Teach Your Children Well

Creating good personal finance habits in our children is challenging. They probably won’t appreciate your guidance now, but years later they may look back fondly on your wise counsel. We can only hope.

Mark Twain understood:

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.

Good luck with other important life skills such as sex, drugs, drinking, eating, studying, exercise, and social media. I can’t help with those but, below are 6 suggestions to develop financial savvy in kids of various ages so they learn to save more, spend less, and borrow cautiously:

1. Open a checking account in their name.

We all need to learn how to use a debit card. This includes:

• losing it

• avoiding fees

• safeguarding passwords

• withdrawing cash

• reversing fraudulent activity

• using payment apps with it

• setting up direct deposits

• over-drafting our balance

The easiest way for kids to learn is to have their own checking account and make some mistakes when the consequences are small.

2. Offer your kids a better deal with the “parent bank.”

When your kids have some money (e.g., birthday gifts, babysitting jobs), encourage them to save it, rather than spend it. How? Incentivize them by offering a high interest rate. Have them deposit their money with you in the parent bank and credit them with monthly interest that is much higher than they’d earn in the bank. Track this on a shared spreadsheet where they can watch their balance grow.

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 saving money is more important than spending it.

And, just like a regular bank, 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 and maybe they’ll even learn about the magic of compound interest long before they get to high school algebra.

3. Explain debt to them.

The nuances of borrowing money and repaying it in the future is too abstract for kids to grasp.  The two most important kinds of debt for which teenagers need guidance are student loans and credit cards.

If your kids are planning to take out student loans to pay for college, they need to understand the commitment they’re making to re-pay them. The best way to do this is to focus on the future monthly payment and how that compares to their likely future take-home earnings. That’s more concrete than vaguely knowing the borrowed amount that has to be repaid at some point in the distant future.

Just because they can obtain nearly unlimited student loans doesn’t mean they should.

Similarly, kids should understand the seduction and danger of credit cards. One way is to get them a credit card in their name with a low spending limit and let them experiment with it. If they run up a balance, they’ll get a real life lesson in the pain of paying it off. They’ll learn more than if they had used your credit card. A secured credit card tied to their checking account is a good option (see #1).

4. Buy them a US Treasury inflation bond.

Forget the savings bonds of years past. Inflation bonds are a great deal for anyone, especially if your kid has some money to save. Plus, they’ll soon forget they have them and then be pleasantly surprised many years later when the rediscover them and see the balance. Make sure you save the login credentials as you can be sure they won’t. I explained these elsewhere.

5. Open a Roth IRA when they have earned income.

For teenagers who have earned income, there is no better way to save than a Roth IRA as that money will grow tax-free forever. And, they won’t see it in their checking account tempting them to spend it. How do you incent them to save this money? Offer a matching contribution (just as your employer may do with your 401K).

How big of a match? My same glib answer as with the parent bank:  whatever it takes. 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 offered more. As every parent knows, fair is not equal.

You can withdraw contributions from a Roth IRA with no financial penalty. So, even if your teenager plans to use this money for college or a future down payment on a house, it is still a good deal to put it into a Roth IRA now.

For grandparents, there’s no better gift than a contribution to your grandkids’ Roth IRA. They’ll still love you even though that may not have been exactly what they had in mind for their graduation or birthday present.

6. Talk to your kids about money.

For many of us, money is taboo. Don’t make it so in your house. Have an occasional discussion about spending behaviors, how much things cost, making choices, borrowing, paying for college, charity, expectations around an allowance, and most importantly, all the money mistakes you’ve made.

Teach your children well and many years from now they may even 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.