Money skills are truly 21st century survival skills. – Richard B. Wagner
Wagner goes on to say, “…money skills access the stuff of survival. For first world ‘us’ money is our key for food, shelter, and clothing.”
This is undoubtedly true, and since every parent’s goal is for their children to one day leave the nest and survive on their own teaching your children how to make wise money choices should be one of your top priorities. Furthermore, if money skills are learned well a child can do more than simply survive. He or she can thrive, living a full and rich life while assisting others along the way.
For these reasons teaching your children how to make wise financial decisions is a vital parenting task which should be approached with thought, study, and commitment. To get you started here are the 10 smartest things ever said about teaching children how to make wise financial decisions:
The Greatest Gift
“I’m keenly aware that they are your kids, not mine, so I offer these suggestions with humility. But they have 70 years of financial security ahead if they get this right – perhaps the greatest gift you can give them – or else 70 years of money-worry if they get it wrong…so let’s try. Not least because if they’re financially secure when they’re grown, you’ll feel more secure. The overall ideas are so simple that any child can easily grasp them. Spend less than you have. Save the difference. Watch it grow. How complex is that?” – Andrew Tobias
Financial security, like all of the greatest gifts parents can give children, is priceless – meaning it can’t be purchased with money. You can only give it to your children by consistently teaching simple financial principles and helping them develop the discipline to live them. Paradoxically, teaching your children to make wise financial choices is also a key to safeguarding your own financial security. For their benefit – and yours – this is an area you literally can’t afford to ignore.
The Power of Example
“The most important financial asset we bequeath our kids is their unconscious adoption of our spending habits. If they’ve grown up watching you max out your…credit cards to buy stuff you don’t need, you’ve likely poisoned their financial future.” – Jonathan Clements
On the other hand, if they see you trying your best to make wise spending decisions – even though you make mistakes from time to time – you will give them a solid foundation on which to build their own financial houses.
Every parent quickly learns the truth of James Baldwin’s statement, “Children have never been very good at listening to their elders, but they have never failed to imitate them.” Always remember you are being watched, and your habits will likely impact not only your own financial future, but also that of your children.
Experience is the Best Teacher
“One of the most useful services that we can perform as parents is to provide our kids with opportunities to screw up in interesting ways that make lasting impressions but do no genuine harm. We all learn by trial and error, and our most important insights often arise from our biggest mistakes.” – David Owen
Let your kids make small money mistakes when they are young, and the consequences are limited, instead of big money mistakes later when the consequences are much more serious. In order to do this your kids need two things: money of their own and the responsibility to decide how to use it.
Money of their Own
“The mistake most parents make, I think, is to blur the boundary between their own money and that of their children, to the point where the children can only be irresponsible and annoying. If your own income consisted solely of what you were able to beg from a fickle boss, then you would wheedle, too. Children who have no control over their own funds have no incentive not to plead for money and then to squander every dollar that comes into their hands.” – David Owen
The cure is to make sure your child has some money of their own. How you get the money in their hands – paying for chores, an allowance, or other methods – is less important than making sure kids have their own financial resources. There is simply no other way for them to learn.
Responsibility to Decide
“Having real control of their money forces children to confront and weigh their actual desires. It also frees parents from having to play an invariably judgmental and adversarial role in the family economy….” – David Owen
After giving his daughter the resources and opportunity to make some of her own spending decisions Owen noted the difference, stating, “The question my daughter has to answer is not, ‘How can I talk Dad into paying for this?’ but ‘Is this something I really want?’”
There really is no other way. If you want to teach your children how to make wise financial choices you have to give them access to money of their own and fairly wide latitude to spend it how they want. The consequences of their choices – both good and bad – will be a far more powerful teacher than lectures from parents.
