As I write this blog about raising financially responsible kids, I want to be completely transparent (dad joke). My wife and I have a 9-month-old daughter named Charlotte, and we are far from having it all figured out. However, through many conversations with more experienced parents, we’ve found that no one has it figured out. Every family just has to try their best with what’s available and most importantly – love your kids. So, keep this in mind as you read my thoughts and research.
I grew up in Chesapeake, Virginia. My dad, a schoolteacher at Oscar Smith high school in the 90s and since then a contractor, and my mom, a cancer research specialist at Sentara Norfolk General, laid the foundation for my relationship with and perspective of money. They were open and honest about their finances, explaining where they went right and where they went wrong. These finance-related conversations created a stronger bond between us. Now, with a family of my own, I still find it helpful to run questions and scenarios by my parents regarding financial decisions because I truly value their experience and input. My wife and I strive to be financially responsible, saving where we can while also spending a reasonable amount to enjoy ourselves in the present.
So how did my parents do it? What was their secret sauce that led to children that 1) have a solid foundation of personal finances, 2) feel comfortable asking for financial advice, and 3) aren’t in loads of personal debt? As I look back over my childhood and young adulthood, here’s what I’ve found to be the most impactful things my parents did as well as a few other things that my wife and I may implement with our children:
Start talking about money early.
One of the first things you can do for young children is to show them how money factors into everyday decisions. “We can either buy this toy or buy this candy bar.” Explaining scarcity and being responsible with our dollars early can help foster an environment where he or she connects things or experiences with money. Eventually, that conversation may lead to something like, “Mommy and daddy have to go to work so we can _____ (live in our house/turn the lights on/vacation/etc.)”. The important thing is that you talk about the concept early.
Giving/Saving/Spending
Something my wife and I would like to implement is the concept of giving/saving/spending early on. For each dollar your child earns, talk to them about what percent will be given, what percent will be saved, and what percent will be spent. Have the conversation and develop a plan before the money is earned and help them stick to that plan. Cash is the most visual tool; it may be helpful to use mason jars to help with the illustration. Instilling this approach early can help raise adults who are generous but also responsible.
Set an example and be transparent in your strengths and weaknesses.
Transparency is key, to an extent. Including your children in your money conversations can be beneficial in their learning. Some people choose to discuss the expenses in detail but decide to leave out the amount of income, just in case their kids decide to tell the whole neighborhood. Once that trust is there, I believe it can set them up for success by walking them through your positive and negative decisions with your money and introduce them to the idea of money budgeting.
Set up a savings account, brokerage account, and/or a Roth IRA.
A bank account is a big step for a child. Set up a joint account with them and talk through how automation can help stay on track. If they have a job, automate a consistent dollar amount of money into their savings account each time they are paid. Make sure to discuss their goals as well, as this can help with motivation. Are they saving for a new toy, a new car, or something else?
A Roth IRA and/or a brokerage account can be a great tool to get them thinking about the future and physically seeing their money grow. Consider matching their contributions to reward the act of saving for the future.
Saving for college
Once your child reaches high school, begin having conversations about the college you choose (public vs. private, in-state vs. out-of-state, etc.) and how your major/field (i.e., art vs. engineering) can impact the student loan debt you leave with after school. Compare that with the earnings potential for each potential career. Then, show an example of a reasonable budget after graduating college, using the appropriate starting salary for the career options.
- If you make $30,000 out of school with $80,000 in debt, here is your monthly cash flow.
- If you make $50,000 out of school with $30,000 in debt, here is your monthly cash flow.
Debt is scary.
Whether you share from personal experience, or you look up horror stories about it online, make sure you talk about debt. It can be crippling for someone just entering the workforce. Talk to your child about how that brand new car may not be the best decision right out of college by discussing budgets and cash flow. If possible, have conversations like this before they make a big purchase. If you’ve laid the groundwork for financial planning, they’ll likely come to you before making a big decision anyway.
Finally, here are a few tips straight from my parents’ playbook:
- Growing up we were not given an allowance. Household chores (pooper scooping for the dog, washing dishes, taking out the trash, etc.) were things that needed to be done as a family unit, and thus was not compensated for. Mom and dad go to work to pay the mortgage, and kids do chores as their “rent.” Some may say that is strict, but I like it. Wherever you stand on that, think about whether or not you will incorporate an allowance, and if so, how that money will be “earned.”
- To help us learn about hard work and entrepreneurship, my dad helped us start a lawn-mowing business. We would cut lawns every Saturday morning together. Not only was this a good learning experience, but it was quality time with our dad as well. Consider starting something with your child, should time allow.
- My parents paid for the essentials (food, clothing, etc.) as well as anything we did together as a family (dining out, vacation, etc.). However, we had to use our own money if we went out with friends, went shopping for ourselves, or were making a big purchase.
- The exception: the auto deal. My parents provided a 50% match up to $5,000 for our first car purchase. I would like to take this idea and expand this to include retirement planning and savings as well. Once my children have earned income, our plan is to set up Roth IRAs and provide a 100% match for any contributions, up to the income limit. Our hope is that this will spark a passion for investing. Not to mention the compounding growth of contributing to a Roth IRA at a young age.
Conclusion
Raising financially responsible children is a never-ending task. As your child matures, be sure to stay on the front-end of these conversations. The most important takeaway is transparency and trust. Build that trust with your child to where they feel comfortable coming to you with financial questions. If you are interested in scheduling a family planning meeting to educate your family and discuss your financial plan, give Tull Financial Group a call at (757) 436-1122 to talk to an advisor.