5 Principles for Kids and Money.
We all want the best for our kids. We want them to grow up into happy, purposeful, responsible, grateful and independent adults. We want our children to find their path in life.
It has been shown that money makes parenting easier up to a point, and then it makes it harder. As Coventry Edwards-Pitt writes in her book ‘Raised Healthy, Wealthy and Wise’ to have the same chance of raising a well-launched child, parents with wealth have to work harder than parents who are less wealthy. They have to be proactive, consistent, and engaged when it’s all too easy to be just the opposite.
Regardless of our means, here are five basic principles that we can follow to help our kids grow into financially responsible and productive adults.
1) Start the conversation (way) earlier than you think
Studies have shown that by seven years old many money habits are already set. I find that amazing. Even by the age of three, kids are able to grasp economic ideas such as value and exchange. There are little opportunities every day to talk about money and explain basic concepts to your children. You don’t have to be a money genius yourself.
Use cash. Unfortunately, because we use plastic so often for buying things, kids are growing up with an almost magical view of money. Some kids never see their parents’ part with cash. Explain to them what happens when you use a debit card or credit card (if you use a credit card and don’t pay it off in full, that purchase will cost you a lot more than you think). And stick to giving your kids cash. Cash is the only way to teach children real spending choices. I know some people worry about giving children cash because they can lose it, but surely that’s a lesson worth learning too?
Wants v needs. Even young kids can understand the difference between a want and a need. When you are out shopping, play a little game with your shopping trolley. Put a divider close to one end. Keep the largest space for needs, and the smaller space for wants. Get your child to decide where the items go and talk about why.
Lots of small things v one big thing. Research shows that people tend to be happier when they use their money to buy lots of small things rather than one large thing. This is a useful concept to teach kids. Beth Kobliner writes in her book “before your kid cleans out his savings to buy that one big thing, encourage him to think about all the smaller things he could get for the same amount.”
Opportunity cost. Kids can understand that when we use our money one way we lose the opportunity to do something else with it. The key thing here is that they understand that once they have spent money it has gone.
2) Say no and delay gratification.
One theme I see a lot of with people who have generated their own wealth is the desire to give their kids all the things they didn’t have. And whilst we know intellectually that giving our kids everything they ask for isn’t a good thing, emotionally it’s an easy escape in the moment.
It’s important that we learn how to say “no” and help our children learn to handle hearing “no”. Saying no to your children is a way of showing your love. In the long-run it shows them that you care enough about them to go through the short-term discomfort. Edwards-Pitt writes, “saying no to children and seeing through the consequences is a challenge that all parents must face, regardless of their wealth status – but it may be even more important for children of means.”
By saying no we can teach our kids delayed gratification. We can help them understand that it’s good to wait for something they really want. Try helping your kids savour a food treat by letting them have half now and half later. Teach them how to save up for something they really want. If you are waiting in line at the supermarket or airport try using the moment to explain patience to your child. Sometimes we have to wait, it’s part of life. Self-control is a huge part of being financially responsible and kids can learn that from a very young age.
3) Let them fail.
More and more research is pointing to the key trait of resilience in dictating how successful and happy we are in life. Adam Grant talks about resilience as the strength and speed of our response to adversity. When something bad happens to us, big or small, how much are we able to overcome it, or how well do we persevere in the face of it? Resilience is critical for children and adults, regardless of financial status.
Not rescuing your child is hard, but allowing them to fail and letting them experience the logical consequences of their behavior is a part of teaching them to be financially responsible.
This can be taught from a very young age. For example, what do you do if your child forgets something for school? Do you let them get through the day without it or do you go home and fetch it for them?
In a paper titled Facilitating Financial Health, the authors point to guilt (once again) as being at the core of this parental dilemma. Continually playing the role of “fixer” for our children and bailing them out can create “resentment and anger on the part of the parents or other siblings, a sense of entitlement or resentment on the part of the recipients; a lack of motivation, passion, innovation, creativity and drive for financial dependents; and mutual frustrations that can damage relationships.”
4) Show them hard work.
Whilst we all want our kids to be happy, few of us understand that happiness in life comes from hard work, achieving personal goals and the feeling that comes with the effort. It is important to teach your kids from a young age that you make money by working. Talk to them about the job that you do, and point out real jobs of other people that you know.
Chores are a great part of life. Financial experts generally agree that we should set the expectations for what our kids do just because they are part of a family. Clearing away after a meal, keeping their room tidy, putting their things away when they get home from school, helping with the laundry – these might be part of the ‘expected’ list. But we can pay them for doing extra chores over and above what is expected. Things like keeping the garden clean, washing the car – they might be chores for which they earn money.
5) Remember, they are always watching you.
Teaching your kids financial literacy is important, but more important is being a good role model. Kids learn by watching us – they learn from how we live, what we talk about, what we value, what we buy, what we don’t buy. Teaching children values is more important than teaching them financial literacy.
Think about the different lessons kids learn when you they watch you spend extravagantly without much thought or when they watch you spend with restraint, whilst weighing up the trade-offs.
Don’t be afraid to explain to your children why you spend money the way you do. Talk to them about what you believe is really worth spending money on. Show them how you keep your priorities straight and teach them that family and character are more important than money or possessions.
Kids need to understand that the presence or absence of money does not define who you are, or who they are. Teach them that material things may or may not mean that a person has wealth (new cars for example are often funded by debt).
Most importantly, teach them gratitude. If your kids have things that others don’t, talk to them about it. Help them understand that it’s not the norm, that you have to work for it and appreciate it. Tell your kids your own story so that they understand the struggles you have gone (or are going) through. Being able to feel and express gratitude will not only help them financially, but it will also help them foster better quality relationships, maintain optimism and be physically and mentally healthy.
georgie@libertywealth.ky