As Sarah and I roll along the path to financial independence, it naturally has some degree of impact on our parenting. The financial choices and decisions we make, like it or not, are different than the average American family and thus likely different than the decisions made by the families of their friends.
Our goal as parents is to have any financial success that we enjoy never result in any sense of entitlement for our children. We want to imbue in them a strong sense that you need to work hard for what you have and that you need to put away for the future in order to preserve what you’ve earned.
How can you do that successfully when you’re on the path to financial independence? How do you balance giving your children lots of opportunities and experiences with a sense that you also need to work hard and save for the future?
This is something Sarah and I have struggled with a lot and, over the years, we’ve come up with several strategies for doing this.
Be An Example
This is the first and foremost principle to follow. Sarah and I need to be good financial role models for our children. In other words, we need to behave in a way that demonstrates financial sensibility and restraint so that our children see up close that this is how adults act.
How do we do that? Well, we start by thinking about the key principles we want to pass on.
Be frugal. Avoid being wasteful in your spending. Let your children see you do things like buy generic products and make meals at home. There are thousands and thousands of frugal ideas out there. Not only will these things save you money, they’ll also provide a great example of responsible financial adulthood for your children.
Of course, there will be some areas of your life that you really care about that you want to spend more on. That’s fine, but if you do that, make it clear that splurging in that area is counterbalanced by strong cost-cutting in other areas. You can make this point when you’re doing something frugal by simply saying that we do things this way so that we can afford other things.
Spend less than you earn. This is the fundamental rule of good personal finance. You should be living this in your own life and it shouldn’t be a secret from your children in any way.
While you don’t have to tell them exactly how much you spend, you should reinforce the idea that you should never spend as much as you earn, let alone more than you earn.
Eliminate debt. If you’re paying off debt, tell your children that you’re getting rid of that debt. Again, you don’t have to delve into specifics, but make it clear that you borrowed money from the bank to buy a house or a car or to go to college and now you have to pay it back and more.
You can even teach them about debt by loaning them a dollar or two in advance of their allowance, but then charge them interest – and stick to it – when they have to pay off the debt when their allowance comes around. You can relate this to what you’re doing, and then also mention how you have more money if you just wait a little while to spend it instead of getting impatient and getting into debt.
Save for the future. If you’re contributing money to your 401(k), you don’t need to tell them exactly how much you’re saving, but that you’re putting aside some of your money for when you’re older and no longer working.
You can use an elderly relative as an example here if you wish, explaining how they saved money for retirement and are now able to do so or how they didn’t save money and now have to work even though they’re old. Connecting the idea to real people makes the concept more real.
Explain Your Choices
It’s good that you’re making these choices and showing them to your kids, but it’s also good to explain some of the choices you’re making. Why are you choosing to spend less? Why are you getting rid of debt? Children tend to love it when you explain the “why,” and doing so here is a great way to do that while teaching some valuable lessons. Here are three ways to do that.
Show them a simplified version of your family’s budget. The valuable lesson that you can teach here is that your family spends a lot of money in order to keep things going. The mortgage or rent, the insurance, the utility bills, the food costs – they add up, and that’s something that is well worth impressing on your children.
A big part of that is to show them that savings is a part of a normal budget, one that should be given priority over other things a person might want. It’s completely okay to have some money in your budget for entertainment and hobbies, but that’s the part of the budget that has other things as a higher priority.
Keep the budget simple. Dollar amounts aren’t needed. One good way to do this is to make a pie chart or something similar with each type of spending with a different color. You can use this as a tool for talking with them about where the money that the family earns actually goes.
Take your children shopping with you. I find this to be a very good experience, even with younger children, if you go into it recognizing that you’re going to be shopping fairly slowly and having a lot of conversations.
As you shop, have a running monologue about the decisions you’re making and invite your kids to share thoughts and ask questions along the way. Allow them to be heavily involved in some decisions (effectively allowing them to choose, but steering them gently toward better choices).
It can make a grocery store trip long and slow, but it can be an incredibly rewarding learning experience when you’re shopping, especially if you shop with some frugal principles (a grocery list made from a meal plan, for example, and a willingness to buy generics and a willingness to buy in bulk).
