Smart Kids – Smart Money: What are You Teaching Your Kids About Financial Planning?
How we feel about money can usually be traced back to our experiences growing up. With that in mind, if you’re a parent, are you being intentional about what you are teaching your kids?
The lessons you’re taught – or not taught – as a child can have a long-lasting effect. In the world of wealth building and financial success, what you don’t know can hurt you. There are proven rules in regard to money and time-tested best practices that must be learned in order to experience sustained financial success. For some, these important lessons were learned the easy way, and for others, the hard way.
If you have children, or are planning to in the future, helping your kids truly learn and understand finances and financial planning should be a priority. We find in talking to clients who are parents that this can seem like a daunting task, but it may be easier than you think. Values differ from family to family, but the Linscomb & Williams team has put together the following tips we feel can be a useful way to help children become financially prudent adults.
At Linscomb & Williams, we feel it’s best to start teaching a child about money early on. The sooner you can plant the seeds of good financial habits, the better. Here are a few ways you can get started:
Use Candy or Toys as Currency
Self-discipline is one of the most important habits you can teach your children. Not only can this habit stay with them for the rest of their lives, but it can also transcend money into other parts of their adolescence and adulthood.
Take candy for example. At the end of Halloween, a lot of children have a bucket full of unwrapped candy. This can be a great opportunity to teach them not to eat the bulk of their candy in one sitting, and to use moderation.
You can help your children understand that delaying gratification for the right reasons can enable them to enjoy the things that they like more frequently. Instead of eating all of their candy in one or two sittings, help them understand that one or two fewer Reese’s Cups today will preserve extra treats they’ll still have tomorrow.
A bucket full of candy can also be a great way to introduce a budget. Set up a payment chart for your children. Maybe 5 pieces of candy can buy them a certain level of reward, such as a new toy; 10 can buy something larger; etc. If they wait a week to “cash in,” offer to match their candy total so they can get something bigger. Even if it’s subconscious, your children will start to see on a very basic level how budgeting and saving works.
Give an Allowance
The concept of budgeting and self-discipline can be further driven home when you’re ready to give them a regular allowance. This can be a great way to see what kind of habits they are developing, and learn the value of money early.
With an allowance, your kids can specifically see how money can afford them the things they want, but can run out if overused. An allowance also offers the opportunity to save each time they’re paid, similar to how money should be saved after each paycheck in the real world. If your children save consistently, they can see how much their money grows over time, leading to the perfect introduction to bank accounts and keeping money safe.
Be a Good Example
Your relationship with money is also important at this stage. Like many other habits, your children are watching you to learn how the world works, and money is no different. Do your best to show how you can delay gratification, and wait until the time is right to buy your own “toys” or enjoy certain things. Without a doubt, the example parents set in managing their own finances seems to be the biggest influencer of all on the financial habits developed by Generation Two. They watch what you do much more than they listen to what you say.
The big takeaway at this stage is to help them understand that money can become scarce if used improperly, so it’s important to start developing the self-discipline muscle.
When your children reach their teens, continue helping them understand the relationship between discipline and money, and take the lessons from the early years into their teens.
Explain Needs Vs. Wants
Helping a young person better understand needs versus wants will help them tremendously in their youth. You can do this by explaining how you cover your family’s needs first and then use money for fun. Show your kids how it’s important that they take a step back before making an impulse buy and asking themselves, “Do I really need this?” At this age, they are generally old enough to become involved in hearing discussions about the family's finances and decisions.
Bring Children to Financial Advisor Meetings
Connecting lessons to the real world is one of the greatest ways to help your teen learn. If you bring them along any time you meet with your financial advisor, they can learn a number of important lessons. The Chairman of the Linscomb & Williams Investment Committee cultivated what proved to be a lifelong interest in the stock market following an introductory visit with his father's financial advisor at the age of 17.
