Book One in the Dollars & Sense Books series
Kids and Money: Building a Solid Foundation
As a certified financial planner, I thought I would have no trouble coaching my kids to handle money responsibly. But when I decided to give my three sons an allowance to buy candy, toys, running shoes, and a million other things, I was just like every other parent. I did not know where to start or what steps to take. And because I counseled adults on managing their finances, my lack of expertise when it came to coaching my own kids really surprised me.
At that point my wife and I set out to learn how to teach our kids to handle money. We have used a variety of techniques, and our boys have developed confident money-management skills. Over the years, I have developed and refined a complete program to teach kids about money. I call this the Making Allowances System. My wife and I have been extremely pleased with the results, and this system has also worked for our friends, relatives, and associates. This book aims to help other parents have similar success.
Addressing a social problem
In the work I do, I have observed that many adults do not know how to handle money responsibly. My hunch is that this is because they did not handle money enough when they were children. Their parents did all of the spending, banking, and saving. They may have received an allowance, but it was used only to make small purchases. Unfortunately, they may never have learned how to save money for more expensive items or for long-term investments. It is no wonder many adults in our society are hooked on credit cards and live month to month, spending all of their incomes. They never learned basic money skills as children.
If you want your children to grow up to be financially responsible adults, I believe you must let them handle money often. At an early age, they need to handle money and understand the importance of depositing money in a bank on a regular basis. They also need to develop the habit of saving money for major purchases. These lessons will help your children develop a much more comprehensive understanding of money and how to manage it.
Giving an allowance sets the groundwork for good money management because it provides an opportunity for parents to help their children develop good habits that will stay with them for life. If you can teach your children to save, spend, and invest responsibly, you will prepare them for a productive, successful life.
This book shares the insights I have gained from my personal experience of teaching kids about money. But before we get into the details of the Making Allowances System, let us have a quick look at the dangers and opportunities you face as a parent in regard to your kids and money.
Kids and Money: The Dangers
Perhaps you are one of many adults who did not learn good money management from your own parents. Yet at some point in your life you managed to pick up the information and skills you needed. Maybe you think your kids will manage just as well. I am not out to scare you, but as a parent, you face six key dangers if you do not have a system for teaching your kids healthy habits and attitudes about money.
If you do not teach your children properly about money, they could grow up with poor money handling skills and become financially irresponsible adults. They might end up spending every cent they earn, living paycheck to paycheck. They could become mired in debt or, even worse, they could remain financially dependent on you when you should be saving for, or enjoying, your retirement. In fact, how you teach your kids about money now could affect your own personal wealth in the future.
Because they lack positive money-management habits and attitudes, your children could adopt destructive values about money. In today’s complex, consumer-oriented, media-saturated world, your kids might adopt values about money that completely contradict your own. For example, they might come to equate money with self-worth. They might become hooked on acquiring possessions, on keeping up with the crowd, on always staying in fashion. They might adopt the attitude that you are always available to bail them out when they need money, that if they want something, all they need to do is ask for it. They might develop unrealistic expectations, believing they are entitled to all the latest gadgets, even believing their happiness depends on having them.
The debt trap
If you do not teach your kids about money when they are young, they could grow up to be victims of our credit and consumer culture. They might develop poor money-management habits as adults and possibly end up in paralyzing debt. Consider that they could enter their twenties and thirties not knowing how to set financial goals, how to save money for the future, how to make a budget, how to plan buying decisions, and how to be smart consumers. Newspapers often carry stories of young adults on the brink of financial disaster.
Loss of confidence
Without positive money habits and good life skills, your children could become adults lacking confidence to make the right financial decisions. This lack of financial confidence could affect your children’s confidence in other areas of their lives.
Although you want to take an active role in teaching your kids about money, without proper guidance, you could unintentionally go astray. For example, you might use money to motivate your kids to score goals or earn better marks. These bribes, discussed in chapter 2, can teach your kids to equate money with success, to believe that money is the only real reward for an achievement. In this way, you might teach your kids the wrong values even when you have all the best intentions. To avoid such a result, this book stresses the importance of “principles.” You and your children need to think about your money principles before you take action. By observing the principles, you will be less likely to take missteps.
