How To Teach Your Children About Personal Finance
Saving money is an unnatural act for most kids. How should you encourage them to develop good personal finance habits? Your kids may not appreciate your guidance now, but years later they may look back fondly on your wise counsel. We can only hope.
Mark Twain said it best:
When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much he had learned in seven years.
I offer no insight with the questions of sex, drugs, drinking, eating, and exercise, but I have some suggestions on how to develop financial literacy in kids of various ages so they learn to save more and spend less.
1. Open a bank account their name
We all need to understand about losing our debit card, incurring fees, safeguarding passwords, using peer-to-peer payment systems, and overdrafting our balance. The easiest way is to have a bank account and make a few mistakes when the stakes are small.
2. Offer them a better deal with the “parent bank”
When your kids have some money (e.g., birthday gifts, babysitting jobs), encourage them to save it with you, rather than spend it. Incentivize them by offering a high interest rate. Have them give their money to you to hold and you’ll credit them with interest that is much higher than they’d earn in the bank.
How high? Simply put, whatever it takes to close the deal. Start with 1% per month and go higher if necessary. You want them to internalize that this is better and more important than spending the money now.
And, just like a regular bank, always give them the option to withdraw the money from the parent bank and spend it as they choose. If they do, they’ll hopefully regret the foregone savings and interest. Track this on a shared spreadsheet where they can see their balance and maybe they’ll even learn about spreadsheets and the magic of compound interest.
3. Open a Roth IRA when they have earned income
For teenagers who have reportable income, there is no better way to save than a Roth IRA as that money will grow tax-exempt forever. And, they won’t see it in their checking account tempting them to spend it. How do you encourage them to put this money away? Incentivize them by offering to make a matching contribution (just as some employers do with 401Ks).
How big of a match? My same glib answer as above: whatever it takes to get them to accept the offer. For example, one of my daughters quickly valued the incentive but the other had no interest in a Roth IRA, with or without a match. With the second one, I had to go higher. This is what makes parenting fun.
Note that you can withdraw contributions from a Roth IRA at any time with no financial penalty. So, even if your teenager plans to use this money for college, it is still a good deal to put it into a Roth IRA now.
And for you grandparents, I can think of no better gift than a contribution to your grandkids’ Roth IRA. Yes, they’ll still love you even though that may not have been exactly what they had in mind for their graduation or birthday present.
4. Talk to your kids about money
For many of us, money is a taboo topic, right beside sex, drugs, and death. Don’t make it so in your house. Have an occasional discussion about spending behaviors, how much things cost, making choices, paying for college, charity, expectations around an allowance, and all the money mistakes you’ve made.
Teach your children well and many years from now they may be grateful and realize how much you learned as they grew up.
Or, as Graham Nash sang:
So just look at them and sigh
And know they love you.