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Giving to our children comes naturally. As with any other family practice, our spending habits serve as a role model for our children. The conflict here generally comes with wanting to demonstrate our love through spending and at the same time teach appreciation, respect and responsibility in financial matters.
The teaching and understanding of financial responsibilities starts at home. How comfortable is your household in discussing money matters? Many children have little exposure, experience or training with budgets, checkbook reconciliation, debt management and investments. Thus, they grow up not understanding their financial responsibilities.
1. Start by recognizing your own anxieties about money and investments. It’s okay not to know everything. Purchase reading materials, consult an adviser, take a course and combine resources of knowledge with your spouse. This will help your children understand how to get assistance as adults.
2. Give your children responsibility for some of the financial task. For example, young children (age 5) could count money for small purchases, count and save their allowance, roll coins to form dollar denominations, spend money for a gift, make choices for purchases based on quality or play games involving counting, such as Monopoly Jr.
3. Have children open saving accounts at a young age (age 6 and older). Some schools are making this available at school through cooperation with local banks. Take them to the bank with you to make deposits, withdrawals, and other transactions. Discuss the banking process and talk about certificates of deposits, loans, etc.
4. Have children (8-10) work with a budget and understand that what comes in, goes out and how much things cost. This will teach several important concepts – relative values, cost of household items, variety of types of expenses, choices, and the budgeting process.
5. Have children (10-12) pay bills. This could be a “chore” for their allowance and will help them understand how to read bills, write checks, and record the balance. Also, invest in a stock and read about it together. Owning a stock mutual fund may be best to start with, because of the ease of investing small dollars and the literature that accompanies the investment is plentiful. Children can choose to invest money from allowance, gifts, or part-time jobs. Understanding that saving is “rewarding” and can be enjoyed later for a large purchase is a great lesson. Perhaps you may provide an incentive by “matching” part of their savings. Choose a variety of investments over time to teach them about the various types. Also, start to read the business section of the newspaper together. Explain the stock pages, graphs and advertisements. You may learn a little also.
6. Children ages 12 to 14 should be starting to understand the financial “constraints” of a family, the value of working by earning a living and choices about occupation. It’s important to lay the groundwork about the financial realities of job choice. Not everything is about money. Free time, enjoying one’s endeavors and personal happiness are also important. Start discussing the “abstract” qualities of working as well as the financial. Encourage your child to be interested in working and earning a living.
7. Children ages 14 to 16 can start to prepare their own tax returns. Even if not required, have them do a 1040EZ. If they are earning from working, open their first IRA. This will demonstrate how to lower taxes and save at the same time. Explain your insurance policies and the concept of financial risk if there is a catastrophe. Construct a listing of all assets and debts and explain each item and the concept of net worth. Perhaps they could accompany you as a “reporter “on your next visit with your financial advisor, CPA, insurance agent or attorney. Have them take notes and discuss the meeting afterward. Also, help children at this age develop a few personal goals and then a financial strategy to obtain the goal. Are their goals realistic?
8. Children ages 16 to 18 should already be financial wizards if you’ve followed steps 1-7. At this point, continued reinforcement should be given. Let your children feel a little pain as mistakes are made. If they have overspent their budget, they may have to forgo the movies. Teaching them to live on a budget without personal debt is important. The media works against you in this regard and peer pressure is tough. As with other things in life, financial boundaries are important.
9. Young adults, especially those in college, should prepare a budget for living at college, home or on their own. Make the income match the expense and decide, up front, what income will be an allowance, earning or loan. Teach your child about debt.
10. Adults 21 and over need to have a personal financial plan. Once they have secured their first “real” job, consider buying them an hour or two with your CPA or financial planner. That person can provide an objective view and advice on the payoff of debt, investment options in a 401(k), purchasing a home, insurance needs or need for a will. He or she can develop a relationship with an adviser for future decisions. Remember, financial planning is an ongoing process throughout a lifetime.
For more information about financial responsibilities, please contact Debbie May via our online contact form.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.