Raising Money-Savvy Kids

The following is a guest post from Marotta Wealth Management.

Many people lament that schools don't teach children to be financially responsible. But studies show that book learning doesn't work when trying to teach about finances. Here is a guide for what will give your children the best chance of handling their money well.

Financial responsibility is more about self-discipline than about knowledge. Think of it like dieting or staying physically fit, not solving math problems. It isn't simply information you learn from a book, it is a skill you learn by doing.

I coached soccer for many years and was assistant coach to one of the best. Excellent coaches understand how to design exciting games that teach specific skills. They are able to motivate the players about the game and at the same time teach them the skills they need to be successful.

Training to be financially adept requires the same three methods needed in sports: communication, example and application.

Communication alone is the least effective. Imagine I was teaching you the proper way to kick a soccer ball. In a textbook you read, "Take aim and then look back to the soccer ball as you shoot. Approach slightly from the side. Plant your non-striking foot beside the ball. Strike the middle. Keep the knee of your kicking leg over the ball. Follow through."

If that was the end of the lesson, all players would remain abysmal once they got on the field. Head knowledge isn't enough, and it doesn't help you visualize what is possible. Also, knowing how and why is very different than actually being able to do it.

Most coaching involves simply giving players an example. You do something and you say, "Kick the ball like this." Although "like this" could mean a thousand things, children are very good at abstracting what is important. Similarly, our children can learn financial perspectives and habits simply by growing up in our homes.

Our example as parents gives them a default of what to try first. But unfortunately, most families don't provide a very good model. The average family's finances are appalling. Credit card debt averages $6,500. Half of American families have no retirement accounts. The other half have only saved $35,000.

Getting your own financial house in order is half the battle. The other half is bringing your children into your circle of trust as they mature. Most children feel they are in the dark regarding family finances. My most valuable education came from my mother, who shared every aspect of her household budget with us.

Before age 10, I knew what my father's salary was, the amount of our mortgage and the interest rate we were paying. I knew how much a week's worth of groceries cost and the value of buying term life insurance and investing the difference. Parental actions can be ambiguous, but when they are accompanied with a commentary of values and decision-making skills, they offer sage mentoring.

Communication and example are important, but practice is the key to raising financially savvy children. Given enough time to practice, even children without guidance and good examples will learn from trial and error, just like young soccer players accidentally learn that spinning balls curve.

The physics that causes a lateral deflection of a spinning object are quite complex. But with some trial and error, it is much easier just to learn to do it. Even children with no knowledge of physics can ultimately bend or curve a soccer ball around a wall of players and into the corner of the net.

To raise financially savvy children, give them as much practice time with real money as you can. Encourage your children to make spending decisions as early as possible. Let them make mistakes and learn from them. Give them practice in spending, investing and earning.

They should not be asking you for money. Let them make the tough calls about needs and wants and be forced to choose. If they are not obligated to make hard decisions, you are giving them too much money or not making them pay for enough things. You learned your best life lessons by experience. You cannot teach your children to live within their means if you keep supplementing their means.

Also, they should only be paying for things you are willing for them not to purchase. For example, if you make them pay for a school trip, you must be willing for them to decide not to go. And if they have spent all of their allowance, do not loan them money. Finding that you want to buy something but you have already spent everything is a critical lesson. Make sure your children don't miss it.

Children need experience not only saving, but saving and investing. It takes a while to understand the principle of compounded interest. I thought the lesson was essential enough to cheat and shorten the time horizon. The first time my children had $100, they were allowed to invest the money for one year with an extra 100% return on their money. They could keep whatever they earned plus an additional $100. They were young, and a year was a long time for them.

As part of our firm's quarterly reporting, clients receive a chart showing the net cumulative investment versus the portfolio value, which drives home the power of investing. Even $100 invested teaches the lessons of compounded market rates of return.

Finally, children must learn how an ethic of hard work and persistence produces a financial return. Grit is a better indicator of financial success than IQ. And running a small business requires more persistence than smarts.

My children were allowed to get jobs at age 14 and were eager to do so. That year they also started funding their Roth IRAs and took over more of their everyday spending. They had been prepared and were able to assume much of their own financial independence.

At every age of your children's lives, think through how you can communicate, be an example and give them real-world practice, first at budgeting, then at investing and finally at running a business that provides real value.

Comments

[Old Limey]

I have three children that are each financially successful.
They never received one penny of allowance the whole time they lived under our roof.
Each of them had jobs, starting at junior high school and throughout their childhood - many jobs. They also participated in High School athletics and in the case of my son I had roles in his Baseball and Football activities. In the case of the daughters we attended their activities as Mat maids in wrestling, and Cheerleading in Football.

