the basics like the importance of creating a budget and borrowing responsibly. “I ask parents to think about all the money lessons they wish someone would have taught them when they were younger,” says financial education instructor Monica Eaton. “Chances are, their kids will not get those lessons in school.”
That leaves kids to be taught at home, but unfortunately, lots of parents don’t know how to start the conversation. A recent survey found that 41 percent of parents expressed a reluctance to discuss financial matters with their children. That curtain of silence only makes it harder for kids to develop the financial skills they’ll need once they go off to college or join the workforce.
Rather than skirting the issue, experts say parents can use ordinary experiences—a trip to the mall or the bank, for example—as opportunities to talk about concepts like saving and spending. As with other aspects of life, kids will pick up on what they see their parents doing, too. Explaining the decisions you’re making to secure your financial future, whether it’s budgeting or building an emergency fund, can have a lasting impact.
“When they see mom and dad having more success in their finances, they’ll learn through osmosis,” says Samir Ahmed, a lead planner with the virtual advisory Facet Wealth.
“If you don’t teach kids at a young age, you can’t expect them to grow up to be financially responsible.”
Neale Godfrey, founder of Children’s Financial Network
Separating Needs and Wants
As parents learn early on, kids have a tendency to think they need every item that catches their eye, whether it’s a giant playset or a lunch box advertising their favorite cartoon. But if you want your kids to avoid dangerous spending habits later in life, you have to teach them that they can’t have it all. As the 47 percent of Americans with credit card debt can attest, learning that lesson is easier said than done.
Eaton says that performing simple, hands-on activities when your kids are still young can help them learn the critical distinction between needs and wants.
“Explain that money pays for both needs and wants,” Eaton, the author of the children’s financial literacy book Money Plan says. “Because money is a limited resource, needs come first.”
Teaching Needs and Wants
Start with the Basics
Collect a variety of different items from around your home, from articles of clothing and toys to personal items. Have your child call out whether each item is a must-have or a wanna-have.
Have a Deeper Conversation
Ask your child whether food is a need or a want. Then ask them which category a particular fast food restaurant would fit into. Soon, you’re having a conversation about what’s an actual necessity and what’s a luxury, a distinction that’s key to healthy spending habits.
Put It into Practice
Make it clear that you will pay for things your child needs (e.g. clothing) but not everything they want (e.g. designer jeans). If your kids want to spend their money on wants, Godfrey says, “It’s perfectly okay for them to earn the money to buy that themselves.”
Learning the Value of a Dollar
When kids still cling to the fantasy that mom and dad have a limitless supply of cash, the concept of saying no to a purchase is utterly foreign. If your last name is Bezos, that’s probably not a big deal. For everybody else, teaching children the finite nature of money can help prepare them for adulthood—and potentially save you from a lot of nagging in the short run.
One of the best financial lessons you can give your child is a sense of how much things cost, both in terms of the price tag and how much work goes into acquiring those dollars. Again, Eaton recommends turning it into a game to get kids interested. Take them along with you to a grocery store and give them a list of different items to purchase, but make sure they stick to a budget of around $10. Pretty soon they’ll be paying more attention to the cost of various items and prioritizing what ends up in your cart.
As your kids get a little older, you can expand that exercise into other purchasing decisions, nudging them to become informed consumers. Whether you compensate them for chores or hand out a weekly allowance, the key is to make your son or daughter pay for “want” items using their own supply of funds.
By having to work within those guardrails, kids are learning what it means to have a budget and determine how much they truly value different items or experiences. When kids know that a new video game will drain their account, for example, they may end up deciding to stick with what they have or buy a less expensive, used version. “They have to figure out if it’s worth it or not,” says Godfrey.
Illuminating the Importance of Saving
The sudden Covid-induced recession last year was a reminder of how precarious the financial health of many adults truly is. According to a Federal Reserve study conducted last November, 45 percent of laid-off workers were unable to pay their monthly bills or wouldn’t have been able to if faced with an unexpected $400 expense. In other words, the crisis exposed just how serious America’s savings problem really is.
So how do you get kids to understand the concept of delayed gratification—to put aside some of what they make now so they’re able to handle future needs? Eaton’s preferred method is to create a savings goal with your child and keep them focused on it. Have them select a product or experience they’d really like and help them research how much it costs. You can even create a “goal poster” with a picture of the item, its price, and an indication of how much progress your kid has made toward purchasing it.
“Talk about ways your child can earn money by completing chores around the house,” suggests Eaton. “Each ‘payday’ lets your child choose the amount of money they would like to put towards the purchase of their goal item.”
Godfrey recommends a slightly different approach: automating their savings so a portion of everything they earn is untouchable in the short-term. It could be as simple as creating different jars for spending and savings, although separating funds is considerably easier if you’re paying your kids through a family-friendly app like Greenlight, a debit card for kids and teens that can also be a valuable teaching tool for parents.
For instance, Greenlight users can transfer a fixed percentage of the child’s allowance to their “Spend Anywhere” balance and another portion to their “General Savings.” Parents can even divert part of their payment to the “Give” category, teaching them to set aside a portion of their income for their favorite charity.