First, they can learn to trust certain financial institutions and help understand the normalcy of trusting the right person to manage money. Just as important, they can gain discernment to understand how to sense when things are not right or "too good to be true" lessons, which can be worth a great deal to them in life.
Next, they can learn all of the items that go into financial planning and wealth management. They’ll see the forward-thinking nature of saving and investing, and truly learn the merits of letting money “work” for you outside of a regular bank account. If you and your financial advisor are comfortable, let your teenager ask questions to join the conversation. This is always welcomed at Linscomb & Williams. We love the opportunity to help instill good financial habits in children and young adults.
Show the Value of Donating
If you are a charitable giver and investor, you have another unique lesson to impart to your child: The value of charity and philanthropy. Explain to your children that building wealth and having money can also give you the ability to help others and make a difference.
Furthermore, you can teach your kids that donating to certain charities can actually help your own finances in the form of a tax savings, giving you more opportunities to donate in the future. Explaining the link between good financial habits and the means to help others can speak volumes to teenagers before they head to college and instill the very valuable lesson that "it's not just about the money!"
Young Adult Children
Adulthood is when your children will be able to begin putting at least the basic financial values you’ve instilled in them into action. But there are specific risks that young adults should be aware of, which will come at them in full force during this time.
Teach Dangers of Credit Cards, Student Loans and Debt
Debt is probably the number one risk that young people face. Around the time of college, their mailboxes and emails are likely filled with ads and offers for credit cards. Without understanding the risks involved with paying with credit, young people can fall prey to the grip of bad debt.
At this time, it’s important to explain that while debt can be risky overall, going into debt for school can be less damaging than debt for spending from a credit card, especially if they are going to school for good reasons. Credit cards, however, typically offer interest rates near 20 percent, and with the average U.S. household holding $7,000 in credit card debt (among other debt), your children are at risk of falling into the debt trap that so many find themselves in.
Explain Compound Interest
If you can help your children understand how money can compound itself, they can understand both the merits of investing and the dangers of debt. Explain how the interest earned on a sum of money gets added to the original amount, and how it kicks off the positive cycle of exponential savings growth. Use real world numbers if you can.
Share Investing Knowledge
If you haven’t taught your children about how investing and the markets work, their young adulthood might be a good time. Rather than hoping they’ll learn about money in college or figure out how to invest when they have their first 401(k), you can give them their initial understanding of how stocks and bonds work. In truth, there’s no guarantee that your children will ever learn how to invest, unless you make it happen.
Share Your Financial Situation
When the time is right, it may become appropriate to finally sit down with your kids to explain your full financial situation. This can serve a few key benefits.
To begin, it can help your children see the fruits of all of your labor, and your situation is living proof of your financial lessons. Seeing your situation firsthand can help them grasp what created the life they live and how much better (or worse) life can potentially be if they work similarly.
Furthermore, it can help your children feel confident that you are opening up the family books to them, helping them understand the need for family wealth stewardship.
Discuss Estate Planning
The next conversation is a critical one. Once your children have seen behind the curtain of your finances, you can impress upon how they’re taken care of through the family estate. It’s important that your children see what they stand to potentially inherit, and the planning you’ve put forth to protect the family. Children who can see and feel the effort their parents put forth are likely to continue the trend and may take an active role in your care as you get older and retire.
It’s important to be able to set boundaries with your children. If you decide to financially assist your children when they’re adults, make sure you’re taking care your own needs first. Set clear boundaries, and, if necessary, find a way to cut off your children financially without waiting too long.
How Linscomb & Williams Can Help
Raising money-savvy kids is very much in your grasp. If you can start early and instill positive financial values into your children, it’s likely they will carry your legacy into the future – and even continue increasing it over the next generation.
If you’re not currently working with a financial advisor or feel it’s time to make a change, contact us. Linscomb & Williams is a fee-only, fiduciary financial planning firm headquartered in Houston, Texas and serving investors nationwide. We have 50 years of experience helping families build, preserve and manage wealth.