As parents, we want the very best for our children, in every walk of life. We want them to be prosperous- in the widest sense of the term. Money may not be top of that list, but it’s certainly somewhere up there. All of us would like to raise a financially responsible child.
How do you do that? Well, for starters, not by starting a Roth IRA for them. I’m putting this out here because it is not the panacea it’s made out to be. By all means, do it if it fits into the scheme of things organically. But don’t sweat it one bit if it doesn’t- say because you are an employed physician and do not run your own business.
So what does work? Let’s take a look:
1. Talk About It
The opportunities for teachable moments are endless. Prices at grocery stores, waiting for something to go on sale, making choices for vacation or other big purchases. Or a game of Monopoly.
Keep it simple and age appropriate. The lesson is more likely to percolate. Instead of preaching to them, just talk aloud about the decisions as you’re making them.
And acknowledge that not everyone gets excited talking about finances. And your kid may be one of those. And that’s okay. But remind them that it doesn’t absolve them, at least in the future, of the responsibility of taking good care of their personal finances.
2. Give them an Allowance
I didn’t believe in allowances for kids for the longest time. I was already giving them everything (within reason). This is the book that finally sold me on allowances. It’s a great read. And if you’re too busy to read the entire thing, here’s my 5 minute version.
The allowance should have no strings attached. That way, you use it as a tool, not a reward. It’s not tied to good behavior. Or the completion of chores. Find other consequences for those issues.
How much of an allowance? You get to decide. Many sources quote 50 cents to a dollar for every year of age, every week. But it’s entirely up to you. The dollar amount matters way less than the lesson it imparts.
When do you start? Again, your choice. People choose anywhere between five and ten years of age. Some of it depends on the maturity of the kid, too.
The allowance teaches them that if they want something, they have to give up something else. (Because going into debt is not an option).
Have them split up the allowance into three jars. It doesn’t literally have to be jars- but that makes it tangible for the littlest ones. Label the jars: Spend, Save and Give. Use any proportion you like.
Some people add a fourth jar. The “family tax” jar. To reduce the sting of taxes when the kid finally has a real job. You may choose to introduce this concept right from the get-go- by assigning 5-10% of the allowance to go to the “family tax” jar.
[You can reduce the sting of this tax by using the funds in that jar for something fun for the whole family- like a family ice-cream outing].
3. Say No
“No” used appropriately and sparingly enough helps kids stay grounded. If they get habituated to getting everything that catches their whim, not only do things give them diminishing amounts of joy, you make them ill-prepared to face the “no’s” that life will inevitably dole out.
The “no” however should not come from a place of scarcity. Instead of “we can’t afford this”, how about framing it as “we do not need this now”. Or, “that looks like a good idea, let’s plan to save up for it”.
4. Focus on Gratitude
Right alongside not creating a scarcity mentality, is to nurture the abundance mindset. That comes from gratitude. We do have incredible lives, if you think about it. Why not consciously focus on it?
There are many, many ways to do that. From noticing all the times when someone has less than us and reminding ourselves and our kids to be grateful for it, all the way to generous charitable giving.
I came across a graphic, I forget where, that showed when someone gave $100 to charity in a year, the following year, they made $325 more than before. This shouldn’t be the primary motivation to give, but it does re-enforce that giving doesn’t lessen prosperity. If anything, that bounty is given back to you manyfold.
One actionable step is to write a gratitude journal. Or every night at dinner, or over Sunday brunch, whichever works for your family- talk about one (or three or five) things that each of you were grateful for, the past day or week. Make it specific. Or, like me, you risk hearing “I’m grateful for screen time” coming from the six-year-old every day.
Make it both about money as well as non-money stuff. When gratitude becomes part of our lives, it spills over in everything.
5. Give them Skin in the Game
This is often considered in the context of higher education. You save for college and maybe even further studies. You don’t want them saddled with student loans, like you may have been.
But make your contribution 95%, not 100%. That small debt will not hurt them over the long run. And may motivate them to do better at school. Maybe it’s a small enough amount that they can earn it with a little work on the side, instead of taking out a loan. They’ll learn to get creative.
This actually has much wider applications. It starts with the allowance. Once it’s their own money that’s going towards purchasing something, they quickly learn to get careful about it. Maybe they find that junk from the dollar store wasn’t so fun to play with, beyond a couple of days. Maybe using up all the money in their “spend” jar on Roblox gift cards means they can’t buy the treat they really really want to have, the next time you’re at the store.
6. Define your Relationship with Money
Many grownups, let alone kids, would do well to remember that money is only a tool. And that, like fire, it can be used both to build as well as to destroy.
You work really hard as a physician because it gives you a sense of purpose. The money is just a byproduct. A good one, no doubt, but not the primary driver. In this case, the money becomes a tool that serves your deepest values. Like enhancing your family’s life with quality time and experiences. And of course, the ability to improve the lives of others, by giving.
If, on the other hand, the accumulation of wealth is the end goal, it usually ends up being used for things perceived to improve status. And we all know how that ends.
And children learn as you do, not as you say.
7. Build their Self Esteem
And base that genuine, unshakable confidence not on material possessions but who they are inside. Once they can differentiate feeling good about themselves, as opposed to feeling good for what they own, they’ll be golden.
Teach them that money does not define them. How they treat others, does.
Encourage their efforts more than their results.
Reward them with validation and encouragement, rather than gifts. It lasts longer.
8. Talk about the Basics
One really effective way to get them interested in money and savings is the Compound Interest Calculator. When your eight-year-old sees that the $100 that Grandma gave them on their birthday could grow to $215 in the 10 years that she will go to college. Or to more than $8000 in the 57 years to her retirement, maybe it will light a spark. Maybe she will ask you to put it into her UTMA and invest it in Total Stock Market Index fund, rather than spend it on a toy or treat.
Investing basics are not complex. All your child needs to know that when you’re betting on the entire U.S. economy to grow and prosper, you get to reap some of the benefits of that growth.
It’s the same with budgeting basics.
Nothing that needs to make their eyes glaze over. How much money coming in? How much money going out? Making sure money coming in is more than money going out. That’s most of it, right?
9. Let them Work
This is a loaded one. There are two camps. Parents who believe there is nothing like hard work to give them some perspective. And those who believe that in this day and age, their child’s time is much better spent focusing on looking ahead and beefing up that resume.
I am firmly part of the first camp. Now, my kids are young and I have not faced that dilemma yet. But it’s hard to argue that work doesn’t have any benefits. How it looks may be immaterial. They don’t have to mow lawns in the sweltering heat. They could help you out in your office cleaning or filing papers. They could babysit or run errands for an elderly neighbor.
But, just for some time, putting something else before their own needs, which is what work entails, couldn’t be a bad thing.
10. Give them a Boost
Depending on where you are in your financial path, give them a leg up in life, if, and only if, you are comfortably able to do so. Start a 529 account for them for college education. Start a UTMA/UGMA account for them and put into it whatever you can. This is basically the equivalent of a taxable, brokerage account for an adult. And if they have a job, encourage them to put their earnings in a Roth IRA.
BUT, pay yourself first. You cannot take out a loan for retirement- they can take one out for college or grad school. And the other accounts are, by no means, mandatory for their financial success. It’s all gravy.
And when you’ve focussed on the first nine points in this post, you won’t have to worry that when they can legally access their UTMA at 18 or 21, they’ll blow it on cars, cuties or cash.
Thank you for reading. Please note, there is an affiliate link for the book in this post.
What other things do you do to raise a financially responsible child? Post in the comments below and so we can all learn as a community!