Build a Culture of Trust
“There are all kinds of creative ways to spur your kid to be an excellent saver, but none of them will work if you, as a parent, don’t keep your word. Of course, no one is perfect. But if you promise something, you have to do it – not only because that’s what’s right, but also because it will build the trust necessary for a child to feel confident that if she saves today, she can get what she wants tomorrow.” – Beth Kobliner
The famous Marshmallow Test, and follow-up studies, established that the ability to delay gratification is vital to success in life. In the marshmallow test children were given a single marshmallow and told that they could eat it immediately. However, they were told if they could wait 15 minutes before eating the marshmallow they would be given a second one.
Those that were able to wait – delay gratification – were generally more successful later in life. This brings up the obvious question: are kids born with the ability to delay gratification or can parents teach children this vital skill?
At least part of the answer comes from an interesting experiment conducted by The University of Rochester. In the study children were divided into two groups of 14. Each group was given some meager and broken art supplies and time to create something. Each group was also told by the person in charge that she was leaving for a few minutes, and that she would return with some better art supplies for the children to use.
For group one the person in charge kept her promise, and returned in a few minutes with much better art supplies. For group two the promise was broken. The adult returned in a few minutes without the art supplies and without an explanation.
After this the children were given the marshmallow test. Unsurprisingly, the students in group one, who had learned they could trust the person in charge, did much better than the children in group two, who had learned the opposite lesson. After all, why delay gratification if you don’t believe you will actually get the reward later? Given those circumstances the rational thing to do is to take what you can get immediately.
Since teaching children how to delay gratification is so important this experiment puts a lot of pressure on parents to follow through on promises. If you can’t keep your promises explain the reasons to your children and come up with a plan to make it up to them.
It is imperative that you create a culture in your home were children trust that if they delay gratification they will be rewarded. The best way to do this is to give children ample opportunity to practice delaying gratification and to follow through on your promises to provide the future reward.
Make Saving Exciting
“To a kid, a savings account is just a black hole that swallows birthday checks.” – David Owen
It’s true. Making your children deposit their money in a savings account is a terrible way to get them excited about saving. All the child knows is that he or she no longer has access to the money and the few cents per year in interest they receive from the bank is nowhere near enough to compensate for this.
After trying this and failing miserably author David Owen came up with a better plan. He opened up “The First National Bank of Dad”.
The First National Bank of Dad was run out of home, giving his kids ready access to their money. More importantly, the bank paid extremely generous interest rates. Owen started out paying 5% per month. His children became such good savers he later had to lower it to 3% per month. How much interest you pay is personal, but it needs to be enough to get your children’s attention.
And how did this work for Owen? Before opening up the Bank of Dad his son spent every dime he had as soon as he received it. After the bank opened Owen noticed a dramatic change in his son’s behavior. When he asked him about the change, his son replied that he now liked to let his money “charge up” for a while before spending some of it. The intended message had gotten through.
Some people criticize Owen’s approach of paying such high interest rates, correctly noting that his kids will eventually learn they can’t get those kinds of returns in the real world. Owen acknowledges the potential downfall but defends the practice as being similar to teaching a child how to ride a bike using training wheels. Everyone acknowledges that the training wheels will one day have to come off, but their purpose is to give the child the confidence and desire to try something new and uncomfortable for them. Once they figure out how much fun riding a bike is, they will want to keep riding after the training wheels are removed.
I like the analogy. Teaching children to save is so important that providing the “financial training wheels” of high interest rates when they are young is a reasonable step to take.
Help Them Understand the Power of Compounding
“The most powerful force in the universe is compound interest.” – Attributed to Albert Einstein
It is doubtful that Einstein actually said this, but it is often attributed to him. While compound interest might not be the most powerful force in the universe, it is definitely the most powerful force in finance, and children need to be taught how to harness this awesome power.
If a child can get compound interest working in their favor when they are young they will have a huge advantage in life, while if it is working against them they will have a big hole to dig out of.
One great way to teach children about compound interest is to show them the truly incredible amounts of money they can accumulate if they start saving even small amounts when they are young and delay gratification for a long time.
