Most parents strive to raise kind, compassionate, and productive children who will eventually become happy, independent, contributing members of society. A large part of being a responsible adult is managing money wisely.
Younger generations in America are more educated than their predecessors but are often less financially literate. One study found that only 24% of Millennials, those born between the early 1980s and the mid-1990s, demonstrate basic financial knowledge and an alarming 81% of them already have at least one long-term debt on their books.* Given these trends, it’s understandable why some parents today are timid about "launching" their children into the world.
Basic Financial Principles to Teach Children
Children can begin learning money management skills even at a very young age. Here are some fundamental principles to teach them:
» Importance of Saving. Whether they are saving for a specific purchase or just creating a nest egg, it’s important for children to learn that margin allows them to have options and avoid the dangers of debt. To get them off to a good start, you could set a goal for them to save 10% or more of their income or allowance.
» Setting Up and Maintaining a Budget. Have your children write down everything they hope to buy within a specific time frame (i.e., the upcoming week or month) and how much each item costs. Then, have them compare that amount to their income―whether from allowances, gifts, or jobs. Preparing a budget requires making decisions and prioritizing needs and wants. It’s good practice for your kids to learn financial decision-making with smaller, less consequential decisions with a limited amount of money so they are prepared to make larger, more impactful decisions later in life.
» Banking and Tracking Expenses. Children need to understand how financial institutions work. Help your kids open their own bank savings accounts and make deposits regularly. Teach them the importance of tracking their expenses, how debit and credit cards operate, and the importance of protecting their sensitive bank information and credit scores.
» Setting Goals and Planning for the Future. Having goals helps people to focus and have something to work toward. Consider setting aside a specific time each year (e.g., the first of the year or the beginning of summer) to help your children document, review, and measure their goals and see how to move closer to achieving them.
Think of ways to put these principles into practice for your children. Kids as young as five may be able to understand the trade-off between making an impulsive purchase now or waiting to continue saving their money for a more expensive purchase later.
Parents of older children might consider giving them a set amount of money each month from which they can decide whether to buy something, donate it, or save for the future. They will learn to live with their decisions and the valuable lesson that once they spend money, it is gone.
If your child was not taught personal finance in college, they will need to learn how to:
Establish a budget that meets their level of income.
Apply for credit and manage it wisely.
Manage personal expenses they have not paid for, such as car insurance, cell phone bills, and rent.
Begin to plan for the future and unexpected expenses (emergency funds, savings, retirement, etc.).
Other Financial Principles for Guiding Children
Push personal spending decisions to them. Spending decisions are at the heart of financial planning because people must prioritize what is most important to them. Life is about choices, and people spend money on what they value. Can I afford that new cell phone? Will I be able to make the payments on that car? What amount of rent can I reasonably take on? Let your children make these decisions. Do not make their decisions for them. Allow them to learn the consequences of their choices.
Set expectations. Parents need to intentionally and clearly state what they expect of their children after graduation, with nothing left to interpretation. Can the young adult move back into the parents’ home after graduation? If so, will they be charged rent, and how much? How long can they live there? Are there requirements they must meet to live in the parental home? These questions may sound harsh, but you are doing yourself and your child a disservice if you are unclear about how you will help them and for how long.
Manage adversity. Allowing children to experience challenges fosters personal growth and development while preparing them for life's inevitable ups and downs. Guiding them through this adversity plays a crucial role in nurturing their spiritual, physical, and mental resilience. Acknowledging life's unpredictability and teaching children to navigate adversity equips them with valuable skills for the future.
Advice for Recent Graduates
Receiving that first paycheck can be exhilarating. New grad- uates should learn to handle income wisely by considering these actions steps:
Give: Establish a plan to prioritize and practice generosity.
Budget: Create a cash-flow plan, spend less than you earn, and track spending.
Save: Begin building an emergency fund and saving for anticipated expenses (down payment, new car, engagement ring, etc.).
Plan: Make a plan to save for long-term needs and retire- meant.
Match: Make sure you’re taking advantage of employer benefits, especially matching 401(k) accounts or other retirement savings vehicles.
Pay Off: Pay down credit card debt and student loans.
Automate: Set up automatic deductions to support your savings goals and keep you on track.
Be Cautious with Lifestyle Choices: For young married couples with two incomes, be wary of building a lifestyle that may not be sustainable if one spouse makes a career change, loses a job, or chooses to stay home with children. Instead, prioritize paying off debt and saving for future needs over immediate lifestyle upgrades, such as home or vehicle purchases.
Delayed gratification is the key to financial maturity and can be a difficult lesson to learn. Young people must realize the value of postponing temporary pleasure for future rewards. It’s too easy to go down the road of credit card debt and impulse purchases.
Training children to make wise decisions equips them to live successfully. If you have raised your children to manage their own lives, be resilient, and become financially independent, your future contribution may not be monetary support but instead will consist of insight, encouragement, and wisdom.
By BlueTrust