If you do not make a concerted effort to teach your children good money skills and attitudes, you could make a negative impact on your family relationships because of conflicts related to money. In my opinion, this danger is the most serious. It is not uncommon for families to be torn apart by disputes over business and inheritances. Even when the sums are modest, money-related tensions can arise. This tension between spouses and between parents and their children can destroy the love and joy that should be a part of marriage and family life. If you lack strong money principles and a plan of action, your relationship with your kids could be consumed with arguments over allowance(s) and other financial issues. Believe me, I have seen this happen all too often.
Since I started developing the Making Allowances System, I have noticed that most parents feel threatened by these dangers—either because they did nothing to teach their kids about money or because they thought their own good financial habits would somehow rub off on their kids. For the most part, we parents lack the knowledge, structure, and tools to teach our kids helpful money-management skills. This book was written to provide you with this know-how and thus help you and your children avoid these potential dangers.
Kids, Parents, and Money: The Benefits
On the plus side of the ledger, this book will help you take advantage of the many positive results when you teach your kids about money. The benefits for you and your family are legion, but six major ones stand out: financial responsibility, strong positive values about money, useful money-management skills, increased self-confidence (for both you and your kids), and better relationships.
Financial responsibility as adults
If you help your kids develop good money habits when they are young, they will have a better chance of being successful as adults. They will learn to make choices, will become more independent, and will know how to set and achieve financial goals.
Strong positive values about money
“You have an opportunity to help your kids develop a good attitude toward money; you can teach them that money is not an end in itself, but a means to achieve more important goals in their lives. They can develop a sense of self-worth that is not tied to the size of their bank accounts or to the kind of running shoes they wear. Also, if they develop a good attitude toward money, they may be better able to resist the negative aspects of peer pressure.”
Consistent money habits and useful financial skills
With your help, your kids can grow up knowing how to set financial goals, how to follow a budget, and how to handle money on a daily basis. They will also learn to save money regularly, make smart buying decisions, and set their own priorities on spending.
Confidence to make their own choices
By teaching your kids how to handle their own money from an early age, you will give them increasing confidence to make their own choices. They will not feel they always need to turn to you and other people to make decisions for them. If they develop confidence about money early on, they will be better able to handle increasing responsibility as they get older. Also, their confidence about money will translate into confidence about other areas of their lives, such as school, athletics, personal relationships, and community involvement.
Confidence that you are doing the right thing
If you follow the proven process set out in this book, you will become more confident about teaching your kids. You will see results throughout their childhood and teen years. You will know you are teaching the right principles the right way, which will boost your own self-esteem as a parent. (That is not to say you will agree with everything I say in this book, but it will help you decide what is right for you, and that will further increase your confidence.)
Improved relationships with your kids
As you work with your kids on the concepts around money, you have the opportunity to discuss thousands of topics. That is because money issues affect virtually every area of our lives. As you progress, you will learn a lot about your kids, and they will learn a lot about you. You will also work as a team, instead of as adversaries. This chance to be a team is, in my mind, the greatest opportunity of all.”
The Making Allowances System
Helping you avoid these dangers and realize these opportunities and benefits is the purpose behind the Making Allowances System. It provides the principles, structure, and tools you need to teach your kids about money. The system is presented step-by-step as a series of distinct concepts (one per chapter) to help support you in your knowledge of money management. Each concept contains the following primary components:
At the start of each chapter, you will see three goals listed—what the chapter aims to teach both you and your children. All of the principles, structures, and tools presented in each chapter are designed to help you achieve these goals.
Each chapter presents key guidelines for how best to teach your kids each concept. Following these guidelines will give you more confidence when you are teaching your kids. It will also make it easier for your kids to understand why you want them to do things a certain way. Build upon what you are doing well and what you see will be best for each of your children.
A step-by-step system
Lack of structure is one major weakness of most books about kids and money. They contain a lot of useful information, but they do not give you any real ideas about how to put this information into action. The Making Allowances System is different. Each chapter focuses on a specific concept and concludes with a step-by-step summary. This structure will bolster your confidence, and it will also help your kids learn faster and more effectively. The first six chapters are best completed in order, as the concepts build upon one another; later chapters can be addressed as slowly or quickly as your family decides.
Worksheets, Tips & Traps, and Reality Checks
To help you teach your kids important money concepts, and to keep everyone on track, the book includes practical tools such as worksheets for your family to work on together (also available via my website, www.paullermitte.com). The worksheets are not mandatory but can be helpful to reinforce the discussions you are having with your kids, especially if more structure is needed. There are plenty of take-action tips and cautionary notes in the “Tips & Traps” sidebars. In addition, I share kids-and-money stories from my own life and from the experiences of other people in the boxes titled “Reality Check.”
