Many parents are concerned about raising their children to be financially savvy. If you want to raise kids who can create and manage wealth, there are a handful of key life skills every child should practice. Every kid should practice living within a budget before leaving home, not after. One way to provide opportunities for real world lessons at home is to give your children some oversight of the family budget.
Just as your children need opportunities in order to develop their athletic and academic abilities, they also need opportunities to develop their money management skills. Involving your children in the family finances now will set the precedents they will most likely follow as adults. While each family has to determine what level of involvement is appropriate, here are some general principles that I've found helpful in raising money-savvy teens.
First, share as much as possible about your family's finances. This is very difficult for many parents. Some fear that their children will demand more spending money once they know how much mom and dad make each month. Others are embarrassed that they can't make ends meet, even though they have a good income. Whatever the reason, more harm can come from excluding your children than from talking openly about family money matters.
Children need to see the workings of their own family's finances in order to keep from being completely foolish with their own money. Ask your children how much money they will need to have to retire at age 65 and keep their current standard of living. Most parents and children can only guess at this figure, but the answer is many millions of dollars. That's reason enough to get your kids off to a good start.
Financial decisions are also opportunities to discuss motives, which in turn instill values. A frugal father could just be mean and stingy, or he could be preparing a retirement nest egg that will take care of his wife until age 100, long after he is gone. Without knowing the motive behind his actions, children can easily assume the worst.
Even a parent's weaknesses and mistakes can be learning opportunities for their children. I have met very few people who haven't made at least one or two large financial mistakes. If you are open and honest about these mistakes, the negative example can be turned into a positive lesson for your children.
Also, if a family is having difficulty with their finances, teenage children can help. Getting the entire family to change habits and budget wisely is essential when trying to get out of debt, curb spending, or increase savings.
Finally, the best way for children of any age to get experience with finances is to give them real responsibility handling money. Children cannot learn how to be responsible with money without having a safe way of being irresponsible. I suggest that, as early as children are ready, they be given the slice of the family's budget that most directly affects them. By the time they are teenagers, they could be handling much of the money that effects their lives.
With young children, they can handle the money that is spent on games, toys and entertainment. Having to save in order to buy something that they want teaches invaluable lessons. Learning to avoid impulse buying by waiting one or two weeks before making a big purchase is one habit only learned through experience.
Another advantage of giving responsibility to your children is that it eliminates the whining and nagging for you to buy them more stuff. If your children are responsible for the game and toy budget, then they have to save up enough money to purchase that new game they want.
Parents need to be organized enough to know what amount of money is being spent in each portion of their budget in order to give their children the right amount of money. If parents help their children understand the principles of budgeting while they are young and they will be able to handle larger amounts of money when they reach their teen years.
In their teen years children can take on their own clothing budget. Many children stop wanting those expensive outfits as soon as they know that any money they save is theirs to keep and spend somewhere else.
Children can also be involved in the family's generosity. They can be included in the family conversation about what charities to contribute to and discuss what good is done by those organizations. As they are given their own money, a portion can be set aside for them to learn generosity by choosing the organizations they want to support.
By the time children are teenagers, they should have different budget categories that they spend their money on, including savings and investments. Trying to balance all of these difference categories is what budgeting is all about. By putting a given percentage of monthly "income" into each category children learn the important lesson of proportional living.
Part of being responsible includes keeping an account of where money is being spent. This is also a good discipline to learn. Whatever spending they can't account for each month could be deducted from the next month's allowance. Keeping track of their spending will give them the skills necessary to live well within their means later in life.
Here are some suggested categories, and a sample budget for teenagers: 15% Clothes 10% Entertainment (games, electronics, books, CDs) 5% Birthday gifts 10% Christmas gifts 7% Recreation (movies, eating out, socializing) 18% Educational and vocational pursuits 10% Big purchases 10% Charitable giving 15% Save and invest
It pays to talk with your children and offer them opportunities to practice being financially savvy. Give them a chance to fail while the consequences are not too dire, and they will grow competent to handle larger amounts as they come into adulthood.
If you'd like to further your family's financial education, consider attending the NAPFA Consumer Education Foundation's free monthly seminars. This Saturday, March 24th, I will be speaking on "Raising Money-Savvy Kids" and reviewing additional wealth management principles. All presentations are held at the Charlottesville Northside Library Meeting Room from 12:00pm to 1:30pm. For more information visit http://www.napfa.org/consumer/NCEFCharlottesville.asp.
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