By Barbara O’Neill, Ph.D., CFP®
Financial education mandates have increased across the U.S. As of June 2022, 13 states require all students to take at least one semester of personal finance. In other states, personal finance is an elective or embedded within another course such as math, economics, or entrepreneurship. Expanded high school financial education bodes well for personal financial managers (PFMs), who benefit from clients’ early introduction to personal finance.
Financial education courses notwithstanding, children’s strongest financial influence is most likely their parents. Below are tips for PFMs to share with military family parents interested in teaching their children about money:
- Use Money Soundbites. Children can learn valuable personal finance concepts through the repetition of phrases that describe the importance of saving money. An example is Ben Franklin’s soundbite from more than 200 years ago: “A penny saved is a penny earned.” Follow this up by showing children a $100 bill, a.k.a., a “Benjamin.” Ben Franklin’s face is there for a reason! Other good soundbites include “pay yourself first,” “you can’t borrow your way out of debt,” “live below your means,” and “don’t spend money that you don’t have.”
- Teach Budgeting Skills. Many parents teach their children how to budget with an allowance that effectively acts as a child’s “paycheck.” Parents should also provide guidelines to help children manage an allowance, including what it covers (e.g., discretionary clothing purchases) and does not (e.g., school lunches) and expectations for long-term savings (e.g., “from every dollar, save a dime”) and charitable gifting. Another key guideline is chores expected of kids as a “citizen-of-the-household” vs. those that earn extra cash.
- Let Children Fail. Children commonly run out of money before their next allowance. One option is to let them “do without” for a period of time. Another is to loan them needed money with an agreed-upon repayment schedule and, perhaps, interest. Children learn valuable life lessons from money mistakes as well as successes. Parents can debrief these mistakes and help children improve future money management.
- Leverage “Real Life” Experiences. Parents can use everyday activities, such as trips to the supermarket or a bank ATM deposit, to teach children about money. This may require real-time explanations about what is happening. Take the time. For example, tell children that a debit card purchase will be immediately subtracted from their checking account and that credit card companies will send a bill. Remember that children observe everything including shopping methods, tipping at restaurants, acts of charity, and bill-paying methods.
- Foster Savings. Parents can help children open a savings account at a local bank or credit union and teach them about interest and compound interest. Another strategy that some parents use to motivate their children to save is to match a child’s savings like the government matches service members’ TSP deposits. The 52-Week Youth Money Challenge provides a template for children’s saving goals and parental matching. Another useful savings tool is a family savings jar to which everyone contributes loose change to save for a shared financial goal.
- Monitor Children’s Employment. Older children often want to earn their own money. Research indicates that up to 15 hours of paid employment is the recommended weekly maximum for most high school students during the school year. A job should not consume all of their time. Teens also need time for studying, school activities, adequate sleep, family responsibilities, and fun. In other words, the work-life balance that adults strive for.
- Start an Early Roth IRA. Children can become millionaires by opening Roth IRAs at an early age. Tax-free compound interest over five decades (e.g., age 16 to 67) can turn regular annual deposits into a substantial nest egg for retirement. Adults can give children a wealth-building “jump start.” As long as the children have documented earned income, anyone can contribute all or some of this amount to a Roth IRA, up to the annual limit ($6,000 in 2022). Many investment companies offer custodial Roth IRA accounts for minor children.
For additional information about children and money, review the CFPB website, Money as You Grow.