Kids and Money

If that title doesn’t grab your attention, I’m not sure what will. Kids and money–top of our mind, dear to our heart, and often in conflict. How can we, as parents and grandparents be more deliberate and effective in passing along sound financial principles to those we love?

While not as well-publicized as SXSW, we recently observed America Saves Week. On the surface, devoting a week to promote personal savings may seem a little silly (even to us). That is, until you consider that our national savings rate is near zero and, according to the Employee Benefits Research Institute, 70 percent of American workers are simply not saving enough. The sad reality is that most Americans are headed down a financial path that will not end well.

To get an idea of how dire the current situation is, take a moment and visit where there is a plethora of interesting data and financial calculators. This particular page will show you the net worth of the average American based on age and income. The median net worth for all citizens ages 45 to 54 is only $98,350. Perhaps more striking is the fact that the median net worth for an individual earning $100,000 per year is only $301,475. How in the world is the average person going to fund their retirement?

New research from the financial education site Doughmain shows that our children are (regrettably) following in their parents’ footsteps. Although 81 percent of parents believe that it is their responsibility to teach children about money, they don’t seem to put this belief into action. Incredibly, only 4 percent of the children receiving an allowance are required to deposit a portion of their allowance into a savings account.

How can we get America saving again? More specifically, what can I do to ensure that my child grows up to be financially savvy? One of the most obvious problems we face has to do with the way we make purchases today. We no longer use “real money”. Just slide a card and magically receive whatever you want. I hate to admit it, but personally, I spend more when I use plastic then when I use cold, hard cash – one of the reasons my household uses a cash budget. It also sends a confusing message to our kids. Unless we show them on a regular basis how much we are making, spending, and saving, they have no clue.

Another roadblock to saving is the fact that it hasn’t been very fun or rewarding for the last decade.  When financial markets are volatile, the average investor tends to make investment decisions that are very damaging to returns.  This leads to the perception that financial markets did not work.  In reality, a properly diversified portfolio has provided a very reasonable return over the last twenty years (despite four major  financial crises) and moderate returns over the last 10 years.  That’s a topic for another time, but here are a few tips to help you and your children start moving in the right direction when it comes to saving:

• Set the Example. It’s never easy to save money, but focus on the prize. Encourage open conversation about money, saving, and spending. Involve your children in some of the decisions that you make as parents (needs vs. wants). Tell them how and why you think saving is important. Use everyday examples to reinforce your belief system.

• Show Discipline. If you tell your children that you’re not buying anything extra at the grocery store, don’t cave at the ice cream freezer (or the dreaded candy rack). If you do, the message you’re sending is that impulse purchases are acceptable. The same concept holds true for weekly allowance. If you forget, or don’t have the appropriate cash on hand, the underlying message is that bills don’t have to be paid on time. Foster discipline by including your children in the management of your finances. Explain what it means to pay yourself first and teach them the power of compound interest. Show them how to set up an automatic monthly transfer from their “operating” account to their “long-term savings” or investment account.

• Modernize the Message. Communicate with children on their level and in their language. Their life is digital and always “on”. How’s this for a reality check? My child will probably never receive a paper statement in his lifetime. Show them how you bank online and explain what really happens at the ATM. Instead of worrying about the cost of college, establish a 529 plan and begin saving on a monthly basis. A college savings account is an awesome teaching tool. When you include your child in the process, they gain a better understanding of the value and importance of education. Moreover, they witness first-hand the benefits of compounding and dollar-cost-averaging. The message sticks better when real money is involved!

• Offer an Incentive. Kids are smart. They want to know what’s in it for them. Matching funds are a powerful motivator (think KUT fund drives and your 401k). Offering “free money” in return for increased savings might transform your little shopaholic into a future millionaire.

Good luck and be creative!