Teaching Children Personal Finance: Delayed Gratification Works
Financial professionals often take on the role of educator, providing ideas and information and helping clients apply them to life choices. For clients who are parents, financial planners also may offer suggestions for teaching their children about money. Besides setting a good example, what are the most effective ways parents can give their kids money skills? Especially in a society where instant gratification is the rule, impressing on kids the importance of building future savings can be a challenge.
Christopher Cannon, M.S., CFP®, AIF® of RetireRight Pittsburgh, usually focuses on two main points: the rule of 1/3s, and the power of compounding. “I recommend that they teach their kids to save 1/3, give 1/3, and spend 1/3. This begins laying the foundation for basic personal finance and budgeting. They’ll get the gratification of giving money and seeing how it helps a specific cause. They’ll begin to understand the concept of saving for tomorrow…they’ll begin to grasp cash flows.” Regarding compounding interest, Cannon says, “The earlier the concept can be taught the better. I try to encourage the parents to make it fun and turn it into a game with incentives and rewards. As long as there are incentives kids and people will participate however the real incentive is the long term pay off of the compounded growth.”
Living within one’s means is a fundamental tenet taught by Mark Zoril, AIF® and founder of PlanVision in Plymouth, Minnesota. “They should not spend more than they make. This is a very important message that can make an impression on young people,” Zoril says. “Also, they can talk about how people have to manage what they purchase – how they can learn to say no about buying things. Saying things like ‘That is something that we do not need at this time’ or ‘This does not fit into our budget right now.’”
For kids to learn the value of delaying gratification rather than spending in the moment, parents should not buy things for children, according to Steven J. Weil, PhD, EA, LCAM of Royale Management Services in Fort Lauderdale, Florida. Rather, Weil recommends, “Set up an account at the ‘Bank of Mom & Dad.’ Tell them what you will put in their account each week, and keep them up to date on the balance. When they ask for something in the store, tell them that they have $$ in the Bank of Mom and Dad, and can buy it with their money. If they don’t have enough, tell them they will have to save up for it. Don’t be surprised when they tell you ‘It’s not worth it if I have to use my money.’”
As children move into their teen years, professionals recommend finding ways in which they can earn extra money, and making them responsible to save for larger purchases like school trips, school clothing and supplies, electronics, and other things they want. Parents interested in teaching personal finance might also take adolescents along to appointments with the family tax accountant or financial advisors. They will begin to learn some of the choices adults must make with their money.
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