In this Wealth Planning Update:
It turns out they do listen.
A recent study of college students indicates that those who were given financial literacy courses in high school are significantly more likely than their peers to be financially responsible in their college years.1 These financial literacy courses included not only awareness of financial concepts, but also the application of the knowledge in how they used credit cards and paid their bills.
The results of this study should be great news for parents who long to build the financial literacy of their children and help teach them the value of a dollar. The question for these parents then becomes, how can they teach their children such lessons themselves? And at what age should they start having these conversations? This issue can be even more complicated for families with significant means. What level of detail and responsibility are appropriate and at what ages? How can they equip and not overwhelm? Too often the lack of clear answers can lead to inaction.
So, where should they begin? In the wise words of Julie Andrews in The Sound of Music, we "start at the very beginning."
Financial education at a young age
Even at a very young age, children can learn and gain perspective on the value of money if given the right focus. Giving time and/or money to worthy causes is a perfect place to start for children ages 5-10 and is a great way to establish a basic understanding of economic principals. Children of this age have an inherent sense of empathy. For example, when you tell a five year old that someone is sick or needs help, they not only understand it but want to provide help.
Around holidays or birthdays, you can establish a tradition of choosing one gift to give away to a child that may not have as much. During the holiday season, it’s likely that you’ll see various charities looking for donations with their respective collection bins. Young children may not even know what these collection bins are or who they are for, so explaining that to them is a good first lesson.
When children realize that some of their peers and their families perhaps do not have money to spend on holiday gifts, this information may quickly capture their attention. Then it may not be that difficult for children to connect this information to the realization that perhaps these families don’t have money not only to buy gifts but to meet their basic needs. This realization can then transition into a conversation about what to donate to these families. It could be a gift from a birthday or an early holiday gift. It might even be extra blankets or clothing that they have outgrown.
Your child may embrace the idea of helping others so much that you could find him or her giving away multiple gifts and household necessities. Cultivating perspective on disparities in wealth and instilling values like this in your children at a very young age is a powerful thing.
To provide more financial education and awareness, allow your children to bring their own money to a store to purchase something they want. A child starts to understand how much things cost when they are forced to empty out their proverbial piggy bank and hand over each dollar to you or a cashier for a toy. Many children will think twice about the treat they are choosing to purchase when it is their own money they are spending. When a child wants something that is of minimal cost, allow them the opportunity to buy it with their own money.
Another way to teach children the value of a dollar is to have them repay you when they don’t make use of something you’ve purchased for them. For example, if your child always asks for a shake or an ice cream at the town sweet shop but never finishes it, have them repay you from their own funds next time that happens.
Many clients wonder whether an allowance will help or hurt in developing their kids’ financial education. According to Joline Godfrey, who is a specialist in the field of financial education, allowances can provide a way to teach children about managing money. Ms. Godfrey suggests that allowances give parents an opportunity to observe what type of money style their children have–whether they are a spendthrift or a hoarder of funds, for example. Additionally, allowances can be implemented in a way that will delegate responsibility. For instance, you could give your child $10 per week and explain that he or she will be responsible for buying after school snacks with this money. If your child has any money left over or accumulates surpluses, he or she may then feel free to decide whether to continue to save it or spend it.
The guidance is varied about what types of responsibilities are appropriate to assign to earn an allowance and how much is the right amount. It could differ based on a variety of factors, including your family’s net wealth and family values. Overall, an allowance can be a valuable tool if used effectively.
With children who are mature enough to take on a project like planning a family vacation, such an exercise can go a long way to instilling the value of money and teaching children the results of diligence and hard work. When thinking of the next family vacation, ask your children to plan it out with a specific budget. International destinations provide an added element, helping them to learn about foreign exchange. Creating a vacation schedule, pricing out airline tickets, hotel, and rental cars, and then explaining the rationale provides an exercise in understanding how much things really cost, as well as project management, organization, and leadership skills.
Becoming part of the workforce
Depending on where you live, beginning at around age 16, children can usually work outside the home. Family business owners may find that allowing their children the opportunity to work outside the family business is beneficial because they may have different expectations if they are working for a non-family business. In that way, the child may perceive the job as being "more real," and learns invaluable lessons in workplace politics and responsibility. Even seemingly menial jobs can prove valuable. Nothing keeps a college student engaged in their studies quite like memories of a horrible summer job.
The current economic climate remains difficult for young people to find jobs. If a child is unable to find work, most charitable organizations are always looking for and welcome volunteers. There are multiple options and roles to choose from given the numerous nonprofits that can simultaneously increase your child’s engagement in the working world and facilitate philanthropy.
No matter what the age of your children or your station in life, giving your children a strong foundation can help their development and increase your confidence in them so that someday you can, in the words of Warren Buffet, give them "enough money so that they would feel they could do anything, but not so much that they could do nothing."2
1 Everfi. "Money Matters on Campus". 2016. http://moneymattersoncampus.org/download/
2 Washington Post "Why the super-rich aren't leaving much of their fortunes to their kids". August 10,2014. https://www.washingtonpost.com/lifestyle/style/why-the-very-rich-arent-giving-much-of-their-fortunes-to-their-kids/2014/08/10/4a9551b4-1ccc-11e4-82f9-2cd6fa8da5c4_story.html
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