Teaching children how to manage their money can feel like a perpetual balancing act. One day you’re working to instill good financial behaviors, and the next day you’re trying to help them break bad habits. In many families, the subject of money management comes up innocently enough, often as the result of money a child receives as a birthday or Christmas gift. Anyone who has children is already familiar with the alarming intensity that newfound money burns a hole in the pocket of its young recipient. Trying to educate a five- or six-year-old child on the benefits of sound financial management can seem like it’s more trouble than it’s worth. However, the sooner they learn to save before they spend, the better off they’ll be, right?
There’s an adage in the parenting world that says, “More is caught than taught.” Children are incredibly perceptive. Whether you realize it or not, they’re always watching what you do and deciding whether it lines up with what you say. They’re not necessarily looking for subject matter expertise; they’re looking for consistency. This is true in personal interactions, but it applies to money matters as well. Despite your best intentions, your personal habits may be sending mixed signals when it comes to financial responsibility.
Avoid These Bad Money Habits When Teaching Children Financial Responsibility
As you look for teachable moments and research the most effective ways to help your children learn the value of money, keep an eye out for the following bad habits that can leave your child frustrated and confused:
1. Avoiding the subject completely
When it comes to topics that parents would rather avoid discussing with their children, financial matters probably rank just behind the birds and the bees. But just like the facts of life, if you’re not teaching your child about money, you can be sure somebody — or in this case, something — is. From pop-up windows online to sponsored ads on mobile apps to commercials on TV, it has been estimated that the average child is exposed to approximately 3,000 advertisements per day. It doesn’t take a media strategy expert to know those ads aren’t exactly encouraging responsible financial practices. Taking the time to have awkward or inconvenient conversations about money with your young child will help you create an open line of communication that will benefit you both for years to come.
2. Assuming they’ll learn it on their own
Financial responsibility requires discipline, and discipline rarely develops without focused, intentional effort. In the eyes of a child (and many adults, for that matter), spending is always more fun than saving. When you spend money, you get something in return. Saving relies on the principle of delayed gratification, an unpopular concept for many kids. It would be nice to think that as children grow and mature, they will naturally come around and see the benefits of being financially responsible. While many aspects of growth follow this progressive pattern, research has shown that a person’s financial habits may be established as early as seven-years-old. Leaving children to figure out money management on their own increases the likelihood that they will wind up with a collection of bad habits they’ll need to break once they move out on their own. It’s much easier to form good habits than break bad ones, so stepping in to help your child learn how to handle their finances is a time investment that offers valuable returns.
3. Paying them for things they should do for free
If you’ve ever responded to one of your child’s (many) questions with “because we’re a family, and that’s what families do,” you were on to something. When it comes to keeping the family home in order, household chores are part of the deal. When everybody pitches in to do their part, nobody feels overwhelmed. That’s what families do. But if you decided to pay your child for completing basic chores, it’s possible that you might be undermining that feel-good family principle. While chores can be useful tools for teaching personal responsibility, negotiating financial terms when you want your child’s assistance can backfire on you. A shiny quarter may be enough to convince a young child to pick up their clothes, but a 12-year-old will probably demand a much higher fee to empty the dishwasher. Rather than setting a precedent that offers financial rewards for tasks that are part of maintaining an orderly house, it may be more beneficial to establish an allowance system that is not related to chores. By doing so, you can help them learn the fundamental difference between personal responsibility and financial management.
4. Controlling all their spending
As the resident grown-ups, parents tend to think we know best. And that may very well be true. But when it comes to your children’s financial choices, it may be helpful to give them a little more freedom than you think they should have. Within reason, of course. If you micromanage every spending decision your child ever makes, not only will they never learn to think for themselves, they’ll probably never experience the negative consequences of poor choices. It may seem counterintuitive to step back and let them spend their money foolishly, but many of life’s most lasting lessons come through tough situations. Let them make their own choices from time to time, but when you do, be sure to let them navigate the consequences of those choices as well. Allow the bad decisions to hurt a little, and let them take pride in their good decisions. Giving them the freedom to experience the ups and downs of financial choices can be an effective way to help them understand the value of a dollar — and the importance of making smart decisions.