Here are links to two articles I have written previously that will provide you the resources you need to teach your children about the incredible power of compounding:
Don’t Underestimate the Incredible Power of Compound Interest
Teach Them the Importance of Investing In Themselves
“The best investment you can make is an investment in yourself. The more you learn, the more you’ll earn.” – Warren Buffett
What is the most valuable thing your child owns? They might answer that it is their Xbox or iPhone but Warren Buffett knows they are wrong.
When speaking to a group of high school students in his home state of Nebraska in 2015 Buffett asked the students how much they would charge if he were to offer to buy a 10% stake in their financial future. This means that he would write them a check today that they could use however they wanted, but they would then have to give him 10% of all of their future earnings.
Buffett suggested that the absolute minimum any of them should consider would be $50,000, and most of them would probably be right in asking for several times that amount. The reason for this is, to quote Buffett, “The biggest financial asset that you have going for you, by miles, is the value of your own earning power over the years.”
Buffett than suggests that how much your financial future is actually worth, “is really dependent, in a very large part, on what you do in the next few years.” And that is largely dependent on how much education and training kids get. This doesn’t necessarily mean that everyone needs a four-year college degree, but it does mean that everyone needs training beyond high school.
Buffett concludes by telling the students that when they are young the best investment they can make – far more important than investing in stocks or bonds – is an investment in themselves. Teaching your children this, and getting them to understand it and buy into it, is one of the most important things a parent can teach a child about money. If you want your kids to be financially successful, teach them that the more they learn the more they’ll earn.
Teach Initiative
“Jake Johnson’s approach to providing his son Liam with some money of his own is inventive. The Tempe, Ariz., dad encourages his 9-year old to identify problems around the house, propose solutions, and then (my favorite part) negotiate his payment. Case in point: The boy recently raked leaves in the yard to make $10. Says Johnson, ‘I want him to see that earning money can be creative and fun, not something you do just because someone tells you to.’” – Farnoosh Torabi and Jake Johnson
I really love this idea. I think the reason why is because this one simple idea teaches several important lessons. First, it is a great way to get money into your children’s hands, which is the only way they will learn how to use it. Second, it teaches children to take initiative to get what they want and create their own job. Finally, it teaches them how to negotiate, which is a skill that will serve them well throughout their lives. This is a great idea and I wish I would have known about it when my children were younger.
Conclusion
Economist Natalie Gochnour was once asked what the most important financial lesson her parents taught her was. She responded that they taught her to “Place a substantial premium on the future.” Those 7 words sum up what you need to teach your children in order to help them make wise financial decisions. When it comes right down to it, all of the advice above is really just different ways to teach your children to put a premium on the future.
And to make things even better, putting a premium on the future will not only help them make wise money decisions, but it will also help them do better in school, develop their talents, have better relationships, stay healthy, and be successful in their careers. Much of their success in life will be determined by their ability to put a premium on the future, and money is an important tool to help them learn this.
These 10 quotes should give you some ideas on how you can help your children make wise money choices by teaching them to place a premium on the future. Write down your ideas, pick one or two of them, and start today!
Resources
The First National Bank of Dad: A Foolproof Method for Teaching Your Kids the Value of Money by David Owen
You probably noticed that four of the quotes above are by David Owen, author of The First National Bank of Dad. The truth is, I found it hard to limit my list to only four quotes by Owen. I think the book is brilliant and I consider it an indispensable resource for teaching kids about money. The book is well-written, funny, and packed with great ideas about how you can teach your children to make better financial decisions.
Warren Buffett’s Secret Millionaires Club
Kids love cartoons and Warren Buffett is widely recognized as being the best teacher of financial concepts on earth, so when Buffett turns himself into a cartoon to teach kids about money it would be wise for parents to use it. The Secret Millionaires club has 26 short animations of Buffett teaching a group of kids about money and business. Each episode lasts less than five minutes. The website also has comic books, games, and other resources. I highly recommend it.