Take a moment to reflect on all of the poor financial decisions you have made. Now, imagine your children making similar (or worse) mistakes. Scary picture, isn’t it? Even if you have managed your money wisely, there is always room for improvement with the next generation.
A parent’s responsibilities seem to be never ending. Understandably, smaller issues sometimes fall through the cracks during the fast pace of everyday life — preparing your children for financial success should not be one of those issues. Providing your kids with a solid financial education is one of the most important things you can do in preparing them to leave the nest.
Why Is It so Important?
It is easy to spot a young adult that has no clue how to manage their money. They will typically engage in reckless spending, rely on loans from others to pay bills, and eventually wind up with poor credit and substantial debt. Even young adults who live frugally during college can face hard times after graduation when their student loans become due.
According to a recent study conducted by The Institute for College Access and Success, nearly 70 percent of graduating college seniors will have some amount of student loan debt. The average amount of student loan debt per person was near $29,000. While you can never guarantee anything in your children’s lives, you can make a significant difference in many areas by engaging them in honest and transparent conversations.
The Early Years: Ages 3-7
For children in this age group, it may be difficult to grasp some of the most complex concepts of money. Nevertheless, it is still important to begin teaching them as soon as possible. Research shows that many life-long money habits are formed by age seven. The most important principle you should communicate during these formative years is that saving money is a natural thing to do.
An attractive approach to teaching young children about money is the “Spend/Save/Give” project. Take three jars and label each one appropriately. Whenever your child receives money, either as an allowance or a gift, have them divide it up between the three jars. The Spend Jar can frequently be accessed, and the funds within are free to use on small and inexpensive items. The Save Jar should only be opened when it is time to purchase something your child has been specifically saving up for. Finally, the Give Jar should be reserved to buy gifts for others or give to charity.
Another important strategy to use during this period is discouraging instant gratification – it is also one of the most difficult. Be persistent. Eventually, your young one will begin to understand that every trip to the store does not entitle them to a treat or toy. Denying instant gratification will build a strong defense against impulse spending when they grow older.
The Preteen Years: Ages 8-13
By the time your kids reach this age range, they will most likely be ready to learn a few of the most complicated factors involved in financial decision-making. It is okay to use still the Spend/Save/Gift example though it is recommended to increase the threshold to empty the Save Jar. Remember only to set achievable goals – setting goals that will take several months to achieve may cause your child to lose interest.
This is a good age to get your kids involved in the household finances. Enlist your kids to help clip coupons or make minor adjustments to the budget. Bring them shopping with you, and encourage them to take notice of how much everything costs. When you checkout, translate the total price into something more tangible, such as how many hours you had to work to make that purchase.
A similar tactic can be used for larger purchases: How many months must you work to pay off your vehicle? How many weeks to buy a new television? How many days to pay the phone bill? These are the years to get them fired up about saving money. Let them go online and experiment with an online compound interest calculator. Introduce them to the idea of saving for retirement and staying out of debt.
The Teenage Years: Ages 14-18
Life after graduation is something that all high students routinely fantasize about. While they may be thinking about all the fantastic college parties they will attend, it is your duty to make them think about the financial milestones they are about to experience. According to a 2014 study by the University of Michigan Institute for Social Research, “most students devote about one-half or more of their earnings to discretionary spending on relatively short-term wants and needs.”
Aside from reckless and impulsive spending, the main danger your young adult will face during their college years is aggressive marketing from credit card companies. It is no secret that many major credit card companies deliberately target the young and financially inexperienced. If your teenager is planning to apply for a credit card, teach them to avoid debt by never charging what you can’t pay back within a month.
During this age range, escalate the monetary value of their savings goal. Have them draw up a budget for any recurring funds they may receive. Prepaid debit cards are an excellent way to prepare teens for the “real world” – overdrafts are typically not allowed, you can add funds electronically, and many companies provide online budgeting resources to help track spending.
Your Children Will Thank You
Once your kids turn 18, you will lose a great deal of control over their spending habits. By planting the seeds of smart money management early in their lives, you are directly influencing the success of their future. Even if you have subpar financial skills, it is never too late to learn and pass the knowledge on to your offspring.
The key concept to remember is that you must spend less than you earn to avoid financial hardships. Everything else will eventually fall under that umbrella. Teaching your children about saving, avoiding debt, and planning for contingencies will set them well on their way to a life of financial happiness.