I remember the day that I realized that I needed to make it a bigger priority to teach my kids about money. I was at the local electronics store playing with the iPads with my ten year old son.
“Dad, we should totally get one of these“, my son told me.
“They are fun. But I can’t afford to buy one right now”, I responded.
“That’s okay, dad. You can just put it on your credit card.”
“Uh, but then we would have to pay it back, with some interest. You can’t just put things on a credit card if you cannot afford them.”
My response was met with a completely blank stare. He was completely baffled by the concept. He clearly had no idea what interest was, what credit was, or what it truly meant to swipe that little plastic card. It was clear that my wife and I needed to open up our kids’ tiny little heads, and start pouring in everything that we knew about finances.
My Story
In my childhood, my parents really didn’t put forth much of an effort to teach me about money. I received a small allowance as a teenager, but never had to work very hard for it. My parents lived a fairly frugal lifestyle, and I certainly learned by watching them, but I never developed the skills to manage my own finances. At some point everyone must learn to understand the difference between wants and needs, and to realize that in order to get the good things in life, you need to put in the work and have patience.
When I graduated from college, I found myself a single man with zero responsibilities and a healthy paycheck. But with no idea what to do with this money, I managed to remain living paycheck to paycheck, spending my money mainly on bar tabs and concert tickets.
A few years later, I met my wife and we started a family together. We bought a house and traversed through a cycle of spending and budgeting for years and years until the levee eventually broke and we found ourselves deep in credit card debt, needing to make dramatic changes. We have since righted the ship and vowed to never go down that path again, but it took a serious wake up call to get us there.
I know that our story and our struggles are not unusual in today’s society, but I do want my kids to have a more healthy relationship with money than my own. A few years ago, my wife and I spent a few months reading everything that we could on the topic and decided to make some changes that would help our kids to begin to understand the world of finance.
Model Behavior
The most important thing that you can do to teach your children about finances it to walk the walk yourself. If you are constantly lusting after the newest possessions or dreaming of something bigger and better, than you can be sure that your children will do the same when they are older. If you drag your kids along to endless shopping expeditions to the local shopping mall or mega-store, then by proxy you are teaching them that the proper way for adults to entertain themselves, is to go out and spend money.
Contrarily, if you incorporate healthy money habits into your life, your kids are much more likely to adopt the same behaviors. If you keep your house clutter-free and sell or donate items that you don’t use, it helps to show that there is more to life than material things. If your kids see you comparison shopping, hitting the clearance racks, or clipping coupons, they will start to understand the value in saving a few dollars wherever possible. You might even be able to include your kids in the family budgeting process!
Many adults are afraid to talk about money in front of their kids, but it doesn’t have to be a taboo topic. Money can be a powerful tool to get the things that you want in life, but there is no reason to shroud it in secrecy. I certainly don’t tell my kids everything about our financial situation. They have no idea how much money I make, and their guesses on how much our house cost range from $5000 to $5 million dollars (obviously, the true value is somewhere in the middle). However, I will freely admit to them when times are tight and we won’t be able to go out to eat or go to a movie. In the past few years, I have talked to them about everything from retirement savings to mortgage refinancing. I figure, the more that they are exposed to the concepts that make money work, the more that they will absorb.
Feeling the Savings
Every kid seems to receive money, at least a few times per year. However, what the kids will do when they get this money can vary wildly from child to child. Our oldest son often started begging us the minute that he received a cash gift to take him to the nearest toy store so that he could pick something out. Since it was his money, it felt wrong to tell him that he wasn’t allowed to spend it. After a few days of nagging, we would eventually relent and he would spend every last cent on Pokemon Cards, or another toy that he would love for a few days and then promptly forget about.
His little brother on the other hand, was content to just put every dollar that he received into his wallet, where it would stay untouched. While an instinct to save came naturally to him, it was obviously a much greater struggle for his big brother. We needed to find a way for his brother to learn how beneficial this type of behavior can be.
This is where custodial savings accounts come in. A few times each year, many popular banks offer a special where they give a small cash bonus for opening a savings account. We used this opportunity to open up an account for each of our kids, giving them each a nice little financial bonus to step into savings.
The benefits of having a savings account for the kids are many. First and foremost, the money earns interest while it is sitting in the bank. This news was music to the ears of our middle child, who was thrilled to learn that his money could grow on its own when he saved it. For our older son with the strong urge to spend, the biggest benefit of the savings account was the fact that his cash wasn’t immediately available for impulse spending. It takes 3-5 days to transfer the money from the savings account to a usable format, typically enough for most impulses to die down. This is a similar strategy to the concept of freezing your credit cards in a block of ice that some financial experts advocate.
A year after opening these accounts, it is clear that our oldest is starting to understand the benefit of saving your money instead of spending it immediately. Instead of a drawer full of cheap toys that he forgets that he even bought, he now has a few hundred dollars in the bank. This is enough to purchase something that he can truly enjoy, or to just sit back and watch it grow until he will really need it.
