As parents, we all want what is best for our children.
You may often hear parents boast, “I want my kids to have what I didn’t have.” We want the next generation to be more successful than we are.
Yet, more and more that’s not happening.
“Johnny” is a 54 year old man who still lives with his parents. He moved out briefly when he married and had two children, but 8 years into the marriage, he and his wife divorced, and he moved back home with his parents. That was 20 years ago. He is unemployed and has been for over a decade. His parents pay his living expenses.
“Renee” is a 27 year old college graduate. She went to college at an expensive school to get an art history degree. She is now paying back over $40,000 in student loan debt. She’s working at the local coffee shop while she looks for a job in her field, though in her small town, such jobs are nearly non-existent.
Unfortunately, these types of situations are more and more common. As parents, we want to do everything we can for our kids, but often that turns into enabling, which can lead to the situations above.
A far better response is to teach our children to be financially independent at a young age.
Remember, the earlier you start, the more adaptable your children are. Consider these strategies below…
Here’s How You Help Your Children Be Financially Responsible
For Children Ages 5 to 10
1. Give your children an allowance.
Parents handle an allowance different ways. Some people tie the allowance to chores, and some just freely give the allowance each week. Do what works best for you.
In our house, each child has multiple chores, and each chore is assigned an amount. If the kids don’t do the chore, they don’t get the money. Some weeks they’re not motivated and don’t do their chores. In that case, they don’t get an allowance.
Whatever your rule, if you pay a weekly allowance, be sure not to give the kids any additional money. If your son goes to the arcade with friends and wants you to pony up $10, say no. That’s what his spending money is for. Part of learning financial responsibility is learning to budget money and save for what you want.
You may also want to consider instituting a rule that a portion of their money must go to savings, another portion to giving, and the rest to spending. Dave Ramsey states of this practice, “Here’s the point of saving, even if it’s only a dollar. You want to make sure you teach them a pattern of habits that will help them win in life. . .That one dollar won’t make him rich right now, but getting into the habit of saving will make him wealthy one day” (CBN.com).
2. Help your child set goals for saving.
Let’s face it, saving isn’t always a blast for adults. Children are even more driven by instant gratification. So, from the time a child first earns an allowance, teach her to save for the things she wants.
Let’s say she wants a toy that costs $15. She earns $10 a week for allowance. If you have her set aside 10% for charity and 10% for savings, she now has $8 at her disposal. You could teach her that if she doesn’t spend any of her spending money, she’ll have enough for the toy within 2 weeks. Or, if she chooses to spend some of her money this week on something else, it will take her several more weeks to have enough for the toy. If she spends her money and is then upset that she doesn’t have any money left for the toy, don’t bail her out. This bitter lesson will help her learn money management.
For Children 11 to 18
At this age, your children are beginning to get more financially savvy, and your financial lessons should be, too.
1. Consider giving your kids a clothing stipend.
Some parents give their children a certain amount of money either twice a year or every month to buy their clothes. I wouldn’t recommend doing this with an 11 year old, but a mature 14 year old could handle it.
The point is to give the kids enough money to be able to meet their clothing needs, but not necessarily to buy the most expensive clothes. If you give her $50 a month, she could choose to buy one pair of jeans at the Gap. If she went the other route and bought her clothes at second hand stores, she could buy enough for a full season’s worth of clothes with a stipend from a month or two.
If you do this, you teach your children how far money can stretch and how to make responsible purchases. If she blows her money on expensive clothes and then needs to buy a dress for a formal event, too bad. She’ll have to do without or find another creative solution like borrowing a dress from a friend.
2. Help your child set up a Roth IRA.
Not many realize that if your child is employed outside the home, he can set up a Roth IRA with his parent as guardian of the account. He’ll be able to contribute up to the amount he makes in a year or up to the current year’s contribution limit, whichever is smaller.
True, trying to convince your teen to contribute is another story, but showing him how much a small amount of money he deposits now, while in his teens, can grow by his sixties may do the trick.
If your child is not yet a teen working outside the home, you can set the stage to motivate your child to contribute to a Roth IRA at a young age.
Remember, one of the things to do when your kids are 5 to 10 years old is to teach them delayed gratification and saving for what they want. You can provide additional motivation by paying your child interest for each week that they wait to buy the thing they are saving for. (I suggest that a parent pay the interest rather than the bank because banks’ interest rates are so dismal right now, they won’t do much to motivate your child.) If you child saves $5 a week, and you pay, say, .50 a week in interest, when the child has enough money to make his $20 purchase, he’ll actually have $22 thanks to your interest payment. This can be enough to teach your child the power of compounding interest. If he learns this lesson well, he may happily start a Roth IRA.
3. Help with scholarship and financial aid forms for college.
Are you going to help your child pay for college? If so, early on consider letting your child know how much you’ll be able to pay for her education. If you can’t pay the full amount, she needs to know that early enough so she can be proactive about finding scholarships.
While I don’t suggest that you do all the scholarship research for her, I do suggest that you be willing to help her fill out scholarship and financial aid paperwork. The process can be overwhelming, and a teen shouldn’t have to do it all by herself.
Also, set realistic expectations of how much college costs. Show her what you can contribute to her college education and how much will remain to be paid. If she thinks student loans are the answer, show how much she’ll need to pay per month when the student loans go into repayment. If she’s learned her lesson about the power of interest, that may be enough to cause her to choose an affordable college rather than the dream college she wants to attend.
While you can gently guide her college choice, if she’s insistent about the college she wants to attend, you may have no recourse except to let her make her own mistakes and hope you’ve provided enough financial guidance throughout the years to help her make the best decision.
We all want the best for our children. Rather than showering our children with every material thing, a better strategy may be to teach them to be financially responsible by teaching them the power of delayed gratification, saving and giving, as well as investing for their later years.
Glen’s Note: I think one critically important step in teaching your kids financial responsibility is to set the example. “Do as I say, not as I do,” doesn’t work very well in children’s minds, especially with money. Talk through how you handle your finances with your kids and set the example for them to learn from.