[Editor’s Note: Today’s guest post is from Col. Greg Morgan, USAF, Retired, CPA. He is my father-in-law and clearly did a good job teaching his kids about finances since Katie brought assets into the marriage while I brought in debt. Enjoy the post.]

High-income individuals have a unique challenge with their children.  Every parent wants to provide the best possible life and opportunities for their children. Most high-income individuals are fortunate to be able to meet every need and more for their children. The challenge is how do you do that without damaging the self-reliance of the child and creating economic dependency beyond their adolescence?

How Do You Teach Kids About Money?

Most successful people became that way by overcoming adversity and trials that made them stronger.   While many of those trials were instructive and developmental, they may not be things you want to wish upon your children.  How then can you enjoy the blessings and opportunities of affluence without ruining your children?

Research indicates that parents who fail to teach their children about money may rob them of future prosperity. A Quicken survey revealed that reaching an income of $75,000 or more was challenging for adults that didn’t learn about money as children and those that failed to learn early were also twice as likely to not talk about money with their children.

Clearly, parent-child financial interactions can make a big difference in a child’s preparation for adulthood.  Like everything else to have an impact on a child you have to find their “why” – what catches their interest and work from there.

Create Financial Learning Opportunities

With my children, we sort of stumbled on the need for financial communication when our oldest son was starting middle school and suddenly became very particular about clothes and other needs we felt were unreasonable.  The way we chose to address that with him was to create a budget that specifically funded our parental responsibilities such as school lunch, annual clothing needs, etc. that we would pay a proportional share of every two weeks. In short order, the child that previously would only accept a certain type of designer jeans could be found happily browsing the clearance racks.

When you give your children choices and flexibility, they are going to make mistakes. However, it is far better to let them blow their lunch money and have them learn by going without or subsisting on borrowed PB&J’s from home than for them to learn more painful lessons later in life.

Putting the Ball in Their Court

This system worked well in teaching practical financial principles for all six of our children and they have all gone on to manage their personal finances with great success.  Putting the “ball in their court” for financial decisions opens up opportunities to discuss concepts like insurance, utilities, cost of driving a car, eating out, etc. even if they aren’t paying for it. However, the more kids are involved or impacted by a financial decision, the more they will pay attention.  When they are involved there is a greater chance of being grateful for what they have and learning to discern between wants and needs.

Involving Children in Finances

An idea that I’ve heard about since and wished we had tried is that of a family bank. That is where children have the opportunity to deposit their excess earnings or allowance with the parents and borrow when needed with a high-interest rate for both (within appropriate limits). Monthly the parents/bank directors can review the balances with their children/clients and over time children will learn that smart folks earn rather than pay interest.

Involving your children in family finances can have other benefits as well. It can help temper expectations and help them understand why others might have more or less.  They can help brainstorm solutions such as conserving energy or making tradeoffs in family activities or purchases.

Managing Expectations

In our case, we were concerned about paying college expenses for six children on a military income.  We were able to manage expectations by clearly defining what level of tuition we would be prepared to pay and what they could be expected to work with.  This helped to encourage scholarship applications and school selection such that all graduated from college with no student or parental debt.

One son wanted to go to Harvard but was dissuaded by the reality of what his contribution would need to be.  Fortunately, the lower cost school he selected turned out to be much higher ranked in his major. He did end up going to Harvard Law School years later with a wife and children and qualified for substantial aid since he was no longer linked to parents’ income.

Greg Morgan

Greg Morgan

Creating financial learning opportunities for your children is a lot more work than doing it yourself but will help them learn important lessons in a relatively safe space that will pay future dividends.

A good example of that kind of lesson you may have read about a few months ago in a WCI post about the $1,000 car challenge for his oldest daughter’s first car.  [Editor’s Note: Yes, it’s still going strong. She just rattle-canned it teal blue and could not be prouder of her work or her car. I think she spent 3 hours last weekend cleaning it and putting stickers on it.] While he could have certainly afforded more, the lessons my grand-daughter learned about shopping, evaluating, and negotiating for transportation will be worth a lot more in the future.  The requisite humility to drive a $1000 car to school is not without value either.

Train up a child in the way he should go: and when he is old, he will not depart from it.” (Proverbs 22:6) When parents don’t talk about money with their children they limit their future potential.  It’s an investment of time that will yield dividends for years and possibly generations to come.

What ideas do you have for teaching children about money? Comment below!