So few of us received disciplined and balanced money training while growing up, and basic financial planning or money management still isn’t something that’s taught in schools. If you have kids, grandkids, or other young family or friends, now is the time to help them learn to form positive life-long habits with money.
Start Building Good Habits When Kids are Young
Ron Lieber, The New York Times personal finance columnist, wrote a handy book on how to raise money-healthy kids. But The Opposite of Spoiled is just as much about helping parents, too. Several things he recommends:
- Talk to your kids about money. Abacus advisors agree and urge clients to improve their own relationship to money by talking openly with their kids, spouses, and friends when money matters arise. Most of us grow up with the idea that money is a taboo topic, but once you start communicating openly, there’s a release of awkward tension. Kids see positive modeling in open communication and can eventually put that to use for themselves.
- Don’t overindulge. Studies show overindulgence hinders children’s abilities to become high-functioning adults, and that materialism often correlates with depression. Instilling a sense of ‘enough’ for ourselves and our kids creates balance. For help on this subject, take a look at www.sharesavespend.com.
- Maximize enjoyment of what you do have. Give your kids and yourself a one-week break from a prized object, such as the television or cell phone. You and your kids will appreciate them that much more when they’re returned.
- Talk about giving. Educate and model generosity for your children by talking openly about being generous. Giving is positively correlated to happiness, especially giving away things that are dear to us instead of just giving away our “leftovers.”
The 21st Century Allowance
If you have young children, a good way to start their money education is give them a weekly allowance equal to their age in years. For example, a 10 year-old would get $10/week. Then tell your kids they must split their allowance into three jars: one for saving, one for giving, and one for spending. As the parent you can also offer them interest on their savings. You can start with a higher interest rate early on for extra incentive, but if you don’t want to bankrupt yourself make sure you keep the interest you pay them around 1% per month.
This system works well in many respects: It encourages saving, provides an ample reserve for spontaneous or planned generosity, and lets them know how much is available to spend while walking through a toy store.
A great way to keep track of everything is by using iAllowance. This cell phone app automatically pays their weekly allowance and splits it into whatever buckets you want, adding in interest and keeping a running balance. Your children can have it on their phones as well, and can check (but not change) their balances. If a child doesn’t have their wallet on them, you can buy something for them and deduct it immediately from their digital spending jar. (This same concept also applies to giving).
The Teen Years
Abacus advisor, Gabe Brenner, talks endearingly about the creative ways he and his wife helped educate their teenage daughter about money (while also preserving their parental sanity):
“We put our daughter in charge of her own clothing and makeup spending when she turned 13. Initially, she was skeptical. She was concerned that ‘gaining control’ was going to result in fewer dollars. We assured her we were going to be fair-minded and that the process would not be punitive. We simply wanted her to take over the process that we’ve been managing for her: making choices. “You are going to be an adult in five years,” we explained. “We want to give you practice spending money now, because we think you are ready.”
Our deal was if she spent less then we provided, the difference was hers to keep. It did not mean we wouldn’t lower future budgets. But again, we promised any changes would be accompanied by an open and objective discussion. Initially, we set her allowance monthly. We did our best to forecast. We had to make adjustments for items we didn’t anticipate. She needed work clothes for a Saturday receptionist job at a local hair salon. And we opted to keep new ski clothes outside of the process. We learned as we went. We collaborated.
Once we had a year’s spending experience under our belts, we moved the clothing allowance to every three months. We use Square Cash to transfer her entire next season’s clothing budget to her Capital One Teen Money checking account that has its own Visa debit card. She then uses her debit card to make all purchases. Since the card is hooked up to Mint.com, she (and we) can see what she’s spending.
This summer she announced her budget absolutely needed to be increased. She did not have enough money for ‘basic items.’ We sat down and reviewed some of her prior and planned purchases with her. She’d splurged on an expensive bathing suit. And she was planning to get two expensive dresses for upcoming school formals.
In a mostly rational, largely calm conversation we got the point across that she needed to make some choices. If she was only going to wear a dress once, she might want to spend less on each. And if she wanted to spend more, she might have to wear the same dress twice.
Of course, she was disappointed to not get everything she wanted. But she is going to get what she needs. We shared that mom and dad had just been through the same process. We’d been thinking about how fun it would be to go to Hawaii over Christmas. But it is the most expensive time of year to travel. And, with the summer vacation that we had already taken, it would blow out the travel budget. Instead, we decided to take a road trip and visit family in SoCal.
Here’s the kicker! She supplemented her weekend salon job with a summer job at a local bookstore. She is positively rolling in the dough. If she wants to get two expensive dresses, she can afford it. And I know she knows the value of those hard-earned dollars. She recently said to me, “When I see a $30 mascara at the store, I now think to myself, that is three hours work!”
