As parents, we hope we're doing a good job raising our children -- teaching them right from wrong, instilling in them the desire to learn and demonstrating how to manage money responsibly. But what if they see us preaching one behavior while practicing another? What's to stop them from following in our sometimes misguided footsteps?
As Father's Day approaches, let me share a few things dads can do to teach their kids sound financial habits that will last them a lifetime and point out a few behaviors to avoid that you may not even be aware of.
First, try to set a good example with your own financial habits. If you consistently spend beyond your means, don't save for emergencies and don't follow a budget, you risk having your kids imitate your behavior or adopt the same attitude toward money, setting themselves up for problems down the road.
Ask yourself a few basic questions about financial habits they may be learning from you:
- Do you avoid conversations about money with your kids because that's how you were raised, or because you don't feel qualified to give advice?
- Do you pay your bills on time to prevent late fees and possible dings to your credit score?
- Do you balance your checkbook regularly to avoid overdrafts and bounced checks?
- When money is tight, do you choose wisely between needs and wants -- paying the utility bill vs. buying a pay-per-view event?
- Have you set up an emergency fund -- and are you disciplined enough not to tap it for everyday expenses?
- Are you sometimes caught off-guard by bills you should be anticipating (rent, insurance, car payments, income tax)?
- If your family is experiencing financial difficulties (layoff, foreclosure, massive bills), are you having age-appropriate, non-traumatic discussions about the need for everyone to make sacrifices?
- Do you complain about your job within their earshot or say you'd rather stay home with them but need to earn money? You could be setting them up to resent both work and money.
- If college is on the horizon, have you had frank discussions about how it will be financed? Have you started a college savings fund, explored student loan programs or discussed contributions they'll be expected to make?
- When your kids constantly break or lose expensive items or run through their allowance early, do you repeatedly bail them out with no consequences?
Okay, that's a lot of potentially negative outcomes. Let's concentrate on a few positive actions you can take that will encourage responsible financial behavior in your kids:
Use allowances to teach your kids how to handle money wisely, not as a tool to reinforce good behavior. Track their discretionary expenses (toys, candy) and non-discretionary (school supplies, clothes) expenses. Depending on their age and maturity level, decide which expenses they should be responsible for managing and dedicate a reasonable amount for each category in their allowances.
Start out slowly with only a few discretionary expenses, then gradually add others and increase their allowances as they become more confident. Don't be afraid to let them make a few mistakes -- that's part of the learning process. Better to stumble and recover now than in adulthood when the stakes are much higher.
A few other suggestions:
- Use allowances to teach important life lessons. For example, build in dedicated percentages your kids must set aside for savings, charitable contributions and investments -- then involve them in choosing how the money is spent.
- The same goes for cash gifts from the grandparents and tooth fairy visits.
- When you use an ATM in front of young kids, explain that the money it spits out isn't free, but rather has been earned and saved by you. Also explain the penalty for withdrawing more than your account holds.
- To encourage saving during these times of low interest rates, offer to match their savings at 50 percent. That way, when they're eligible for a 401(k) later on, they'll understand the concept of matching contributions and be more likely to enroll.
- Teach by example. If money is tight and you have to deny your kids non-necessary items, give up something of your own that they know you'll miss.
- Open a 529 Qualified State Tuition Plan or a Coverdell Education Savings Account to start saving for your children's education -- and let them know about it well before you start discussing college choices. To learn about 529 Plans, read the guides at FinAid and the Securities and Exchange Commission. IRS Publication 970 discusses both 529 Plans and Coverdell Accounts.
Father's Day is when children traditionally express love for their dads. Show how much you care in return by starting them out with a healthy, realistic attitude toward personal finances.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.