The internet is full of advice on when you should start teaching young children about money. Most discussions begin with the topic of an allowance; the trade-off between spending and saving that many of us still struggle with as adults. As a parent who has done this exercise with my own children, I have little to add to the discussion of timing and benefit amounts. Rather, I focus on what older children need to learn to become financially responsible adults.
Like most lessons in life, financial responsibility begins at home. When it comes to topics like checking accounts, credit cards, investing, retirement accounts, debt usage, and the most basic tax concepts, many young adults are deeply clueless. Our schools are not much help; only a handful of states include financial literacy in the high school curriculum. Since I spent a good portion of my time working with the children of clients, I was not surprised to see a recent survey that indicated that only 40% of millennials understood the concept of “interest”. I wish some of my clients would spend as much time teaching their children basic financial skills, such as how credit works, as they do teaching them how to use the correct fork at the table.
I use a disciplined and hands-on approach to working with my clients’ children. You may want to consider taking my approach directly or delegating some aspects of the education process to financial professionals who help your family. For example, consider introducing your teenager to your banker to help you open a checking account. If there is a problem reconciling the account, encourage them to contact the banker directly for assistance. I haven’t yet met a banker who didn’t want to be helpful. Plus, learning to work with finance professionals is an important skill that is best learned early on. When setting up a checking account, you might want to consider recommending that they apply for a credit card, of course with a low credit limit. (You will likely need to co-sign the card.) You may find putting a credit card in a teen’s hands risky, but it’s best to address financial liability issues early on when the damage can be minimized.
Another example is that young adults often have little understanding of the basics of how taxes work. When a client’s teenager receives their first W-2, I provide an IRS booklet with forms and instructions, and ask them to prepare their tax return by hand. I want them to read the forms to develop a basic understanding of income, deductions and deductions. If your family uses an accountant, ask them to follow this exercise. (I find it interesting that this exercise has the added benefit of arousing a young taxpayer’s curiosity about the abstract concept of “tax policy”.)
Educating your children about investments is a must. Whether you are a self-employed investor or use a broker or professional investment manager, I recommend that your teenager open their own investment account. All adults should learn the basics of asset allocation and explore the world of indexing through mutual funds and exchange traded funds (ETFs). I’m also okay with kids buying a few specific stocks of stocks they’d like to own – hopefully the next Apple or Amazon. With individual companies, I recommend that they download the Company’s Annual Report and Stock Analyst Recommendations to learn some of the basics of company finance. There is a large amount of free online financial information available to them, which kids are usually savvy enough to navigate. When you start to invest, all lessons are valuable, and especially when the investments go south. Understanding the basics of investing for your future, whether it’s saving for a down payment on a home, paying off student loans, or financing your retirement, is an essential life skill. Most finance professionals would be happy to have the opportunity to help; it’s a productive way to cultivate a future customer.
Sometimes parents add a contribution to their children’s investment fund. Especially when the children are likely to receive an inheritance, it is best for your children to learn the basics under your supervision when the dollars are low and the stakes are low. Hands-on experience educates us on a visceral level that cannot be replicated through books and YouTube videos.
Keep in mind that every family has its own financial dynamic and every child is different. We’ve worked with some very astute teens, as well as some remarkably unsophisticated 40-year-olds. Unsurprisingly, along the way, I have witnessed the financial growth of parents as they educate their children.
In addition to other essential life skills, instilling financial sense in our children is an important preparation for a successful transition to adulthood.
Editor’s Note: Rob Clarfeld, CPA, CFP® and a resident of Great Barrington, has extensive professional experience helping people achieve their financial goals.