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Talking to Kids About Money
Cute asian little child girl putting coin into glass bottle in the garden. Kid saving money for the future concept
It’s critical to recognize that becoming financially independent is a journey—one that may take longer in today’s uncertain economy.
“Achieving financial autonomy is a transition rather than an abrupt change,” notes Eileen Gallo, co-author of Silver Spoon Kids: How Successful Parents Raise Responsible Children.
Fortunately, there are ways that allow parents to ease the journey to financial autonomy.
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Affluent parents are often so concerned about their children feeling entitled that they keep them in the dark about the family’s assets. But children often learn a family’s values best by observing those principles in action. Entitlement is a natural state we all go through in youth. To emerge into stewardship, you need to learn about money and accountability.
It can be helpful to ease into sharing elements of financial strategy. Rather than revealing your entire investment portfolio, perhaps start by reviewing a college savings account once each quarter.
Explain the importance of budgeting and saving
Helping a teenager create a monthly budget is a great way to instill financial discipline. Sit down and discuss the basics of money management, or if there’s resistance to your involvement, bring in your Financial Advisor. They can help kids create a budget, learn basic skills and discuss planning their financial future.
Parents can foster solid financial habits in their children by asking them what they are saving for right now and what that goal is going to cost, in effect giving them a chance to develop their own relationship with money and their own intrinsic motivations.
Use philanthropy as a teaching tool
You can learn important life skills—doing research, decision making and accountability—through philanthropy.
Also, it’s a great way for siblings to learn how to make joint financial decisions. For example, children can be allotted a giving budget and charged with jointly evaluating charities and deciding which ones to support.
Naming grown children as co-advisors to a donor-advised fund (DAF) can get them started early on deciding the most effective ways to give to others, as they would be tasked with making recommendations to the DAF on how to spend its assets.
Introduce investing
Investing smaller sums with limited consequences is a great way to learn about making informed choices and managing risk. One option is to open custodial accounts with starter funds and let your child work with your Financial Advisor to create a small portfolio and evaluate its performance.
Explain that it’s not about never making a mistake; it’s about learning from those you make.
Let them falter
Whether it’s a bad investment or a splurge that busts the monthly budget, a misstep is bound to happen occasionally. When one occurs, resist the urge to swoop in and rescue your child financially.
If you take away the consequences, you do your child a disservice. Instead, talk it through and work out a way to solve the problem together, whether that means cutting back on spending or getting a part-time job.
Offer selective support
There are some expenses it may make sense to fund, such as medical insurance, continuing education, or therapy.
Making sure your child has health insurance or the guidance she needs is not an indulgence. Be clear about what you will fund and what the expectations are when you do fund expenses.
Families with greater assets that want to set up trusts for kids can tie trust distributions to certain benchmarks.
One idea Gallo suggests is to create a “results-oriented trust,” which identifies specific results for a beneficiary to achieve while offering some degree of flexibility.
Alternatively, a trust could simply state that the children will receive their money whenever the trustee is confident that they are mature enough to handle it.
A Financial Advisor can help you obtain more information about the various trusts you can use.
Every family will have its own idea about what assets to give the next generation and when. But the most valuable things to give your children may be the knowledge and skills they need to spend, save, invest and share their income responsibly.
Beyond allowing them to become financially independent, such skills will also put them in a better position both to help others and to make sure they in turn leave something for the generations after them.