January 4, 2019
In the Cutter house, we often call our oldest, Maeve, “the Wizard.” This is because as a teenager she knows just about everything about every possible topic. In the eyes of the Wizard, Jill and I, as parents, know nothing.
Well, the Wizard learned a valuable lesson in 2017 regarding financial responsibility. After working and saving as a hostess all summer long, her savings ran out in late October. I knew there were troubling seas ahead when the very nice ladies at Cape Cod Five kept telling me how nice it was to see Maeve so often in the local branch.
It all became very clear to me what was unfolding when Maeve approached me to ask for gas money so she could drive to school. So, my obvious question was, “That money was supposed to last the whole school year; where did the money go? What happened to your budget?” She replied with a sigh and a dirty look only a teenager can master, “But Dad, you don’t understand, things are so expensive.” While I agreed with her that things are expensive, I also know that is no excuse for a lack of financial discipline.
Hmmm . . . time for a life lesson for the Wizard.
While it is natural for teenagers to learn the hard way, they must have a foundation of knowledge to fall back on to learn from their mistakes. As parents we often times expect our kids to be financially literate . . . but what if they are not?
You see, Champlain College did a study on National High School Financial Literacy. This study examines how public high schools around the nation prepare teens to deal with real world finances. Champlain gave Massachusetts a failing grade because its secondary education curriculum framework does not require schools to offer financial literacy courses at all. As the parent of kids in high school and one about to go off to college, I was astonished that there was such a gap. Especially these days, after everything so many families have gone through since the 2008 financial crisis.
Sadly, Massachusetts is like many other states in this regard. According to the Organization for Economic Co-operation and Development (OECD) Program for International Student Assessment (PISA), one in five children in the U.S. doesn’t meet baseline levels for financial literacy proficiency. Financial literacy doesn’t mean that you have to be an accountant or financial advisor. Looking into their definition, they mean simple actions like handling and counting money, to using a budget.
Kids who get financial education in school develop good savings habits compared to those who don’t, according to a long-running study from T. Rowe Price. But the same study also shows that young people who talk with their parents about money are more likely to show good money management habits by budgeting appropriately, having emergency funds set aside for unforeseen circumstances, and are more likely to save.
That’s an important message for parents and guardians. Learning about effective money management and personal finance is, ultimately, something that starts at home.
Unfortunately, that same T. Rowe Price study also shows that the majority of parents are reluctant to talk with their kids about money. Our reluctance can often come from a desire to protect our kids; to not want to concern or worry our children about issues we think of as “adult” problems. But ultimately, we must help to prepare the next generation for the challenges they’ll face, and the earlier we can help to build and reinforce skills of basic financial literacy, the better off our children will be.
I find that money can be a taboo subject in some families, and it can certainly lead to some emotional exchanges. But being able to have open and honest discussions about money with your children will make a big difference when it comes to preparing them for what life will throw at them.
Folks, don’t be afraid to talk about your own mistakes with money. Have you taken out a loan with poor repayment terms? Run up bills on credit cards that you’ve had trouble repaying? Be honest with your children about moments where your money management skills have come up short. Remember, it can happen to all of us. They’ll appreciate your honesty, and maybe they’ll be reminded later to live within their means and make appropriate choices about incurring debt.
Of course, the content and focus of your discussion with your kids about money will depend on their age and your circumstances, but an excellent place to start is to frame the discussion around the values you wish to espouse rather than the actual mechanics of handling and managing money. Explain to your kids about the values that are important to you: Budgeting, living within your means, planning for the future by managing savings and sound investment strategies for your retirement.
Help your kids to feel empowered even from a young age by giving them a budget to work with, to help them build awareness of where their money is coming from and where it’s going to. Even for something as simple as an allowance, establishing and maintaining a budget gives your child control over money rather than making it something mysterious.
Especially as kids work outside the home for the first time as teenagers, working a summer or part-time job, help them set up and maintain a bank account. Get your kids invested in their future by having them set aside some portion of their income for their future education by putting money in a college savings account.
Some kids can amass quite a bankroll working part-time and summer jobs. Get them thinking about their future by setting some of that into a retirement investment account – there’s no minimum age requirement to open a Roth IRA, for example. This and even a plain old savings account will do much to impart to them the importance of one of the fundamental building blocks of personal wealth: The power of compounding interest.
So, since the Wizard ran out of gas money for her car, ol’ Maeve was back on the bus for a bit, giving her some time to reflect on her money management skills. This Fall was a different outcome for the Wizard as she put together her spending plan to make sure she was not . . . back on the bus.
Ben Franklin once said, “An investment in knowledge pays the best interest.” Teaching financial responsibility to our kids while they are young and impressionable will pay dividends for them as they encounter the challenges of adult life. Entering into 2019, let’s remember the sooner we start to build that financial foundation with our kids, the better.
Be vigilant and stay alert, because you and your kids deserve more.
Have a great week!
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 email@example.com.
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