Raising a money-smart kid
Our college daughter (just survived freshman year!) spent the last couple weeks at home. As she was reviewing the packing list for next month’s NROTC training, she noticed that it included traveler’s checks.
“Traveler’s checks”?!? If you’re at least in your 40s then you may have dim memories of using them in your youth. If you’re in your 20s then you may not have any idea what they are or how they’re used. Heck, I don’t even know where to find them these days, let alone how much to pay for them.
It wouldn’t surprise me to discover that a 21st-century Navy activity is recycling a 1980s packing list. However, my spouse pointed out that there could still be 18-year-olds in the world (let alone in the military) who may not yet have their own checking accounts or credit cards. Unless they want to risk carrying around hundreds of dollars, traveler’s checks are about the only “safe” option. Provided, of course, that the young clerk at the cash register has ever seen a traveler’s check before.
Our young adult has carried a credit card for over five years, and she’s had her own checking account for nearly a decade. The experience has had a few speed bumps & potholes, yet she’s been managing her own finances for nearly half her life. She’s far ahead of her demographic in handling money and investing it. I can’t claim to be a financial guru at raising money-smart kids, but we know a few resources that have worked out just fine for us.
The first place to start a child’s financial education is: you.
If you have money problems then you’re going to have to figure out how to avoid passing the syndrome on to the next generation. You may have trouble managing a credit card, or you may be struggling with consumer debt, or you may just be blissfully financially ignorant. All of those situations can eventually be remedied. You’re already reading this blog, and from here it’s a matter of checking out the links in the sidebar blogroll (such as the Dollar Stretcher) or the Recommended Reading section. Figure out your money problems, get help with solving them, or find a book/website that works for you. It’s a long journey, so start it today. If you have any inconsistencies between your own money behavior and the financial-management skills that you try to teach your kids, then one day they will inevitably notice the contradiction and throw it back in your face. No, I don’t want to get into how I learned that.
Before you start your kid’s financial education, however, I should emphasize that the point of this tutoring is “education”, not “amassing wealth”. For the first two decades of your child’s life, they’re going to be learning how to handle their money. Just as they consume hundreds of dollars of school supplies over the years, during their financial education they will consume hundreds of dollars of… dollars. They will only learn fiscal responsibility through several episodes of fiscal irresponsibility.
Let’s look at this debate from a kid’s perspective: you’re trying to teach deferred gratification to someone who’s still developing the emotional and mental capacity to even understand the vocabulary. You’re essentially asking them to turn their birthday money hard-earned assets over to some faceless financial institution where it apparently won’t see the light of day for a million years, or until they go to college. (To a kid, both of those time concepts are approximately equivalent.) Then you’re telling them how good it will feel when they finally exhume “their” money from its lockup and get to actually do something with it. This is hardly the time to start talking about saving for retirement.
To a kid, the only logical approach to this problem would be to spend all of their money right away, before you get your hands on it and make them do something “responsible” with it. The longer you persist in being the authority figure in this deferred-gratification save-your-money debate, the longer they’ll resist your tyranny and avoid learning how to manage their own money.
The only way to resolve this authority conflict is to not start it. Apply your parental jiu-jitsu. Be their friendly financial adviser, not the authoritarian rule-maker. Share their joy when they come into a pile of cash, and engage them in a happy discussion of their many options. Help them understand what can happen if they decide to spend it all on toys & candy. When they inevitably run out of money, then sympathize with them and validate their feelings… again and again and again. Show them how to avoid running out of money, and model the correct behavior in your own financial life, but let them handle their own tools. As they master the basics then you can give them bigger, sharper, and more powerful tools.
Eventually, they’ll get it. But for the first five years or so, it’s probably best to have a mental image of them lighting their allowance on fire and running around waving it around like a 4th of July sparkler. Get used to it. Remind them of their choices, but let them scorch their own fingers. Sooner or later they’ll realize that they’re in charge, that they’re tired of being poor, and that they can trust you to show them how to achieve their goals. Then, when they go through puberty, they’ll re-learn that lesson all over again. And when they go to college (where it’s harder for both you and for them to monitor their financial health), then they’ll probably test out the concept one final time.
With that frightening money-burning image seared into your cerebral cortex, let’s talk resources.
Kids are ready to start learning about money as soon as they stop eating it. For most kids, this happens around the age of two. Even at this stage, they’re able to understand that a trip to the grocery store means they can have “one special thing”. If they don’t follow the rules (let alone melt down about it), then the trip is over and they leave the store. It only takes one or two abandoned grocery carts before they understand the concept.
At the age of four or five, they’re ready for an allowance. The point of an allowance is to teach them how to handle money, not how to earn it.
They should get this allowance whether they do their chores or not, whether they behave or not, and even whether they’re learning the concept or not. If they want more money than their subsistence allowance then they have to do their chores, behave, and show that they “get it”. But the most important aspect of an allowance is that they receive it every week to learn how to handle money. It has to be reliable, not a random lottery win to be spent before it’s taken away. It’s not a gift or even a privilege: money is a skill that they have to learn just like writing or reading. Of course, at this age you’ll want to limit the allowance to something like a dollar a week. Now when they choose their “one special thing” at the grocery store, you can point out what it costs and how money can buy it.