Help them to budget something they’re financially in charge of, like opening a lemonade stand. Whenever your child is responsible for any kind of spending, help them work through a plan for spending that money before you ever take them to a store. Encourage them to think in advance about what they’re going to spend their money on.
You can use a similar perspective when it comes to a lemonade stand. You could have mom and dad “sell” them the supplies at a sufficiently low cost, or you could even have them go to the store and buy what they need. That way, they see the impact that repaying a debt has or that basic expenses really have on the bottom line.
I’ll touch on entrepreneurism again in a moment, but suffice it to say that even simple entrepreneurism like this can teach incredible lessons.
Don’t Give Them Everything
It is really tempting to give your children everything in the world, but doing so usually ends up in disaster as your children start to build a taste for consumerism and an expensive expectation for life as well as a lack of patience. A healthy balance between the two is a good thing. Here are three key practices to keep in mind.
Allow them to have unfulfilled desires. It’s okay for your child to want things and not receive them, even if it’s the thing that they want more than anything else. This is especially true in the face of strong emotional responses, as giving into their desires at that point simply tells them that if they want it bad enough and are willing to break normal behavioral rules, they can have it.
It’s really okay for your children to have some unfulfilled desires. It helps them to learn how to handle it. One good approach is to ask them what item they want most in the world. Write it down, stick it in a safe place, and then look at it again in six months. Almost always, your child won’t even want that item any more, and that becomes a powerful way to show them that such strong desires fade out and really aren’t that important after all.
Keep holidays and birthdays low-key. A nonstop cavalcade of gifts isn’t a helpful thing for a child. It’s fine to celebrate a holiday with a gift or two, but their appreciation for what they have drops with each additional gift that they receive.
Our holiday this past year was very straightforward. Each child got a “big” gift and a couple small gifts that were mostly add-ons to the bigger one. This worked really well, as it left them room to appreciate a gift or two from grandparents and they actually had time to enjoy and appreciate each gift rather than having such an abundance that they couldn’t possibly appreciate them all.
Encourage them to be entrepreneurial. If they want to fulfill more of their desires, encourage them to come up with a plan to earn some of that money.
Perhaps they could do extra chores at home to earn some more – and they could negotiate with you for a reasonable rate. Perhaps they could operate the proverbial lemonade stand. Older children might want do do things like clear snow out of driveways and sidewalks or mow lawns to earn some extra money.
The goal here is to show that hard work translates into money in your pocket.
Have a Low-Key Lifestyle
A low-key lifestyle not only saves you stress and money, it teaches your children that a low-key lifestyle is a healthy thing, too. Here are four principles we’re using to ensure this in our own house.
Minimize their exposure to things that induce temptation and consumerism. One example of this is commercial television, which is simultaneously filled with product placement and commercials. Children see other children on television enjoying something and thus they believe they’ll enjoy it as well. It’s no different than how ads can prey on adults, except stronger.
Instead of turning on the television, encourage your children to read books, play non-electronic games, and go outside. Put a stiff cap on television time and internet time.
Set some family things as sacrosanct. For example, set a family dinner time and make that dinner your goal at least five nights a week. Try to schedule at least one or two nights a week for a family activity as well.
How does this help teach your children about good financial practices? It shows them that they don’t need to spend money to feel like they belong with a group. A strong family provides that group. Beyond that, such family events provide a great forum for talking abut personal finance and other parenting issues.
Enjoy fun things that don’t involve buying products or paying admission. Go geocaching. Go to the park, either to the playground or to the hiking trails depending on the child’s age. Build a blanket fort in the basement. Play a board game. Volunteer as a family for a charity.
Those activities can be a lot of fun and can show your children that fun can be had without buying products or without paying expensive admission fees. You should always be on the lookout for things to do that don’t require money so that both you and your family learn to appreciate them.
You don’t have to always enjoy free things, but you should enjoy them frequently enough so that your children are aware that they’re always a fun option.
