Let Kids Make Money Mistakes Early
Parents often ask me how to teach their kids to manage their money. My answer is simple. No mater your age, people learn best by doing, not lectures. The best action parents can take is to facilitate a safe environment where your children make age appropriate financial decisions that are important to them.
A key criteria for learning about managing money is for it to be age appropriate. Talking to your six year old about their college savings account is pointless because they cannot understand what it means. But, he can understand what it means when you tell him he must choose between his a bag of cookies or chips at the grocery store. Giving kids choices when they are young is a good way to begin training them to be decision-makers. They may protest the first time you inform them they must make a choice. But, eventually they will consider the pros and cons of their choices and weigh the value proposition for them. For example, they may choose the bag of cookies because they want to share it with their friends. Over time, they may even plan out their strategy in the car on the way to the store! This is the moment you know your parental authority is running out, but you are happy to know you are raising a critical thinker.
Managing decisions that are important to kids is critical as well. We see parents open an investment account for their teenager and become disappointed when their child does not engage in the process. In this case, the teenager fully understands the concept and merits of investing, but they simply do not care because it does not affect them now. Wearing stylish clothes, having the most current smart phone, and driving a cool car are important to them. As a result, we suggest your teenager pay for some of their own expenses, such as gas or entertainment. Help them open a checking account and set them free. Managing the money will be even more meaningful, if they earn the money themselves from a job rather than receiving it as a gift. Either way, your teenager will gradually learn that managing money is about trade-offs and making choices to live within their means.
This leads to the last important element, creating a safe environment that has room for failure. It is common for parents to bail out their children, especially when the stakes are high. For example, parents often pay off high credit card debt for their adult children or help out with mortgage payments so their grandchildren are not forced out of their home. At this point, the parent knows the consequences are dire if they do not step in. This is why it is important to create a learning environment earlier on when the child has room to learn from mistakes. For example, that teenager who just opened a checking account and is managing their own expenses will likely run out of money, maybe even overdraft their account, because they spend too much on clothes, eating out, and movies. This is the time for parents to calmly sit back and watch their children squander away their measly little bank account. Will you be annoyed by it? Yes, of course, but in the whole scheme of things the small financial loss will be worth it in the long run. Your child will learn so much from the consequences of spending all their money - skipping eating out with friends, riding the bus instead of driving themselves, or opting to stay home with you to play board games instead of going to the movies! The point is they will figure out what is important to them, learn how to make better decisions, and in a way that it is not the end of the world if and when they fail.
The best way to learn how to manage money is to just do it. Parents can play a role by facilitating a safe environment where your children can make age appropriate financial decisions that are important to them.