Teaching Our Children Financial Responsibility
Christopher Koopman Contributor: PowerPassionProsperity
Financial responsibility is something that is taught, not innate. However, most people learn about financial responsibility by trial and error. I hope we can change that, by empowering our children, grandchildren, and future generations to learn financial responsibility and to take ownership for their financial wellbeing. This does not start when our youth turns 18 years old, in fact, it should start as early as age 4. Instilling good financial habits early in life can help increase financial confidence, knowledge and ultimately lead to more financial responsibility. However, in my opinion, we as a country have failed miserably in teaching our youth about finances.
Learning about financial responsibility can start early in life and it is relatively easy to do. There are simple action steps we can take in helping our children understand money, what its value is, and what it can be used for. These actions steps should be used in three phases of their life prior to age 18. Phase 1 should be implemented early, age 4-6. Phase 2 should be initiated from age 7-12. Lastly Phase 3 should be implemented from age 13-18. Notice, this is ongoing. It does not stop. Much like learning in school is K-12, and most often beyond high school, we should consider the same for financial responsibility learning.
Here are some examples that we can implement during the three phases of financial learning:
Phase 1: How to earn money
When my daughter Juliet was 4 years old, I would have her help clean her room. This would involve putting away her toys, making her bed, and organizing her clothes. I would split the room into 3 areas that needed attention so that she would begin to take notice to math. Not only did this help her room stay clean, it was teaching her that she had responsibility to keep these areas of her room organized. Each time she would clean an area of the room and complete the task, she would receive $1. When her bed was made, she would receive $1. When her toys were organized and put away, she would receive $1 and when her clothes were put in the drawers, she would receive $1. Now in this early phase, the value of a dollar is not what we are teaching, however what is being taught is the act of receiving something for completing a task. This is critical, as the value of money at this point is meaningless, however, engraving the act of receiving something for doing something is what is important. I would continue this until age 6. Sure enough, by age 6, Juliet was stuffing her piggy bank with dollar bills. She was beginning to ask what these dollar bills are, and what they do. This is what naturally leads to Phase 2
Phase 2: Curiosity
Juliet is now 7, and is very curious about money, because she has accumulated it. She already understands that money does not grow on trees, and that you must complete some form of work, to receive it. Now, our focus is about what money can be used for. In Phase 2 you begin to count money, as their math skills in school are expanding. We have begun to count the money in her piggy bank and total it up. When we travel, we allow Juliet to bring some of that money so that she can spend it and use it to purchase something of her choice. We would limit how much she can bring, typically $20. What is so interesting, is now in Phase 2 they begin to understand that there are limitations to money, and what it can purchase. This is CRITICAL, as beginning to accept that some items can cost MORE money than they might have, truly teaches about the limitations of money. In Phase 3 they begin to really think about value. I have always told my clients that cost is only an issue in the absence of value. Well, watching a 7-year-old decide about what they will or will not spend money on, is teaching the value proposition of money. This is a wonderful exercise that is not only fun to watch, but lets them feel the emotions of money, and how it can be used as a means of exchange. Because Phase 2 continues until age 12, these concepts of value will continue to grow. Their awareness to money as an exchange unit for goods and services becomes clearer to them, and they begin to choose what they value, and what they do not value. You will need to help coach them in this a bit, however, letting them fall a couple times is good to. For example, letting them purchase something that they are excited about at first, but becomes less interesting to them quickly, lets them understand that we must choose carefully what we spend our money on, because the piggy bank will become empty if we spend foolishly.
Phase 3: Responsibility
In Phase 3, this is where true financial responsibility is born. It is a combination of Phase 1 and 2. However, what is different in Phase 3 is that earning money must be done on their own. It needs to be voluntary. Meaning, teenagers should be working in some capacity. This could be a job, or chores at home. But the “money supply” should be cut off unless they proactively ask to work and earn it. Once they own the financial responsibility of proactively earning money, in Phase 3 we begin to teach about financing, and interest. In this phase money can move from the piggy bank to a bank account or cash value insurance policy. This creates more “ownership” of their finances, as well, they can begin to see the accumulation of money and compound interest build up. If we rush to investments that carry risk such as a stock, bond or mutual fund, this can jeopardize their hard earned money, and I would suggest adding correlated to stock market risk assets like these a bit later in life, perhaps after age 18. In teaching the story of compound interest its best to build further financial confidence in financial instruments they can see work, that are predictable and safe.
Self-financing is another great concept to teach in Phase 3. For example, when my daughter Juliet will need her first car, she will “borrow” her own capital, and pay herself back with interest. This engraves further financial responsibility by having a commitment of paying for something monthly. Thus, setting the stage for what it feels like to pay for a mortgage for example.
These are just some examples that can be used to help strengthen financial responsibility early in life. I encourage you to try some of these strategies out! Many of my clients have found these techniques not only useful, but critical. Imagine the impact this could make if all children practiced this. Our future generations would be more financially intelligent and make better financial decisions.
I have been fortunate enough to see the children of my early career clients grow up over the past 18 years in practice. They all are financially intelligent, and way ahead of their piers! They have a stronger foundation of financial knowledge and are very responsible with their money. They have financed automobiles, some have paid for their own college, and others have even purchased real estate by age 25!
Remember, Financial responsibility is also OUR responsibility to teach to others! I encourage you to pass this message along, and let us collectively work as a society to teach more responsible financial behavior.
I am the president and founder of Statera Wealth Solutions, Inc. We focus on sustainable wealth building solutions for those who want to grow and protect their wealth. Our modern perspective challenges outdated conventional financial wisdom, awarding our clients improved financial wellness and less financial stress.
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