By “financial independence”, I don’t mean an independent financial state where one no longer has to work, although your children could at some point be in such a state — you never know! Rather, I’m referring to the ability of your children to manage their finances increasingly independent of your involvement.
The Fall 2009 edition of USAA Magazine had an article in it that I noticed today on this topic, and I thought many of their suggestions were very good. I’ve listed the key points below.
GIVE THEM A PLAN
Determine what skills, financially, you will turn over to your child at what age, and teach them accordingly. i.e. as they begin to earn their first allowance or income, require they use their own money for trips to the movies with friends.
MAKE FAMILY MONEY VISIBLE
Share your family’s monthly budget with your children as they grow older to help them understand how and why certain financial decisions — and sacrifices — are made.
AVOID OVER-INDULGENCE
Quoting straight from the article: “Keep your teen’s allowance modest enough that he’s motivated to save for things he wants and eventually to get a job.”
MAKE A CONTRACT DEAL
Develop an understanding with your kids to talk with you before signing any financial contracts, such as school loan agreements, credit cards, etc. The article cites a recent Sallie Mae study that claims the average college student carries $3,173 in credit-card debt, a figure that is 46% higher than just four years ago.
DON’T ALWAYS BAIL THEM OUT
I can imagine this might be the hardest concept of all, but it is best to let this happen first when they’re younger, and they run out of money for fun activities, or clothes, or whatever. If this lesson is not instilled at any early age, then one day their financial crisis will be something bigger, like being short of funds for groceries for the week. Help them learn the value of planning now, even if it means them learning the hard way sometimes.
TEACH THE VALUE OF INVESTING
Help your child open a suitable investment vehicle for him or her as soon as they are old enough to understand the concept of saving money — a Roth IRA or even a simple bank savings account at first. Talk with them about how you invest through your personal savings, 401(k), and/or other retirement or short-term savings plan, and show them real numbers to demonstrate to them how your funds go up and down as financial markets swing up and down, and as you contribute and withdraw from the accounts.
EXPLORE FINANCIAL CLASSES AND OTHER RESOURCES
Encourage your kids to take a personal financial class at their high school or in college, if one is offered. But remember, parents have the primary responsibility to teach kids these important skills. There are a number of good books out there to help families teach their children about finances.
TEACH THEM YOUR PRINCIPLES
This is an item not mentioned in the USAA article, but one I’ve added to the list. Although somewhat obvious throughout, I think it deserves strong mention. Most families who are committed to educating their kids about finances probably take a fairly prudent approach to finances, and so best of all these families should actively seek to persuade their kids of the value of savings, giving to others, living under a plan (a budget), buying things with cash instead of credit, the importance of insurance, etc. etc. The area of finances is too critical of an area to let your kids “find their way”. The principles and truths of areas such as budgeting, insurance, savings, and how compound interest works are too important to hope your kids discover and learn about them on their own.
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