Don’t oversubscribe to activities to the point that you have to take away from frugality and free time. Here’s the truth: oversubscribed children never have the chance to be bored, so they never learn how to deal with boredom on their own. There’s always something to do when you’re oversubscribed, so when you get older and find that you have to structure your own time, boredom hits like a sledgehammer.
Modern society is loaded with ways to extract money from your pocket to alleviate boredom for a little while, so a person that isn’t already aware of how to kill boredom for themselves is going to be very prone to spending their money on such things. Give your kids the opportunity to learn how to conquer boredom for themselves – it’s an incredibly valuable skill.
Have a Consistent Allowance Plan – or Not
Some parents choose to use an allowance system, where their children receive some amount of money each week. Sometimes, that money is in direct exchange for chores; in other houses, it isn’t. There are good reasons for each of those particular sets of decisions. Here are three key points to consider when fleshing out an allowance plan for your own children.
Allow all guardians to be involved in planning out an allowance scheme. This shouldn’t be the domain of just one parent in a multi-parent household or a divorce or separation situation. All people involved in the raising of the child need to be involved in the decision and discuss it thoroughly so that they’re on the same page.
Without that kind of shared discussion and commitment, it’s easy for one parent to completely undo the learning and messaging that’s coming from another parent. Communication is key. Talk about your plans, whatever they are, and find a way to do it so that everyone is happy before you start implementing.
Make sure that there’s some saving/budgeting component to any allowance plan. Part of the value of an allowance is that it provides a very hands-on tool for teaching children money lessons. It gives them the chance to learn what it means to put money aside for the future, even if it’s just saving for a few months for a particular high-priced item that they desire.
There are lots of different methods for doing this. Some parents use a “money savvy pig,” which is a special piggy bank divided into four separate sections for spending, saving, investing and donating. We’ve used these and they work really well. Other parents use a “jar” system, where they have a number of lidded jars with labels on the that their children can contribute portions of their allowance to.
Whatever you choose, make sure that they need to save at least a little of their allowance for the future, whether it’s for something big like college or just for a bigger toy down the road. When a child sees how their savings over time builds into something bigger, it can have a real impact on them.
Stick with it. Regardless of what plan you choose to use with your children, stick with that plan. Don’t give up on it because your children don’t seem to be “getting” the lesson immediately or because it’s a bit of extra work for you.
Most of the value in the lessons you can teach with allowance takes a while to click in the mind of the child. They need to see savings working over the long haul to really understand the value of self-denial.
For example, my oldest child didn’t really seem to believe me when I encouraged him to start saving part of his allowance for an expensive toy he wanted a few years ago (a Nintendo DS). He couldn’t imagine at first how a few quarters a week would turn into enough money to earn that console. However, when his birthday came around, several relatives gave him money. Before he chose what to do with that money, we stopped and counted it up. It wasn’t nearly enough to buy that DS – in fact, it wasn’t half of the cost. However, when we dug into his savings and counted that up, it actually made up the entire difference. His slow savings – a few quarters a week – enabled him to buy a very expensive item with his own money. That made a huge impact on him.
Stick with your plan, whatever you decide. It will teach the best lessons over the long haul.
The most important elements of all of these suggestions boil down to three things.
First, be a good example. You can’t realistically expect your children to become smart financially if you’re not showing them how to do it. You need to be the best example of good finances – and of good all-around personhood – in your child’s life. They might not duplicate you, but they’ll incorporate more things than you think into their life from your examples. Not only that, when you’re a good example, you’re actually making great financial choices for yourself, which helps your own finances.
Second, communicate. Children endlessly ask “why” for a reason – they’re curious and want to know more about almost everything. Feed that curiosity and talk to them about how money really works and the value of spending less than you earn and saving for the future. You also need to communicate with your partner and any other caregivers to ensure that you’re on the same page about financial lessons.
Third, make money decisions as real as you can for your children. Allow them to make real decisions on their own that actually have an impact on their future. Should they buy bubble gum now… or save for that big item that they want? A child can learn a lot from that decision. Allow your child to make that choice, but walk them through the benefits and consequences of each decision. They’ll learn a ton from that.
If you keep those things always in the center of your mind and heart when it comes to your children, you’ll help them greatly when it comes to learning about sensible finances. Good luck!