[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
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!
Great post! Thank you.
Is it necessary to mention that your father in law is helping you move right now? You’re a practicing ED doctor and we’re in the midst of a pandemic where your father in law is likely high risk. What you do privately is your own business, but a public anti endorsement of social distancing is something else. In our family, we are very painfully socially distancing from the grandparents (and everyone else not required as part of medical work, for that matter)
That note does need updated; we were going to run this post two week sago when we actually moved in but bumped it and I didn’t update the note.
The problem is it is a free country and we couldn’t stop him. It didn’t seem right to pull the boxes out of his hands once he had bothered to come all this way to help. You’ll be even more upset to find out 20 of our neighbors showed up to help uninvited. Let’s be honest though, Utah isn’t Manhattan. The pandemic is not affecting us all equally. I have yet to have a COVID-19 test come back positive at work.
Nice job raising great kids. We are financially blessed, and don’t want to de-motivate our kids also. We were committed to paying for their education as long as they were committed to working hard at it.
An idea that we use now after college (that is probably very child dependent) is to underwrite retirement contributions in qualified plans for our young adult children, up to $30k/year each. They have access to 403b/governmental 457b/IRA, so they have more than $30k “room” to contribute.
Our thinking is that as young people, they have more legit “good” uses for money than their income can support (house down payment, emergency fund, possible grad school, etc) . We help them in an important area (retirement savings) without subsidizing an inflated lifestyle.
Obviously this only works if you have a relationship where they can accept a gift with “strings” attached to it – won’t work for all kids/families.
Overseas with monthly or less visits to the PX we were getting our 2-3 year old a toy at every trip and were bemused that she couldn’t easily choose, wanting everything she saw, or so it seemed. So we gave her a budget/ allowance to cover perhaps one smaller toy monthly and all at once every choice was very thoughtful. In fact anytime we suggested a purchase she began asking (this continued into her teens) “are you paying for it or would I be paying for it?” and some trips bought nothing!
Now she is a home owner since 25 and has been teaching her fiance about retirement savings and calculating how much he should contribute to be put on the house title when they marry.
Another great book to try reading is Ron Lieber’s book; “The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money.” We often refer this book to clients as it addresses children of all ages and all levels of affluence. Extremely useful for my kids too. Enjoy!
Good post and we have tried to start getting our kids (ages 7 and 10) as financial literate as possible without letting them peek behind the curtain at our actual earnings as I still think they don’t comprehend why they can’t get whatever they want when you may be making 400k a year despite explaining living expenses, need to fund retirement, etc although we have introduced those ideas. We started when our kids were about 5 and 8 letting them set up a lemonade stand. They borrowed about $15 from the “dad bank” to buy lemons, mix, cups, and posterboards for signs. So many people were willing to stop by just because they saw kids working for money in our neighborhood that they wanted to support those behaviors (many wealthy people got there with hard work and not daddy’s money) and they sell out usually in about 2 hours. They then pay us back with a small amount of interest for the “loan” and pay us “rent” for the prime corner location and then split the profit. They then donate a small portion to the charity of their choice and then split the leftover and put half in their savings account and blow the rest on whatever they want. Not perfect, but it gets them thinking about costs of borrowing, saving, and giving and was a good way we found to at least begin to tackle the subject when they can still be fooled that money actually grows on trees. When they are older, I hope they leave our house with a good understanding of how all our finances work but for now this will have to do.
I agree that it is hard not to spoil your kids at every possible chance especially if you are a physician, but in the long run you may be doing your children a disservice.
I talk freely about finances to my daughter (now 14), including how much I make, how much my net worth is, and what I am striving to do building up a passive income stream to let me retire early.
I also wanted to promote her saving her money and ended up creating my own “Bank of Daddy” where I allowed her to deposit her money and gave her a pretty high interest rate (12%) so that she could really see the effect of compound interest.
Our kids are nearing the age where we’re starting to have similar discussions. They’ve already earned money selling craft projects and are are excellent about saving every penny that touches their hands. Bank of Dad only pays 10% interest in Colorado though. Honestly, my 11YO could easily be described as a cheapskate, but she’s extremely happy with all of her “found” outdoor collectibles – leaves, shells, pine cones, bird nests, driftwood – that turn into art projects. Retail shops seem completely invisible to her.
I’m wavering between privacy since finance discussions almost universally impact people’s perceptions in a negative way vs. the value of having open discussions about money with other people to hear different perspectives. No idea what a reasonable balance looks like at this stage. Most families are *way* more than a bit nutty when it comes to discussing income and wealth. That’s a shame since it keeps people from learning anything new.
What expectations do you have for your daughter discussing family finances *outside* of the family?
Although it is hard to monitor everything I have told her not to discuss our household finances with her friends.
She goes to a private school so I would say the majority of her classmates are from very well to do families themselves and likely even if the numbers got out it would not be as big an issue as I wager I am probably close to the average in terms of financial positioning compared ton others attending this school.
Nice post. This is something I’ve been thinking a lot about. It’s probably due to the increased time spent with my child.
We are at the beginning stages of financial literacy with our child (who is 7). At this point, encouraging good habits and learning where money comes from is at the fore front. We’ve established the “spend, share, save” jars. Anything our child does that makes money is split 3 ways.
I’d be interested to see what other recommendations others have for children who are in the double digit range.
Regards,
Psy-FI MD
This is a tough subject for us.
We have kids that all grew up in the same house, with the same parents, and had the same parental teaching about finances. They are now in their 20’s, the most successful has thrifty habits, a high income and a rapidly growing, substantial net worth. Another is in negative territory with high balances on credit cards despite knowing that this is a terrible financial choice.
Ouch!
Great post. We use FamZoo (no financial relationship). This allows you to pay kids allowance,split between spending, saving and charity. You can create job lists with payments and penalties if not completed. My kids can spend freely from their “spending” account without parental input. Just as it says in the post, I’d prefer they make their mistakes on smaller amounts of money. I knew it was working when my daughter spent a week deciding whether to buy a pricey toy and recently became concerned that the $40 bedding set we were buying was too expensive .
Very helpful article ! Allow me to add my own life long experiences and observations about money and children!
“Teaching” children about money is multi factorial and demand more than teaching ; the parents must “live” it with them to demonstrate how practical it is to handle the wealth !
1. Make money the old fashioned way, honest hard work !
2. Put away enough money for the “ rainy” day !
3. Budget the rest for home, food, education, recreation and charity ! Teach children compassion and empathy !
4. Treat hard earned money with respect and dignify its use by never being contemptuous of poverty ; you and your children are a mere stones throw away from becoming poor ; remind them always ! Good luck !
Cheers . VENKAT WARREN.