A collaborative piece by Don Opatrny of the Lovins Group and Amelia Renkert-Thomas
BEING RESPONSIBLE WITH MONEY IS A LEARNED SKILL
The more that parents talk openly with kids while reinforcing good money skills, the earlier kids will become confident and competent in their abilities to manage their financial capital. In our first installment, we set forth some basic guidelines for teaching money skills. Below are a few areas which can be problematic for families with teens and young adults, with suggestions that can help.
Kids develop their own economies with friends and siblings, making loans and cross purchases, often on vague terms. Help them learn to document their loans, to charge interest, and to arrange payments by modeling this behavior with loans you offer from the bank of mom and dad. You can set a rule that any loan that isn’t documented won’t be enforced—good practice for a future when friends or even colleagues may come to them for loans. If your kids are having trouble collecting on informal loans with siblings, you can help them learn by declining to be their collections agent.
Help your high school student(s) learn to use a credit card safely and appropriately before they go to college. This might be a good step once they prove that they can manage a responsibility such as a gas card appropriately. Many credit card companies will issue a “satellite” card in a child’s name and let you put a separate credit limit on it. This will enable you to monitor how the card is used and prevent kids from spending beyond the established limits. You might want to give them a budget for some aspect of the expenses you pay for and let them make the purchase choices (for example, for school clothes).
Help them save for bigger purchases by talking with them in concrete terms about the tradeoffs between current and future spending. A kid who is saving for something will be motivated to learn about researching different options, shopping for a deal, managing tradeoffs, and dealing with unexpected expenses. Help them stay the course, and don’t bail them out. To incentive savings, consider paying significant interest for the portion of allowance they elect to set aside only to be used for purposes discussed and documented several months ahead.
Talk about financial tradeoffs in your own lives, at an appropriate level. Discuss opportunities for savings versus spending. Find opportunities to talk about value received for their money choices: for example, purchasing snacks and other items at the airport can be a great time for comparison shopping and discussing tradeoffs between various benefits. Is it worth it to spend more on a healthy snack rather than junk food? On a book that someone else in the family might read? Unit cost is another good lesson: when is buying in bulk better than buying a single item, multiple times?
Help them learn not to be wasteful and to set budgets for items or services you supply (such as phone data). Help them understand background costs by encouraging them to turn off apps that they aren’t using so that they don’t waste data. Consider charging them for data overages and help them manage tradeoffs between use of cellular, secure wifi, and public wifi.
Avoid letting them become cavalier about using your money. They will do their darnedest to get you to pay for things so as to maximize the spending power of their own allowances. Encourage them to learn to be good shoppers whether the item being purchased is inexpensive or expensive. Help them understand tradeoffs. If it’s a complex purchase (such as buying a pet) help them understand all the related expenses. Recommend a cooling off period between the request and satisfying it, and require that they let you know well in advance when they have a request (whether it is for a dress for a dance, a book for a report, etc.) Ask yourself regularly if your children would learn more by using their own money for the things you purchase for them.
Learning to deal with embarrassment about not having enough money for a purchase, and how to stop a transaction midstream when you find you don’t have enough or that the item is more expensive than you thought, is a critical skill, especially for kids who have lots of financial resources. Otherwise, they learn to buy themselves out of embarrassing situations. You can “help” your children grow in their ability to deal with uncomfortable situations by supportively listening while resisting helping them out of a jam they can truly manage themselves.
Introduce investing, from 401(k)s to family investment partnerships. Help them understand liquidity, investment time horizons, capital gains taxes and risk vs. reward. As they become more knowledgeable, point out the differences between stocks, bonds, and more esoteric investments like private equity, hedge funds, commodities and bitcoin. If you are not comfortable with your own knowledge in this area, you may want to ask a trusted advisor to give a presentation.
Reinforce the connection between your children’s human capital, their dreams, and their financial capital. Help them envision how they might achieve their dreams by sacrificing current desires for long term goals. If a child has a dream that you want to encourage, and that you know is beyond their means even with diligent savings, help them make the case for the dream and then create a matching program where you supplement funds or provide other resources. Learning to lay out a dream and persuasively yet respectfully request additional resources is an important skill both for entrepreneurs and for kids who may one day have to work with trustees to access trust assets.
Good money skills are important for children – and adults – of any age. Learning to deal with spending, saving, borrowing, and investing early creates a solid foundation for independent adulthood.