Knowing that wants are unlimited but that resources aren’t, we created a safe-space for our daughter to experience that dynamic. She can make choices and own her outcomes. By the time she is an independent adult, she is going to know how to use her resources wisely.”
Online Banking for Tweens and Teens
As Gabe mentioned in his story, online banking for your children has never been easier to set up and monitor, and provides a fun, connected way to engage your kids.
Step 1: MONEY (Teen Checking) from Capital One
Setting up MONEY is easy and entirely online. If you want to set up multiple accounts for Spend/Save/Share “buckets,” it’s a convenient way to manage those. Kids love it, and so will you. Here’s what you need to know:
- It’s free.
- The minimum age is 8, but know your kid. That is pretty young.
- It links to your existing checking account.
- You can transfer money to your child using the website or your phone.
- You can pay allowance with recurring, automatic transfers.
- Your child gets a Debit MasterCard in their name, which they love.
- They can use a smartphone to deposit checks and check balances.
- There is a network of free ATMs (Costco, CVS, Target and 7-Eleven).
Step 2: Square Cash or Venmo
There will likely be numerous occasions when you and your children need to exchange money. Someone doesn’t have a debit card and the other picks up lunch and needs to pay it back, or your spouse lends your daughter money for makeup and they need to pay her back; something always comes up.
Square Cash or Venmo makes the process of sending money to each other as easy as sending a text, and it takes all of two minutes to download and set up. It’s a free app and it’s secure. While not essential, you want to keep this process as fun and frictionless for kids as possible. You might even end up using it with your own friends as well.
You should consider introducing these apps a bit after online checking. It is a lot to get used to all at once. By delaying, you also start to establish the pattern where your child anticipates fun, new finance tools.
Step 3: Mint.com (Personal Finance Online)
Going through this process with your kids is about more than just creating an elaborate online cash register. It’s about establishing strong financial habits. So, connect their accounts to Mint.com.
What Mint can do (among other things) is let kids see how much money they are spending over time and what they are spending it on. You’ll be delighted when your 14-year-old declares, “There’s no way I go to the vending machine that much. I guess I should pack snacks.” Priceless!
More Advice For Teens
Even when it doesn’t always feel like it, parents still retain enormous influence with their teenagers. Besides engaging them with online tech banking, give them short but memorable ideas in order to plant healthy financial habits:
Find Some Work
It may be physically tiring, but it can be emotionally energizing. It’ll be a bummer having to work sometimes but kids ultimately thrive with responsibility and positive feedback. They’ll build new relationships and they’ll especially love the paycheck.
Save Now and Often
Tell your teens if they save at least 15% (ideally 20%) of their pre-tax income, starting now and forever more, they’ll always be in solid financial shape. Tell them if they only retain one thing, this should be it.
Investing Takes Time and Patience
Stress to your kids when they start investing they should take the long view of the markets. Their youth is a cushion to all the ups and downs. If they can survive high school, they can survive the stock market.
Compounding Returns are Amazing
Albert Einstein was asked (or so the story goes) what was the most powerful force in the universe? He answered, “Compounding!” When your money makes money and that money grows, watch out. Tell your kids they may not be excited now about compounding, but someday they will be thrilled.
Credit and College
Someday your child will finally make it to college, only to be faced with the complicated nature of credit. According to Bankrate, only 1/3 of young adults aged 21-29 have a credit card. Sometimes they are blocked by the load of student debt they’re carrying. Sometimes they’re rejected because they have no work experience and haven’t interacted with the financial system in any meaningful way.
One thing parents can do to ensure their adult-ish children are financially successful is make sure they participate in the banking system during their teen years. It’s important that young adults begin early to establish a good credit rating, even if they don’t plan on keeping large credit card balances.
Here are three things you can do to help your child make a good case for credit without turning to you to co-sign with them:
- Encourage your child to find employment and file their associated tax returns responsibly. Banks will look to a source of repayment, and allowances don’t count.
- Make sure your child has a checking account and knows how to use it. If they’re on a first name basis with employees at your local bank or credit union branch, even better.
- If you’re worried your child might not handle credit responsibly, consider fronting a deposit of $300-$400 for a secured card. Secured cards have a low credit limit, usually equal to the opening deposit. With a secured card, your child can learn how to use credit without affecting your credit rating.
Teaching your child about the essential nuts and bolts of money over the course of their developmental years can be extremely rewarding. It’s never too early to start helping your kids find their way (while also quietly minimizing your own parental headaches). Reach out to an Abacus advisor today for more ideas to put the best strategies in place.