New readers will enjoy the book “If You Made A Million”. It gives kids the vocabulary and makes it sound fun. The best part is that they can imagine having more money than they’ve ever dreamed of, and they’ll know what they can do with it.
As they start reading in elementary school, you’ll start reading David Owen. His “First National Bank of Dad” got us most of the way through high school. I’ll skip over the gory details (you’ll enjoy reading his explanations) but your kids will learn how to save their own money in their “Bank of Kid CD”. They’ll even learn to take better care of their toys so that they can resell them on eBay when they’re tired of them. When they learn to read, write, and do math then they’re also ready for a checking account.
We discovered that the Navy Federal Credit Union will let a kid open a checking account (with a parent’s joint custody) when they’re nine years old. NFCU even issued her an ATM card, and she learned her own important life lesson when she promptly lost the card. She made the hard choice to wait over a year to replace it (until the old card expired and a new one was issued) instead of forking over the $25 replacement fee.
The checking account caused many tears at first. She learned the real reason that you have to write neatly and do the math correctly (not just for a good grade!). She learned to record the checks as soon as she wrote them. She learned how frustrating it can be to have to take your time and figure out the mistakes, no matter how many attempts are necessary. A bounced check was a financial disaster. Some months the checkbook never even came out of her desk drawer. But she thought it was so worth it at school to see her teacher’s faces when she whipped out her own checkbook to pay for her classroom purchases, so she persevered. After a year she discovered Quicken and online statement reconciliation, and the tears eventually dried up.
For her 13th birthday, we learned that Citibank will issue a credit card (with a parent’s joint signature). She’s still using that card, although today it’s a backup to her American Express Blue. We’ve helped her balance her account a few times, and we’ve helped her talk to the “customer service” reps when necessary, but she’s done all the work.
Personally, I think the best part of her financial education was when she had to learn how to manage a clothing & toiletries budget. We eventually got to the point where she was given the funds only twice a year, and they had to last an entire six months. She could dress really good or smell good, but it was her choice. Being a girl, she learned this fashion/hygiene concept very quickly. Knowing my own teenage experience, this tactic will probably only work for boys after they discover girls.
Another teen financial resource, believe it or not, is Suze Orman. (Stay with me here– I’m talking about teen financial education!) Suze is the perfect combination of snark with basic financial skills, and she gets a lot of air time in our house. I may not agree with much of her teaching, but each show is worth an hour’s money conversation. Our teen now completely knows the rules for “Can I Afford It?” and has the big picture on “How Am I Doing?” When she hears the word “girlfriend”, she knows there’s trouble. The show’s best lines have become part of our household vocabulary. I highly recommend watching it with your kids when they’re 13-18 years old… even if it’s just so that you can tell them “You are SO denied.”
In our family, we even expanded David Owen’s “Bank of Dad” concept to the “Kid 401(k)”. When our kid turned eight years old, she knew that in another lifetime (just eight more years!) on her 16th birthday her 401(k) would have earned enough for her to afford a car. We skipped over a whole bunch of financial-math details back then (like “contribution matching” and exactly how much car you can buy with a few thousand bucks) but for the next eight years, she confidently knew that she’d acquire the skills and understanding to get her first car.
When our financial tyro turned 16, she surprised us with the idea of using her Kid 401(k) to buy a share of the family car that she’d sell back to us when she moved out for college. (Of course, she had to take care of her investment, washing it and changing its oil and not wrecking it.) She had nearly eight years to come up with that idea all by herself– it didn’t come from us. Now that she’s in college, her “401(k)” money is sitting in a CD ladder (at Pentagon Federal Credit Union) until she gets to a point in her life where she actually needs a car. (For now, she’s all about compound interest.) Just knowing that she controlled the resources was enough to keep her from squandering them.
Disclaimer: As I’ve said before, I’m no financial guru. Our teaching techniques have only been applied to a sample of one. They’ll probably work for your kid, but they may work at a different pace. You might find better resources or methods. (If you do, please post a comment here to share with us!) You have to tailor the education to your kid’s abilities and interests. (Many of my lessons to her came in the form of explaining how I screwed it up when I was her age. That sure captured her interest.) I can certainly attest that there will be failures, and you will have to be patient. There may not be progress every month, but you’ll see it from one year to the next.
Our daughter will quickly admit that her first college semester was financially rocky. (Let’s just say that the high-school graduation presents didn’t last very long.) I was more than a little frustrated by her explanations, but I took solace in knowing that she already understood the mechanics of managing her assets. She quickly got a handle on her flawed logic and she turned the situation around by herself. She did not go into debt, and she is building her net worth. She spent Christmas break transferring her assets to her new Fidelity Roth IRA and setting up an automatic savings deduction. She’s also doing her own tax returns. She’s almost off the family payroll!
So on her NROTC summer training when she sees someone using traveler’s checks, maybe she’ll take them under her wing and show them how to get a checking account and a credit card. She’s learned how to do it, and today she’s ready to learn how to teach it.
Right now our daughter’s reading Liz Weston’s “The 10 Commandments of Money”. When she returns from sea duty in a couple of months (our daughter, not Liz), she wants to map out her asset allocation and start her dollar-cost averaging. I’m looking forward to that conversation. See you soon, honey!
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