How to Teach Your Children to Be Financially Responsible From an Early Age

Most parents today recognize how different childhood is in the 2020s compared to childhood when they were growing up. Our ubiquitous connection to the internet and children having access to tablets, smartphones and social media at early ages can shorten their years of carefree innocence. If you are making a concerted effort to let your children, be children for as long as possible, you’re not alone.

Parents rightfully rely on educators to help their children understand how the world works at an appropriate pace of growth and maturation. However, there is a large blind spot in modern primary and secondary education – financial responsibility.

There are many children who graduate from high school without really understanding the ramification of things like student loans, credit card debt or compound interest. This leads to avoidable young adult mistakes like racking up significant credit card debt or neglecting retirement savings at an early age.

There’s no reason you can’t both protect the innocence of your children and prepare them for a responsible financial future. There are a variety of educational tools and basic life lessons you can instill without making money or finances a terrifying prospect for your kids.

Allowances and Savings

There are some parents who think children should do chores or get good grades without needing some kind of monetary or material incentive. That’s certainly your right as a parent, but an allowance is a convenient way to start teaching financial life lessons.

Delayed Gratification

One of the most basic lessons even preadolescent children can learn is that waiting and saving pays off. Saving is not natural, as illustrated by the Stanford marshmallow experiment. The psychologists who ran the study gave participating children two choices:

• Take the small immediate reward (a single marshmallow)
• Wait a little longer and get a better reward (two marshmallows)

According to follow-up studies of the children, the ones who delayed gratification tended to have what the researchers described as “better life outcomes.” (Higher SAT scores, higher educational attainment, low BMI, etc.)

Luckily, your children aren’t lab mice in a psychological study, so you can choose your own ways to encourage them to delay gratification in life. It’s not a bad trait to attempt to instill in your children, as research does indicate it can lead to a greater likelihood of future success.

Saving for a Big Purchase

Even relatively young children can grasp the concept of money and exchange. It’s a concept they’ll naturally pick up on their own as they see you interact with the world. As they get a little older, they will be able to recognize the distinction between getting an immediate thing they want (like a candy bar) or saving up to get something that’s better but more expensive (a video game).

You can do this exercise whenever they get a little extra money, whether it was from chores or a birthday card. When they’re tempted to buy that candy or a cheap plastic toy at the drug store, ask them whether they’d rather have that or the video game. Delaying gratification and saving isn’t easy for a lot of adults, much less children. You can help remind them of their options.

Encourage Your Teens to Open Savings Accounts

Thankfully, the credit industry has legal boundaries, and you can’t legally get a credit card until you’re 18. Unfortunately, many 18-year-olds aren’t prepared for the responsibility, or simply don’t understand the repercussions of this seemingly free source of consumer goods.

You can encourage your child to open a savings account and get a special kid-oriented debit card as young as 13, which can have several benefits:

• They experience depositing money
• It helps them easily track progress toward big purchase goals
• They can use their debit card to make their own choices (good or bad) and learn from their mistakes without doing long-lasting harm

Explain the Good and Bad of Credit

Good and bad credit aren’t intuitive concepts to understand. The average child isn’t aware that some shadowy “credit bureau” is watching everyone’s spending habits. They might not realize the long-term consequences of debt or missing credit card or auto loan payments until the damage has already been done.

Explaining the dangers of debt isn’t always easy. The concept of an annual percentage rate (APR) isn’t a simple thing to explain, but you can create your own lessons about interest.

If your child asks to buy a $2 candy bar in the checkout line of a store, but they’re out of birthday money, offer to buy it for them so long as they pay you back $3 next time, they get some cash. Their immediate reaction might be to gladly accept the offer, but when it comes time to pay, they might be annoyed at the arrangement they agreed to.

Teaching consequences of debt and obligations at an early age may be a good way to help children make better financial choices when those decisions carry real-world weight.

Do You Need Help With Financial Planning in Phoenix?

At Fullerton Financial Planning, we help many Phoenix families set up savings and investment plans to support future generations. If you want to maximize the inheritance your children or grandchildren receive, while also ensuring you have the money to live comfortably in retirement, our team can help.

Call us at (623) 974-0300 to learn more.