Financial knowledge isn't built into our DNA. It has to be learned. Unlike long division and gymnastics, personal finance is not properly covered in school (if covered at all). So it falls upon parents to impart financial knowledge to their children. Unfortunately it's easy to slip up and make mistakes. In this article, we'll look at five ways you may be stunting your child's financial growth.
- The Vow of Silence
A lot of funding has been put into researching why kids fall into particular traps. Teen pregnancy, drug use, underage drinking and many other early problems have been traced back to a lack of communication – hence, the "if you're not teaching your kids about ____, then who is?" campaigns. A lack of financial education doesn't seem as serious as a drug addiction, but its long-term consequences are quite severe. Remaining mum on financial matters sends the message that either money is not important, or it's something to fear and never mention. Neither of these are lessons that help with the financial realities children will face as they grow up.
If you're not willing to teach good financial habits to your children, the school system and the media are the main information sources by default. If you need motivation to take your child's financial guidance upon yourself, watch TV with your child and consciously try to spot the image of personal finance they might be getting from both the shows and the commercials they see – it is, quite frankly, terrifying.
- Fair-Weather Finance
Ranking second only to remaining silent about financial matters is the tendency for people only to talk about them when things are going well. Personal finance and the financial world as a whole is not a Disney movie where cats and birds break out in spontaneous songs of joy – it is fraught with problems. It's far better to be honest about problems – late bills, flat stocks, bad decisions, etc. – and engage the family in solving them. Looking at financial matters as a problem-solving exercise for the family will also lessen the stress traditionally felt by people trying to "keep the household budget (or portfolio)" all by themselves. It will also teach your child to approach financial problems as just that – problems. Problems can be challenging, but there are always solutions if you're creatively searching for them.
One of the greatest investing minds of all time, Benjamin Graham, was introduced to the world of stocks and bonds through a mistake in his family's finances. Graham's widowed mother put a significant portion of the family's savings into U.S. Steel at its overvalued peak. Graham charted the stocks decline, and that of his family's wealth, from the quotes in the newspaper. The poor performance of the stock compounded the family's woes and Graham spent many of his formative years in a struggle against poverty. This experience turned him from the common belief in investing in blue chips for the long-term and eventually led to his formulation of value investing summed up his book "The Intelligent Investor."
- The Money Tree
"Money doesn't grow on trees," is one of those clichés that has somehow grafted itself to the national consciousness. Although we often have this gem ready when asked for cash, our actions often contradict it. Many people are inconsistent when they hand over cash to their children, whether in the form of earned allowance or a simple gift.
Wanting to give money to your kids is natural, you want them to enjoy childhood and not feel that anything was withheld, but easy money policies can be as damaging to families as they are to world economies. Learning to earn money via an allowance given over for extra chores is a good way to introduce your child to how money is traditionally made. Small gifts of cash are also is fine as long as it's framed correctly – again, communication is key.
The easiest way to send a consistent message is to write out ground rules such as, "I will only pay an allowance on work beyond regular responsibilities like a clean room" or "I will never buy something on short notice in a store. Any purchases have to be talked about before going in." You can then sit down and discuss the rules with your children and adapt them as necessary.
- Birds and Bees Before Stocks and Bonds
At what age are children ready for investing? The sooner, the better - as with investing itself. Although stocks and bonds seem daunting when you look at the pages of stock quotes or the calculations behind operating cash flow and profit margins, the basic concepts can be presented simply. Children pick up on branding quite early and the concept of one company, say Disney (NYSE:DIS), making products ranging from movies, magazines, books, video games, toys, and apparel isn't hard to grasp. Remember to try to cover all types of investments, real estate, business ownership, collectibles and so on. Although you may prefer bond investing, there's no guarantee your child will gravitate to that versus something like business ownership. You don't have to be an authority on every type of investment; eventually, your child will begin to seek out information on his or her own. Your job is to catch their interest and encourage them along.
- Monkey See, Monkey Do
While attempting to teach positive financial lessons to your children is laudable, the message will be drowned out if you don't practice good financial habits yourself. In many ways, the best thing you can do to help your child financially is to help yourself. Fixing your own financial weakness puts you in a better state to teach your kids about finances, and it will certainly lend authority to your words because you'll be practicing what you preach.
Until a nationwide financial literacy course is instituted, you are the only teacher your child will have in the area of personal finance. It's a big responsibility, but you can make easier by communicating with your child, reinforcing good habits and following your own advice. In the era of boomerang kids, seeing your child grow into a financially independent adult is as much a financial victory as a moral one.