A 2013 University of Cambridge study revealed that children’s monetary habits develop as early as 7 years old. Not surprisingly, the study found that parents are the largest single factor in the development of good financial habits. Thus, the monetary habits you instill in your children now can have a significant impact on such habits in adulthood. We sometimes get asked what activities and lessons you as parents can utilize to direct behavior – we have provided a list, divided by age, below.
If you take anything away from this article, our hope is that you consider the concept of instant gratification vs. delayed gratification – this very well may be the most important ideal when directing your children’s financial behaviors.
Age 4-10
- Take Your Turn! While this may not seem directly related to money/finance, this is a very important idea to impart on your children – you cannot always get what you want immediately. Whether your children are at the park waiting to go down a slide or waiting on a sibling to finish playing on your family’s Ipad, this idea of waiting their turn is a basic yet necessary tool to avoid instant gratification.
- Set a Savings Goal. This is the “next step” in avoiding instant gratification. Instead of simply purchasing a toy for them immediately, set a goal and have your children perform activities (whether it be chores or saving birthday money) in order to purchase the toy. This goal must be reasonable in both time and cost – you do not want to make it so difficult that your children get frustrated and give up.
- Learn to Say No. Again, this is related to the last point - there will be times where your children may want something that is simply not affordable, and saying “no” is critical – explain in simple terms that you cannot afford the item or that they must earn the item (through chores or behaving).
- Spend. Donate. Invest. You may have heard me discuss the “Money Savvy Generation” Pig, which is a spinoff of the traditional “piggy bank.” Instead of one slot to put the money, there are 4 slots for each of the above titles. You can have your children save for a specific item, save for a worthy cause, invest the money for a long term goal, and finally have a small pot that they can spend immediately. We have several of these Pigs left over, so if you want one, please reach out to either of us, and we will send you one. Otherwise, you can find them online on Amazon[1].
- Include Your Children. Consider your children when making financial decisions. For instance, you can explain why you wait to purchase something on sale or purchase certain things in bulk. You can even take this idea a step further by providing your children $5-$10 at the grocery store and having them make their own choices with the money (given certain parameters).
Age 11-18
- Compound Returns. You can first start out by helping your children save while at the same time explaining compound returns. For instance, if your children have $100 to save, you can explain to them that they can spend the money immediately OR save the money, and if they save it, you will provide them with $2 per week, and you can increase the “interest” each month. Once your children get older, you can explain a compound interest calculation – consider the “Doubling Penny”[2] You can also explain the idea of opportunity cost - if you spend the $2 to buy a snack after school each day, you are not saving for the $50 videogame you want.
- Get a Job! Anthony started working when he began high school, and worked part time during the school year and full time in the summer. Because of this, he had his own money to spend that he could thus budget himself.
- The College Discussion. When your children begin high school, this may be a good time to discuss how much you have saved for their college and how much you are saving on a monthly basis. Your children should be actively involved in the process of understanding the shortfall (if one exists) for college and explaining on a basic level the idea of borrowing to pay for college early on (if there is a need to). This can help crystallize the type of school they can afford. Also….
- The College Discussion (Part Deux). There is an economic term known as the “free rider” problem, and one possible archetype occurs when one overconsumes a good or service due to the fact that the individual is not paying for it. This is college to a T and why many children choose the more expensive private/out of state university when the less expensive in state school would suffice. This is where the parent needs to either a) set limits as to where they can attend school (particularly if monetary resources are scarce) or b) force your children to have some skin in the game – have them take out loans for a portion of the overall cost. If they are looking at $20,000 in student loans with an in state school vs. $40,000 for an out of state school, they may think twice about going to the more expensive university.
- Your Child’s First Credit Card. You should cosign a credit card with each of your children. This is critically important, as you need to have your children build credit as early as possible. By cosigning, you can monitor the card yourself. However, your children can be in charge of making sure they stay within your own set limits. You can have them be in charge of signaling to you that it is time to pay off the credit card each month. Explain to your children that if they are late in making the payments, it will affect not only their credit but your own, and how this can affect your/their ability to purchase a car or obtain a mortgage.
- Taxes! This is one of the many facets of being an adult that gets overlooked. Young adults do not understand how to navigate their tax return, when to file their taxes, etc. When your children begin making their own money, you should take your children through a tax return and explain how to file their taxes, so they are prepared when starting out in the workforce.
- The Stock Market. This can start out simple. Purchase a few shares of your children’s favorite stock and allow them to follow the price of the stock online. You can then have your children purchase a new stock each month, with the stipulation that they buy a company that is completely different from the rest of the companies in the portfolio. This will, at a basic level, teach them the importance of diversification. If your children are working and bringing in at least a few thousand dollars, you can consider opening a Roth IRA for them. This can be their first foray into the world of qualified accounts.
- Have your Children Talk To Us! Once they graduate from high school/college and are in the working world, have your children reach out to us. We are happy to help them determine which benefits to choose and set a savings goal.
[1] Amazon: https://www.amazon.com/Money-Savvy-Generation-LMSP-Blue-Pig/dp/B0002HRWBQ
[2] Doubling Penny: https://www.habitsforwellbeing.com/story-a-penny-doubled/
Karen DeRose and Anthony DeRose are registered representatives of Lincoln Financial Advisors Corp.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors.
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