Before you pass your wealth on to your children, make sure you pass on the tools to manage it.
Earning. Saving. Budgeting. Planning.
It’s never too early to familiarize your children with fiscal responsibility, says Dave Foster, co-founder of Foster & Motley, a Cincinnati-based independent Registered Investment Advisor. The firm offers clients customized, fee-only financial planning and investment management services and has helped facilitate these conversions within families for years. A family meeting with a financial professional is not necessary but will often kick-start the conversation between parents and children.
According to Foster, money management is an integral life skill, and talking to your children about fiscal responsibility early not only helps give them a better understanding of the value of a dollar, it helps prepare them for life in the real world. “It’s really common sense,” Foster believes. “You don’t have to be a financial expert or manage your money perfectly to teach them. Simply talking to them about earning, saving, and spending money is a great start.”
“I don’t think people develop money habits early in life just by seeing or hearing, but I do think it’s never too early to talk to your children about money,” he says. “Waiting to talk to a 23-year-old about money is probably not as effective as talking to an 8-year-old. But I think where you can start is by giving your 8-year-old an allowance or spending money. I was a big believer of that with my four kids. It’s not a unique suggestion, but starting a job at 23 and having money for the first time can be daunting if your parents did everything for you – paid your credit card bills or if you needed 20 bucks, they just handed you 20 bucks. Now you’re 23 and you’re saying ‘Whoa! What do I do with this paycheck?’
“So, I think you give them an allowance, and it’s up to them to decide whether they want to spend it on a doll, baseball cards, or Gummy Bears. I think people learn by making mistakes, and I would prefer they do it with $4 rather than $400.”
What About Earning Money?
When it comes to allowance for chores versus allowance for its own sake debate, Foster maintains there is no right or wrong answer. To each parent, their own philosophy. He can only speak from his own experience with his kids.
“In our household their allowance was not related to what they were asked to do around the house. I said, ‘This is your allowance, I recognize that you need spending money, but don’t ask me for more. In other words, you get $10 bucks every Saturday, don’t ask me for money when you want to buy baseball cards.’ If they took the garbage out or cut the grass, we separated that from giving them their allowance. Our deal was, for their allowance they got a dollar a week for however old they were. Eight dollars for an 8-year-old; 14 dollars for a 14-year-old.” Something different might work for other families, and Foster is aware that this is not a one size fits all approach. When kids have money of their own, they account for it differently than if they are spending mom and dad’s money.
Developing Good Habits
“It’s all about developing good habits because bad habits are hard to break, and there are a lot of crazy money messages out there today. I just think it boils down to equipping your kids with the tools they need to manage money realistically and responsibly.” There’s nothing wrong with your children realizing they have to “watch their nickels” if they want to buy something while on vacation or give Christmas presents.
“To me, the message in all of this is, they’ve got to learn how to spend money and save money, short- and long-term. The only way you learn that is by doing it.” Teenagers holding down summer jobs like cutting grass or babysitting is a good idea when they want to buy a high-ticket item, Foster adds. “I don’t get handing an 18-year-old a credit card, saying Mom and Dad will take care of it, don’t worry about it. That seems a bit unrealistic for the future when they face reality.” College graduates who are working but still living at home can pay for their own car insurance, cell phone bill and chip in toward the family food bill.
Keep it Age Appropriate
Talking stocks and bonds might not ring a bell with your 8-year-old, but it could be advantageous with a 15-year-old. Foster suggests parents keep financial management lessons at an appropriate age level, and also consider each of your kids’ different personalities or interest in financial matters. Some kids are savers and others are spenders, how you talk to each of them could differ.
“An important discussion at 18, 19, or 20 is about debt – what it means to borrow, what a mortgage is, what a car loan is, how interest rates work,” notes Foster. “Talking about investing may be a little trickier,” and that is one topic a financial professional can help address.
According to the American Institute of Certified Public Accountants (AICPA), children should start learning how to handle money wisely as soon as they begin showing an interest in it. In addition to parents helping children learn how to handle an allowance, the AICPA recommends taking your child to the bank to open an account to introduce them to the concept of saving money. This lets children set their own financial goals to help them make the connection between setting a goal and saving for it; and teaching your children how to be a smart consumer – i.e., encouraging your children to save up for something they really want rather than buying something on impulse. Not purchasing something for your child every time you take them shopping; having your children put things they want on a birthday or holiday wish list;
showing them how you purchase items based on price and quality – it all helps teach financial literacy.
When it comes down to it, though, every parent has his or her personal approach.
“Don’t be afraid to talk to your kids about money,” Foster says. “Again, there is no right or wrong way. What’s important is that you start.”
For some practical tips and age-appropriate conversation starters visit www.fosterandmotley.com/moneytalk.
Foster & Motley is located at 7755 Montgomery Road, Suite 100, Cincinnati, OH 45236. For more information, visit www.fosterandmotley.com.