5. Underestimating what they can understand
Kids are smarter than we think. You’re probably comfortable teaching your youngsters about basics like spending and saving, but have you thought about broaching topics like investing? While childhood may be too early to focus on the details that take finance professionals years to figure out, it’s not too early to start focusing on the concept of investing. In a recent interview with CNBC, renowned investor, Kevin O’Leary, shared how he used a see-through piggy bank to teach his small children the power of investments. When his children would put money in their piggy bank, O’Leary would add additional pennies each night when they slept. “The idea was that they would wake up and see there was more there,” he explained. “That was for them to understand the concept of compounded interest.” You don’t have to explain all the intricacies of investment strategy to your children, but as the Shark Tank investor demonstrated, the younger you teach them about investing, the better off they’ll be.
6. Forcing them to save
It can be tempting to make your children save money whether they want to or not. As an adult who understands the power of compound interest, it’s only natural to want your child to start saving sooner rather than later. But if the collective experience of previous generations has shown us anything, it’s that the more you demand a child do something, the less they actually want to do it. The benefits of saving and earning interest are substantial, but you’ll do your child and their financial future a favor by encouraging them to set money aside instead of demanding it. To teach our children how to be smart with their money, we have to let them know we’re on their side. If we turn every financial conversation into a win/lose scenario, we risk damaging the personal relationship that is far more valuable than any financial gain.
7. Shopping without them
Without practical application, all the financial teaching in the world is little more than theoretical ideas. In a world where an increasing number of financial transactions are completed virtually — either online or via mobile apps, kids tend to view purchases as painless formalities. If the only time they see you shop is when you buy something from Amazon, it will be hard to convey even the most basic fundamentals of financial management. So, rather than leaving your kids with your spouse or a sitter the next time you go to the store, take them with you and let them get in on the action. Comparing physical products can help them understand the difference between cost and value. Sharing your shopping budget with them will help them learn how to navigate the flood of marketing messages and choose purchases wisely. And even though debit cards and mobile apps offer quick and easy check-outs, consider using cash and letting your child observe the physical exchange of money for goods. This old-school practice may be just what your child needs to understand that once you spend your money, it’s gone.
8. Failing to teach them about credit and debt
Perhaps more than any other financial subjects, credit and debt have the potential to sidetrack your child’s long-term financial stability. While this may be a subject too deep for the preschool crowd, you’ll certainly want to address it with your child no later than their junior high and high school years. Without a proper understanding of the true cost of debt, your kid may be in for a rude awakening when they head off to college and get inundated with credit card applications. Without the proper understanding, they may be tempted to sign up for credit cards and equate their newfound credit limit with “having money.” The easiest way to introduce them to the effects of interest is by lending them a small amount of money and setting a time frame for them to pay you back — with interest. This can be particularly effective when they earn money by working side projects or part-time jobs. When they see that quick access to money requires them to pay back more than they borrowed, the value of their hard-earned dollars will take on a new significance.
9. Neglecting the subject of generosity
Teaching kids to be financially responsible is a big deal. After all, much of their life will be spent earning money and trying to manage it. However, if all your instruction focuses on them, their money, and how they can control it, you’ll miss the boat. One of the best things we parents can teach our children is to be generous and use their money to help others whenever possible. But there’s a catch. Generosity starts in the heart and carries over to material things, not the other way around. To properly teach your child how to be generous, you’ll need to model it for them. How? Good question. Start by talking with your children about the experiences of people outside your family. Think about how various experiences make them feel and look for ways to help whenever possible. When you notice your child being generous towards a friend or family member, point it out and praise the action! Last, but not least, sit down as a family and choose a charity you can support with your time and your finances. When generosity becomes a family trait, your child stands a far better chance of carrying on the tradition when they leave home.
Raising children is incredibly rewarding, but nobody ever said it’s easy. The same can be said for teaching them the value of money and helping your kids develop solid financial habits of their own. By understanding the subtle and not-so-subtle ways we as parents can accidentally undermine our own efforts to raise financially responsible children, we stand a much better chance of avoiding those mistakes in the future.
Fortunately, you don’t have to figure out all the money matters on your own. Spero is here to help you and your children create a solid financial foundation that will provide long-term stability. We would love to talk with you about your current situation and your goals. Once we understand what you would like to accomplish, we can determine which products and programs can help you achieve those goals.