PT 1: How to Raise Financially Responsible kids
Updated: Oct 29, 2019
Step One – Talk About Money
One of the things I regularly get asked as a financial planner is how do you educate your children to be financially savvy? Well how do you? Unfortunately, most children graduate high school these days being able to find X in a basic algebraic equation yet do not have an understanding of basic financial principles. That’s not to say that schools are not doing their part, as they absolutely are! As parents the onus is on us to continue this education at home so kids have the basic life skills to be financially responsible adults.
As we live in a limited folding cash society it’s not surprising to find that kids don’t know the value of money. Money to kids simply doesn’t exist. The bank of Mum and Dad is a given to most kids and the ‘Bing’ on their itunes account when they make a purchase is simply a fairy tale world where money grows on trees, It has become a bit like the old hole in the wall where money appears when mum and dad put in the magic numbers. How can we educate our kids on the value of money in a society which has endless buy now pay later schemes and is basically cashless?
Break the ice, talk about money! We live in a society where we do not talk about money, where it is a taboo subject that gets only discussed when absolutely necessary. Therefore, many children are excluded from simple financial discussions and lack basic financial literacy. The simple act of discussing finances and about budgeting can open a discussion that will promote positive healthy attitudes towards money.
A simple game in the grocery store to guess and check how much each item costs and estimating how much they think the total bill will be, can help them to understand how much our consumables cost. I remember when I left home for the first time and being horrified about how much shampoo and conditioner cost. I had never had to purchase these items before myself and could not get over how a necessity could be so expensive, these are the situations that can be avoided with instilling some core financial understanding into kids when they are young, otherwise you end up with children leaving home that are either broke or with dirty hair.
The next big discussion should be about how much things cost to live. I regularly say to my own kids turn off the lights when you are not using them, but never gave them a reason as to why it’s important. I recently had a discussion with my 10-year-old daughter after returning from a weekend away to find that she had left the light in her room on all weekend. I asked her if she knew why this was wrong. She said it was using power that wasn’t necessary, I agreed with her but then went on to explain that electricity costs money and that each week when I get paid I put money aside to pay the bill. I could see her little brain ticking over trying to comprehend the concept. I realised here that whilst I have been educating them in the grocery store about cost, and by using cash and having them check the change, I had failed to educate them on all aspects of finances.
I also talk with my kids about tax, partly because I am a financial planner and partly because I was so unaware when I left school what a huge chunk of your earnings went to tax. For example if your child gets a job earns $500 per week, that if they are an employee they will not receive $500 in their bank account on pay day. They will only receive $464 because $36 will be allocated to tax. This can be a difficult concept for a young adult to grasp. They worked the hours and the earned the money but yet they are paid less? Having discussion with kids when they are young about things like infrastructure, roads and schools being often funded through tax. This can set a pretense and positive attitude towards tax. The more tax you pay the more money you have earned! This is a novel concept and can help kids having a positive attitude towards tax rather than begrudge the wonderful things our tax provide to our community.
As much as it pains me to say it, the game of Monopoly can be one of the best ways to teach your kids how to manage money, if you can get past the bickering and fighting the concept is very important. Nowadays it also comes with a credit card rather than cash notes to better assimilate reality. This simulation of life on a game board hits some of the basic life aspects such as paying rent, electricity, gas and getting your pay check upon passing go. Taking the time to play this game gives kids an understanding of what to expect in life.
I encourage you to begin conversations about money with your kids and instill in them the realities they will face as they get older. If you begin with the end in mind and if you want your children to grow up to be financially responsible what steps do you need to take now to teach them the skills for the future? Start a conversation, break the ice and watch them flourish!
Please look out for our next blog post which discusses how to ‘Teach Kids to Budget’ or email email@example.com if you want to discuss further.
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