Growing up affluent is a double-edged sword. Having your children not have to struggle each day for economic survival is a blessing. Yet, it is easy for them to fall prey to the expensive and frivolous.
More than eight in ten parents surveyed in a Smith Barney Working Wealth poll1 said raising financially responsible children was deeply important, and that they felt more successful and accomplished when their children understood the value of money. Yet 70 percent admitted that having wealth makes the task of teaching that value more challenging. Many expressed fear that they weren’t passing down a strong work ethic.
It takes skill to manage money, even with professional help. It also takes character-a wisdom that grows out of virtue and care for others. Your Financial Advisor can help you find the best way to teach those skills. To impart financial values to your children or grandchildren, consider these expert tips for every stage of childhood.
Up to Age 11
Setting limits is one of the most valuable practices. "It’s key in wealthy families to be able to say, ‘There are ceilings,’" says Judy Barber, a licensed marriage and family therapist with Family Money Consultants LLC in San Francisco. She says that when you “help children learn the difference between needs and wants” you are building a lifelong foundation. Setting limits also prepares kids for a common occurrence in life: Cash flow, even in wealthy families, goes up and down.
1. Explain what you do: Talk to children about money in an age-appropriate way. Explain how you make decisions about buying things and where money goes when you give it away. Explain why you care for others’ needs. If they don’t see it, they won’t know-so bring children along to the neighborhood center where you volunteer, or at holiday time, bring toys to a local homeless shelter together.
2. Keep it simple and immediate: Young children think concretely, so experts say to keep lessons tangible. Get the child a piggybank and when he or she receives money, talk about using some for spending and setting some aside for savings. Saving for goals can begin in elementary school. But if saving takes too long, many children lose interest. That’s okay. Some kids are ten before they’re able to do long-range planning. Don’t rush it.
3. Learn through play: Preschoolers can learn by pretending to shop or run a store. Encourage games with receipt books to tear off, paper money or a cash register. By elementary school, a pet is an excellent tool for learning money management.
4. Make allowance reliable: Whether allowance is tied to chores or not is a parent’s decision, but experts concur that families should avoid docking a child’s allowance for bad behavior. "Young people need a consistent amount," Barber explains. A study she ran found children whose allowance was reliable were, a decade later, notably more fiscally responsible. Some experts suggest dividing the allowance into separate jars for saving, spending and charitable giving.
5. Invite a child to give: Giving has its own inherent value, and brings the giver joy. It also carries lessons about responsibility and decision making. Perhaps allow a child to hand over a donation when possible-and help children find causes that matter to them. Sabin says, "It invites them to see how they can be responsible for making financial choices. The lesson is the power of your actions can make the world a better place."
Tweens and Teens
Emotions run high with independent-minded adolescents, so matter-of-fact education is key. Skip the tales of your youthful privation. “Saying ‘Be like me’ will fall on deaf ears," says Dan FitzPatrick, CEO of Citi Trust. “Young people have to find their own basis for a sense of self-worth. It’s extremely important in families of wealth." So mix objective education with a continuing emphasis on values—which teens can now begin to apply.
1. Enlarge allowance-and responsibilities: It’s probably time to discuss increasing tasks and upping allowance to $25 per week or more, as well as increasing the number of items the young person must buy, many experts say. They might include toiletries, birthday gifts, or clothing. Barber cautions, however, against loading that duty onto a highly pressured, tightly scheduled child. It may be too much responsibility.
2. Ratchet up the terminology: By middle school, introduce more sophisticated terms, like “compound interest” and "mutual funds." In order to give them a larger picture, expose kids (calmly) to financial unpredictability. Offer assurance that you could weather a downturn. "Explain that you get advice from experienced financial planners and the value of that," Stewart says. Consider visiting a Financial Advisor together. If you have a college investment account, look together at how it’s doing. Explain what college costs and what your current savings will buy.
3. Encourage employment: Some students are too overloaded, but if you have a business or a local office, encourage your adolescent to do some filing, errands, repairs or data entry. It will be harder to squander money that’s taken time and effort to earn.
4. Shape a wise consumer: Continue explaining your thought processes—now at a higher level-ahead of big purchases, and help with research. "My daughter began shopping on the net for clothing," says Stewart. "No one could believe it when she found a beautiful, barely worn homecoming gown for $24." When children blow their money, don’t bail them out. Mistakes are learning opportunities.
5. Preserve volunteering time: Allow time for and encourage volunteerism. Research shows that charitable activity makes kids happier as they help others find happiness and teaches self-esteem, teamwork and financial and analytical knowhow. Direct involvement also helps kids connect to the fate of others. If your child or grandchild isn’t interested, sit tight; it can take time for a young imagination to spark.
Cyber Finance, KID Style
Kids don’t have to look far for a seasoned guide through the world of finance. At the Young Investors Network (smithbarney.com/yin/home), the ins and outs of investing, budgeting and saving come in jargon-free, easy-to- grasp digital doses with real-life examples and fun hands-on tools – including video games. The site helps young people think through their immediate short- and long-term financial goals and provides a "goals calculator" to formalize the experience. After mulling over what they want, they can even use a savings and budget calculator to figure out how to get there.
Getting the terms: One part of the neon-bright Web portal introduces young investors to the terms and meanings of stocks and dividends through a scenario in which a teenage character, Mandy, starts a company selling old clothes from her grandmother’s attic and pays her investors small dividends from her earnings.
Taking part: Young investors can get involved more actively by creating their own "cyber portfolio" for a taste of stock investing. There’s a quick lesson on the difference between short-term investing (saving for your first car, say, over one to three years) and how that can be accomplished with bonds, versus funding an immediate need, such as a laptop, by investing in cash equivalents like money-market funds.
Understanding time: Finally, the merits of long-term (more than five years) investing are noted, such as funding college tuition with growth vehicles like stocks. When it comes to college, there’s also a college-cost calculator. Along the way, they learn the tradeoff between risk and return. There are discussions on philanthropic experiences, risks and rewards and the downside of getting too deeply in debt. And so you don’t miss out, there are areas geared toward parents and classroom teachers as well.
Ben Proctor is a Certified Financial Planner and Vice President-Wealth Management with Smith Barney’s Greenspring Station office. He may be reached at 410-494-8097 or by visiting his web site at www.fa.smithbarney.com/benproctor.