Their jobs included Car Washes, Fast Food outlets, Pizza parlors, Delicatessens, Stacking shelves at drug stores, Delivering newspapers and flyers, Pumping gas, Installing Car Radios, Cutting grass, Baby sitting, and doing Housework for elderly people.

This was before the age of mobile phones and computers so they used our home phone. Every month I gave each child an itemized list of any of their calls that were long distance or involved message units, which they dutifully paid.

When they were old enough to drive I offered them interest free loans and a payment book, they never missed a payment.

I think these days it is very difficult for teenagers to obtain this type of work but in our days it was easy for them. Each of our children is frugal, knows the value of money, is a saver, pays off their credit cards in full every month, has brokerage accounts at Fidelity Investments that I still manage for them, lives well within their means. At ages 52, 50, and 47, the two eldest are multi-millionaires and the youngest is very close to having a net worth of $1M. Now, after 55 years of marriage, we still have great relationships with all three of them and are very proud of their accomplishments. Yesterday, in fact, I went on a 9.5 mile hike with the middle child in the Santa Cruz mountains of the SF Bay Area.

Raising Money-Savvy Kids can be done but it was much easier for us because of our own background growing up in working class families in England during WWII.

[Nate]

Very good article – I really enjoyed it. It appears that economic outpatient care (just giving kids money) is more harmful than helpful… That will be difficult for me considering I grew up very poor and have looked forward to giving things to my children… I will have to find the proper balance. Also I can’t get enough of your experiences Old Limey – I soak in the wisdom every chance I get!!!

[Paul]

I don't know what is more impressive ... how Old Limey's kids turned out, or the fact that Old Limey can still hike 9.5 miles through mountains at his age!

[GrowingRichKids]

I'm intrigued. Did the author share his/her salary and mortgage details with his/her kids when they were 10 years old? I definitely want to share information with our boys (9 and 6) in a way that's appropriate for their age but am leery about being so upfront with the eldest one as he's likely to share it on the playground. (Knowing him, he'd start a survey of his friends.)

Great to be reminded though that it takes a variety of techniques to truly teach kids about money. Giving them the opportunity to experience mistakes and successes is key.

And for Old Limey, my question would be: how are your own children teaching your grandchildren about money? The same way you did?

[Old Limey]

&GrowingRichKids
My son and his wife are doing a great job raising their wonderful, healthy, personable, and beautiful, 10 year old daughter. He was my biggest problem when he was growing up and there was a period in his youth where I was ready to disown him. However in his twenties he underwent a total change that took my wife and I completely by surprise. While imobilized in hospital recovering from a back surgery he had an opportunity to think about the direction his life was taking. He came out, made a 180 degree change in his lifestyle, his occupation, and the people he was associating with, and settled down. Today I am very proud of him and realize that everything we had attemped to teach him hadn't been forgotten - he was just late getting started after a period, that I never experienced. It's called "Sowing your wild oats". Sometimes these days when I read an e-mail from him it's like an echo of something that I implanted in him when he was a teenager or even earlier.

The two daughters, even though they have done well financially haven't fulfilled my expectations in raising their children. One major difference is that in most marriages the husband plays the major role in setting the rules, and America being a melting pot, unlike the Britain that my wife and I grew up in, brings couples together from a variety of ethnic, religious, and class backgrounds and the rules and standards under which my daughters were raised hasn't been followed in the raising of their children. Another factor that I have come to realize is that Genetics can play a huge role in how offspring turn out. One daughter unfortunately married into a family that we came to realize years later has serious genetic problems that go back many generations on the mother-in-law's side of the family. At this time, one grandson is totally normal, the other grandson has had behavioral and addiction problems, diagnosed as a very small child that now make him unemployable, unable to make friends, and getting worse. The third child, died of a birth defect, an inoperable tumor that started growing when her growth spurt kicked in at age 7. Prior to that she was so unusually intelligent that I started tutoring her in Math & Science and was amazed and overjoyed at her capabilities. The father is highly intelligent but has obvious genetic deficiencies that he has been able to work around and become a very successful attorney in spite of his weirdness. Another problem I have noticed is that wealthy, busy, workaholic fathers that live in wealthy neighborhoods are often guilty of throwing money at every problem that surfaces rather than being disciplinarians and taking the time to bond with their children, engage in family activities, and teach them good values.

In future years DNA testing is likely to be widely used by couples before deciding to have children. The technology is coming along well but hasn't yet progressed to the point where it is affordable and popular.

[Cassie]

Call your dad and today and thank him for his forward thinking. Money is the last great secret in our society. By far, the majority parents never discuss financial specifics with their children.

Because parents are rarely transparent about money, children learn to measure success by the height of the pile of stuff a family owns. They miss out on a great opportunity to learn from the families success and failures.

This secrecy often carries long into adulthood making it difficult for adult children to make smart choices when their elderly parents need assistance.