Because most things money are taught at home, the way parents handle their finances can have a lasting impact on their children's financial habits. That's the message of the 6th Annual Parents, Kids & Money Survey published in March 2014 by Baltimore-based T. Rowe Price. When children have questions about money, 58% will approach mom for an answer, 39% will ask dad, 2% will ask another family member, and 1% will look elsewhere, the survey found. Although 67% of parents report they are very or extremely knowledgeable about managing personal finances, nearly three-quarters "have some reluctance" to discuss financial topics with their kids.Their two top reasons: they don't want their kids to worry about financial matters and they feel their children are too young to understand.
More than two-thirds of parents say they are concerned with setting a good financial example for their kids. Still, many not only avoid talking about finances, they model bad behavior. Not all the mistakes are self-evident. But all are fixable.
5 Habits to Avoid
- Keeping mum about money For many parents, discussing money with their kids is as daunting as having "the talk." But avoiding the topic leaves kids in the dark – not just about the family's own financial situation, but about financial topics in general. Even if parents are not financial rock stars, they have experience and perspective, and can use their financial mistakes and successes to share knowledge and skills with their kids.This equips young people to think about money, ask questions and take a proactive approach to their own finances.
- Not budgeting A budget, sometimes called a spending plan, is an outline of anticipated income and expenses that can be used to track actual cash flow and set spending goals.Using a budget can help families plan for expenses, spend wisely, save for future goals and develop lifelong money-management skills. Not creating a budget sets a bad example. Aside from problems – such as being short for this month's bills – not budgeting can make kids feel it's OK to have a hands-off approach to money. Creating one shows them how to be proactive about balancing income and expenses.
- Failing to distinguish needs from wants Needs are things you have to have to survive: food, shelter, clothing, health care and transportation. Wants, on the other hand, are things you would like to have that aren't necessities. Justifying a "want" (e.g. a luxury-model car) as a need ("I do need a car, after all…") can be costly to a family's long-term goals. Budgeting for needs first, and then wants, helps ensure parents can meet their financial obligations and teaches kids that smart money management requires sound choices.
- Making excuses or placing blame When grown-ups blame someone else for their financial situation or perpetually make excuses, kids can grow up thinking people have little or no control over their own finances. Making them believe their financial situation is due to other people's actions, not their own, can set them up for financial failure. It's crucial for parents to acknowledge their financial missteps and find ways to do better next time.This will teach kids that they – not other people – are in the financial driver's seat.
- Lifestyle inflation This happens when people respond to earning more money by spending more money. If our colleagues drive expensive cars, we want to also. If our neighbors take luxury vacations, so do we, even if it means living beyond our means. The result can be overwhelming debt and teaching kids it's more important to have material things than make smart financial choices. Steering clear of lifestyle inflation, and using a higher salary to save more rather than just spend more, sets a good example.
Good Intentions Gone Bad
Even well-intentioned financial decisions can end up hurting your kids. One common move is to save for your kids' college before saving for your own retirement. The big problem here: While you can take out a loan to help your kids pay for college, you can't get a loan to cover retirement. Rather than foregoing your retirement savings, it's OK to let kids use student loans, grants, scholarships and part-time jobs to fund their education.They will have more of a vested interest in their education, and you won't have to ask them for money when you retire.
Another well-intentioned mistake parents who grew up poor sometimes make is giving their child "everything" to make up for what they lacked in childhood. Buying kids whatever they want – or giving them money whenever they ask for it – leads to a sense of entitlement and the false idea that things will always be this easy. Learn to say no to your kids and encourage them to save their own money (from an allowance or part-time job) for purchases.
And here's a mistake parents rarely worry about: routinely disparaging those who have more money. While the intention here is probably a good one – to make kids feel better about their own family's financial situation – it ends up making kids feel that wealth is bad: something they either should never aspire to have or that will always be out of reach. It's better to have balanced conversations that discuss the positive impact of wealth, the responsibilities of having money and the potential pitfalls.
The Bottom Line
Though parents want to set a good example, many have bad financial habits they unwittingly pass onto their kids. Even well-intentioned moves can have a negative impact on how children handle their money now and in the future. Taking a proactive approach to your own finances and maintaining an open line of communication with your kids can increase the likelihood that your child will grow up financially savvy.