How Do I Help My Children Become Financially Responsible?
by Sandra W. Larson, CFP®
One of the great deficiencies of many of our school systems is that our children graduate from high school with very little knowledge of personal finance, if any. It is very difficult to know when to begin the process of personal finance education. We can begin early with paying our children allowance for chores completed which is the lesson method many of us grew up with. We can transfer the responsibility of purchasing “extras” to our children in high school when they get their first real job. Whatever method you might choose to use, it is essential that by the time your children reach the age of majority, they have some understanding of the value of a dollar and how to get that dollar.
The basic premise:
hard work = reward (financial or other) = steps towards achieving your goals
Before or right after your child graduates from high school they should have a few things figured out:
What Bank or Credit Union do they want to use? (not the Bank of Mom and Dad). Based on your experience, you might have a great recommendation for them. If not, they can seek guidance from another adult who has a particularly great relationship with their financial institution.
Help them get a credit card with a very low limit. This will help them build their credit history. It also helps them to understand that everything purchased on credit steals from their future buying power. Example: If I earn $400 per month, and spend $500 to buy a new coat, pair of boots and new blue tooth speaker, I now have only $300 to spend next month because I have to pay off my credit card. Or I have $375 to spend for the next 4 months plus because I only want to pay my $25 minimum payment due. Learning that lesson with a small credit line helps to keep them from making the mistake many of us make of borrowing from future earnings for today’s happiness. The best part of this early learning tool is that if they fail, it is much easier to bail out a $500 credit line than a $5,000 credit line.
Creating a budget is essential for most people. If you understand what it costs to meet your essential expenses and STICK TO IT, you have a fighting chance to stay ahead of the debt monster. Many people spend most of their adult life living paycheck to paycheck using debt to bridge the “I want or need it now” expenses. I have met people who will only pay cash and never use debt in any circumstance. If you want to be a CASH ONLY person, budget in a “savings” category for emergencies and “savings” for your target purchases like cars, phones, computers, vacations, etc.
Debt can be important. Most people pay in installments when they buy homes, vehicles and college or technical schools. It is important to be able to use debt for some of our foundational expenses as described above. But it is important to know that you don’t want that debt to get out of control. Having $50,000 in student loan debt is big if you graduate with a degree that will only allow you to earn minimum wage. My daughters were all working and attending college at the same time. There was some wailing and gnashing of teeth along the way, but they have all managed to learn valuable lessons about managing their personal finances.
Some people think it is the failure of the parents NOT to pay for their children’s college, let them live at home until they have a great job or provide the $50,000 wedding. The only failure by parents is allowing their children to NOT learn how to make the proper choices when it comes to their financial responsibilities. I have a friend who told their son that they had put away $100,000 for each of their two grandchildren for college. One grandchild got into a school that would cost $200,000. What was the son’s response? That is not enough money. He needs $200,000. That is what we have created in our society. Not a “thank you for your gracious offer of $100,000.” The response is “HE NEEDS MORE.”
Teaching your children to live within their means is a great lesson. Helping them to understand that the “MUST HAVE” of today is the thrift store donation of tomorrow. Guiding them through the process of making savings an essential expense which creates a firm financial foundation is a great gift. That firm financial foundation can provide protection in the future during times of financial crisis like the Great Recession of 2008. That firm financial foundation can help in times of extended illness, loss of a job, loss of a life partner and in many other circumstances.
There are people who have created great books on budgeting. That is a great birthday or holiday gift. Don’t be afraid to gift wisdom instead of socks! Books on various aspects of financial management, communications, self-help books, everyday wisdom books can send someone on a new, more successful trajectory. With their permission sign them up for a course, buy them a book, get them a library card, hook them up with a family friend who is a financial guru and by all means have them talk with your financial advisor.
That is how we all work together to help guide our kids to financial success!