Financial acumen is like a foreign language. If it is not taught to our kids, it may be lost forever.
More often than we would expect, when wealth or perhaps a business is passed along to children, it is often squandered or lost within a decade. Does this surprise you? It shouldn’t. As parents, we want the best for our kids, however sometimes our actions prove otherwise. We love our children and want them to have a better life than we did. However, by trying to give them more than we had when we were growing up, we may end up depriving the life skills that our children need to be successful. You, as a successful adult, are where you are today though your hard work and sacrifice. In doing so you built up calluses that helped you to become successful. Sometimes, by giving too much to our kids and “rescuing” them, we stunt their development and financial growth.
By giving more, we give less.
There is quite a long list of financial habits we would like to give to our children. However, for the purposes of this blog we’ll simply focus on the basics:
- Hard work.
- Limited debt
1. Accountability: Pay Your Way
Teaching your child to be financially accountable and be able to “pay your way”. A story that I always connect to regarding accountability, is about my cousin. After college, she lived at home for a while; and during this time, if you can believe it, she had to pay rent to her own parents! Her dad was the CEO of an insurance company in Indianapolis, but still, she had to pay rent. What was amazing, is that she did not complain at all. That was how she was raised – you have to “pay your way”. We love our kids and the easy thing to do at times is to not have the difficult conversations. Just buy them a new car, cover 100% of the tuition, etc. However, it is accountability that builds character.
2. Hard work: Learning the Value of Money.
I grew up lower-middle class in Georgia. For most of my youth, the finest retail establishment I frequented was K-Mart. I wore cheap $20 Fayva shoes and kept them alive using Shoe Goo. A modest lifestyle taught me the value of money. I had to work for the things I wanted. My parents were terrific, they took care of all my ‘needs’, but most of my ‘wants’ were on me. That really taught me the value of money. If I wanted $50 concert tickets, I might have to put in an extra shift at Winn-Dixie.
When I started my business 20+ years ago, I was broke! Most of my business income just barely kept me afloat. I remember doing Christmas with Molly on a $40 budget and a hand-me-down Christmas tree from my parents. During these years Molly and I would always go on a Daddy/Daughter vacation to Christopher Creek, usually for 3 nights. My budget (hotel included) was around $300. I remember wanting to save money and suggesting that Molly and I make sandwiches for the road, at least that would reduce our food budget for day 1. Molly, about 10 at the time, resisted, stating “I do not like sandwiches”. I got a little fired up, I was frustrated as Molly did not understand the value of money. I realized that I needed her to have some ‘skin in the game’. My solution: I put $500 in an envelope, gave it to Molly to keep track of all our expenses. I told her that was all the money we had for vacation, and then I made her a deal – whatever money was left over after the vacation, I would split with her – my portion 67%, her portion 33%. Suddenly she was OK with sandwiches!
3. Limited debt: No Bad Debt
There are three key components to teaching a child about credit – 1. Respect credit, 2. Differentiate between “good” credit and “bad” credit, and 3. Learning the value of delayed gratification.
Respecting credit must be a priority. Understanding both the value it can bring, and the benefits of what building a strong credit score can provide over your child’s lifetime, while also understanding the dangers associated, and the negative impacts that mismanaging credit can have. Part of what clearly understanding means here is being able to differentiate between good debt and bad debt. Not all debt is bad debt, for example when it comes to owning your home, mortgage debt can be good. However, credit card debt, or a car loan out of your income range is bad debt. This does not mean do not get a credit card or auto loan – rather, understanding that credit cards should be looked at as a tool to build credit; recognizing that leaving balances on credit cards can have negative consequences, and consistently paying them off each month provides positive benefits. In terms of financing a vehicle, it does not mean to get the newest and the nicest, just because the dealership says you can afford it – but knowing that a loan is a commitment, that the monthly payment will impact cash flow, and ultimately take away from other things to obtain an asset that will simply depreciate.
Delayed gratification – is having the willpower to forgo something you want now vs. waiting for a larger payoff in the future. If there is one value that should be instilled as early as possible, this is it. In credit management, having the ability to delay a desired purchase is fundamental in maintaining low credit card balances. In addition to this, another way to simplify the decision process for when to use credit, is to only use the credit card for gas/groceries or purchases that can be paid immediately from your checking account.