My daughter, Phoebe, and I had to run into The Dollar Store the other day to get some stuff for her upcoming school project. While we were walking through the aisles searching for what she needed, we came across a young boy, probably only seven or eight years old. The kid was having a meltdown over a toy he wanted; one that his mother refused to buy.
Hmmm…I remember those days.
You see, my girls are all older now, but it wasn’t that long ago that I remember being in the same situation. Even today, with Maeve as a senior in high school and Phoebe and Sophie as freshmen, when they want something they can’t get themselves, I’ll hear that familiar whine. But in fairness, my girls know better. That is a scene that plays out in almost every store in every town and city around the world.
We all want to see our kids successful, right? Successful in school, successful in their careers, and successful in their lives. Intrinsic to that success is being able to manage money effectively throughout their lives. The earliest lessons we teach our kids about how to manage money tend to be the most lasting ones.
We, as parents, can lay the groundwork for that at the earliest ages. Research at the University of Cambridge shows us that some money habits are already ingrained in children by age seven. So with our time together this week, let’s talk a bit on how we can help our youth develop positive money habits that will carry over to adulthood.
Let’s face it, if kids observe adults spending money frivolously; if they witness adults fighting about money with their spouse or significant other; if kids view parents struggling in vain to manage their own money; those are the lessons they will follow.
Folks, it’s important to normalize our kid’s relationship to money. But that begins with you and I, as adults, and our ability to speak openly and frankly with them. We must never make money a mysterious or taboo topic around the table. Take a moment this week to carefully reflect how you talk about money with your children. If you talk with them about it at all, see if a different approach is required.
Did you know, for example, that more than half of parents polled by T. Rowe Price either never speak to their children about money, or do it once a month or less? Their 2018 Parents, Kids & Money survey shows that 42 percent of parents polled are reluctant to talk with their kids about money. Heck, the survey reveals that the topic of money is wedged between death and terrorism in the list of uncomfortable topics parents discuss with their children.
Being able to touch and to see money is essential for the even the youngest of kids. That’s what makes the old tried and true piggy bank such a good idea. After all, young kids live in a concrete world of things they can touch and see.
Albert Einstein is said to have uttered, “Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t, pays it.”
It’s up for debate if Einstein said it or if it’s just one of those apocryphal internet quotes. But the power of compound interest over time certainly is not. Even with something as simple as a piggy bank, emphasize the importance of saving over spending. Reward your child’s saving habits by making compound interest payments to their piggy bank. You don’t need your lending rate or frequency to match what the banks are doing. But periodically juice their piggy bank with a little extra to reinforce the lesson of compound interest. In other words, make it fun and rewarding for them to save.
Eventually, if your kid is like my Sophie, the money is going to burn a hole in their pocket, and there’s a lesson here too. When your kids want that Hot Wheel or that Hatchimal and can’t be talked out of it, have them take the money out of their piggy bank themselves. Have them pay for it themselves at the store.
Kids learn that what they want costs money, and the more they spend, the less they’ll have for other things. Opportunity cost can be an essential lesson for young earners who will be more cautious about what they ask for in the future.
Many of us grew up with allowances and continue the tradition with our children. Of course, inflation means that we’re paying our kids a lot more than our parents paid us. Allowance can be an expensive proposition for parents these days!
The important thing, however, is to peg the allowance to what they’re doing. As allowances grow and increase over time, make sure the kids are doing proportionally more for their pay. My kids love it when they ask for more money, I say add more value. Of course I say that jokingly, but the lesson they’ll learn is that with hard work comes reward, and the harder you work, the more reward you can expect. Some experts promote the idea of paying your kids commission for work performed rather than a straight-up allowance.
If you’re like me, your kids may have their jobs to help pay for the things they want, but the well can quickly run dry. When that happens, they usually come calling on the Bank of Mom & Dad to help bail them out. That’s why it’s so important for young folks to learn how to live within their means. I am, of course, talking about budgeting.
My girls keep their noses in their phones most of the time. The good news is that there are a million apps to help people of all ages get a better grip on their finances through careful budgeting and money management. In the end, it doesn’t matter which app or services you choose. Find one that works with your lifestyle and something that your kids will help buy into. The goal here is to help your children feel empowered with their money handling, not overwhelmed or restricted.
Lastly, check with your bank to see if they have a debit card aimed specifically at children and teens. As kids get older and money moves from the concrete (what’s in the piggy bank) to the abstract (paying for things with a debit card), it’s important to transition them to this way of using money. Look for debit or prepaid cards with parental controls to help you track spending and setting limits. Understanding how to sensibly and responsibly use debit cards will help pave the way for your kids to use credit cards appropriately as they get older.
Employing some or all of these concepts will help your children develop the skills they need for responsible money management later in life. Don’t make money management something scary or anxiety-inducing. Help our youth become comfortable with money. Teach them to understand the tools and techniques that they’ll need to be financial whiz kids – and financially responsible adults.
Be vigilant and stay alert, because you and your kids deserve more.
Have a great week folks make sure to tune into our weekly financial educational radio show every Saturday from 5-6 on WXTK 95.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com.
Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.
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