Raising children – or, what actor Ed Asner called “part joy and part guerilla warfare.” Children can sabotage your patience – and your retirement. As with teaching them manners, it’s important to teach kids about money.
One of the smartest money moves a parent can make is to raise financially independent children. It benefits them, but it arguably benefits you more. Consider that more than a third of baby boomers provide financial support to a child. Nearly 3 million Americans over the age of 60 carry student loans – 73% of which is on account of a child’s or grandchild’s education.
It’s no surprise then that people age 65 or older with financially independent children are twice as likely to be in position to retire. Once your children move out, retirement should be your primary focus. The more financial assistance you provide a child, the less you’re saving for retirement.
Unfortunately, many parents, as exemplified by the statistics above, don’t know how to teach kids about money. You won’t find a “Money” chapter in What to Expect When Expecting.
You will, however, find one in the book, The Millionaire Next Door, by researchers Thomas Stanley and William Danko. They found that one common trait among wealthy Americans was that “their adult children are economically self-sufficient.” Further, Stanley and Danko gathered the rules wealthy families followed to encourage their children to become financially independent.
We’ve adapted the most applicable rules into these tips on how to teach kids about money.
Don’t let your children believe that you’re wealthy
Living a high-status/high-consumption lifestyle can skew your children’s perception of money. They will associate materialism with wealth and may grow up inclined to spend rather than save. Remember, children are sponges who emulate their parent’s behavior, including how you talk about and use money.
No matter how wealthy you are, emphasize discipline and frugality
Discipline and frugality are key contributors to financial success. After all, the surest way to build wealth is to regularly save and live within your means.
Parents are role models, and as such the best way to teach your children is by example. If there are inconsistencies between what you say and what you do, children will notice. For example, if you tell your children to save electricity by turning off the lights whenever they leave a room, be sure to practice what you preach.
Don’t pass on wealth until your children have established a mature, disciplined and adult lifestyle and profession
Children raised with silver spoons are less likely to learn how to accumulate wealth on their own. They will consume rather than save and invest for the future. Having not experienced adversity or overcoming challenges to achieve something creates a feeling of dependency. If you spoil your children, they will struggle to distinguish their wealth from your wealth. This leads them to live a high-consumption lifestyle they may not be able to sustain on their own – and neither will you when each dollar is needed for retirement.
If you want to gift money to your kids, consider placing it in a trust or retirement account they can’t touch until a later age. By then your children will have established their own way of living, and a financial windfall won’t make much of a difference in how they live.
Don’t make promises you can’t keep
A child never forgets, so don’t make promises you can’t keep. Whether it’s a new bike or college tuition, false promises do two things: create discord with your children and put you in a tough spot. The guilt of not keeping a promise may impel you to fulfill it even if it is financially detrimental to you. Soon your promises become expectations of your children, who then come to you every time they need money.
Never give cash or gifts as part of a negotiating strategy
Engaging in hostage-like negotiations with children is a losing parenting strategy for several reasons. Your children will believe that the way to your wallet is through coercion. It may also create animosity among siblings. If he gets a bike, then I should get a bike. Further, if you give in to one child you may feel the urge to provide something to your other children, even if your help wasn’t requested.
Don’t try to compete with your children
You already made how much at what age? You own what type of sports car? Boasting about your money sends a confusing message. It rarely works as motivation. Often children are unable to match their parents’ accomplishments. Or, they simply don’t have a desire to live as their parents did.
Therefore, you don’t want to pressure them to live a lifestyle that is unaffordable. It’s better to provide practical money advice or share your experiences from which they can learn.
Remember that your children are individuals
Each child will reach different levels of success. Plus, success is a relative term. Subsidizing the lifestyle of your low-net worth child so he or she can appear as successful as your high-net worth is unlikely to eliminate the inequality.
Emphasize your children’s achievements, no matter how small, not their symbols of success
If you want your children to build wealth, praise what they achieve and not what they own. The goal isn’t to get a high-paying job or build a successful business just to consume. Compliment them on the job but not the material things that may come with it. That teaches children the value of accomplishments instead of purchases.
Teach them that there are more valuable things in life than money
This tip may sound counterintuitive. But, someone who values friends, family, health, integrity, honesty, charity, etc., more than money will likely lead a richer life. You won’t feel the need to chase money, cut corners or cheat others. You’ll be more willing to experience new things with people from all backgrounds, whether it’s bagging groceries or volunteering in a soup kitchen. These experiences can teach you valuable life skills and the importance of wealth over status.
There are many ways to teach kids about money. As there are many reasons why you should. The most important reason arguably is to protect yourself. After all, you have a vested interest in the financial independence and success of your children. They may be the ones who will choose your rest home.