Making inexpensive mistakes when you are a child and learning from them is far better than making costly mistakes as an adult.
In an attempt to be gender neutral, the text alternates between the use of “he” and “she,” “his” and “her.” However, I make no effort to use feminine and masculine pronouns in precisely equal numbers. In the words of the personal finances author Jean Ross Peterson, “Any child is every child, and it is children who are important.” Families also come in all shapes and sizes. Not all of them have two parents or more than one child; children may be from blended families, diverse cultures, or raised by their grandparents. I aim to be inclusive but tend to refer to the traditional family model most often, simply because that is the one I am most familiar with. Please forgive this bias and adapt the advice for your own situation.
So What About You?
Here is one thing I have learned about parents: they can often be very hard on themselves. They worry that they are not doing the right things, that they are not spending enough time with their kids, that they are too strict or too lax. No matter what they do, they do not think it is enough. Well, if you are in this camp, I am here to tell you that things are not as bad as they seem. If you have kids of school age, you owe yourself a pat on the back. You have managed the following:
- You have children. This is a major achievement in itself, because you have accepted the responsibility of being a parent and you have made a huge commitment.
- You love your kids. You would not be reading this book if you didn’t. You provide a caring, nurturing environment for your kids.
- You have helped your children develop some important skills and habits.
- You have probably started some kind of money program with your kids (allowance, regular savings, bank accounts), and you have established some policies about chores and treats.
- You have worked on your own personal financial habits. You may have a regular savings plan, an education savings plan, an investment portfolio, and other cornerstones of sound financial planning (for example, wills and insurance).”
So there you go. Things are a lot better than you might think. All of these accomplishments are the stepping stones to your next stage as a parent: beginning to teach your kids about the world of money. You are ready to begin using the Making Allowances System.
A Little About Me
So why am I qualified to write this book? Well, first of all, I am a parent myself. I have been using this system with my three boys—Ryan, Patrick, and Jeremy—for more than twenty years. I have proven it works with my kids (who have become financially mature young adults) and with many other parents and their kids.
In addition to my qualifications as a parent, I am also a certified financial planner with more than twenty-five years of experience. Working with hundreds of individuals and couples, most of whom are parents, I have learned firsthand the problems and challenges parents face when teaching their kids about money.
But most of all, I am qualified to help you teach your kids because I am passionate about helping parents and their kids learn money-management skills. I have developed and tested every principle in this book because I believe that everyone can benefit from these skills. The system works, and I want to share with you the same good experience I have had with my kids.
The Universal Principles
As mentioned, in each chapter I provide several key principles to help you teach and implement each concept. These sub-principles are based on a number of universal principles that you should understand right from the start. These principles are as follows:
Talk about it
Maintaining an ongoing dialogue with your kids is the best way to teach them about money. Whenever you introduce a new concept or face a showdown over a money-related issue, the most effective way to address it is to talk about it. Choosing an appropriate time to talk is also important.”
Ideally, start working with your children at an early age, preferably age five or six. If you wait until your kids are in their teens, it will be more difficult (but not impossible) to teach them new money principles and concepts. Stick to the system presented in this book to bring your teens to the skill level they need.
Give up control
To learn about money, your kids have to do things themselves. Instead of handling their money for them, let them do it. Let them make deposits and withdrawals from the bank; let them make their own purchases; let them decide what they want to buy with their own money. You can offer advice, but let them do it on their own. Hands-on practice is the best way to learn any new skill.
Let your kids make mistakes
Even if you think your kids are spending their allowance on the wrong things, let them do it. Do not intervene and take charge. Let them make mistakes. If they mess up, they will learn the lesson much faster than by listening to a lecture. After all, making inexpensive mistakes when you are a child and learning from them is far better than making costly mistakes as an adult.”
Although you need to give your kids money for allowance, for treats on special occasions, and for the purchase of trendy clothes and other stuff, you also have to set limits. You must teach your kids that money does not come pouring out of bank machines. They have to learn to make choices based on financial limits. Even if you have a large income and oodles of money to spend on your kids, they will learn to manage money well only if they operate within some kind of set budget. So set limits.
Your job as a parent is to help your kids express their individuality and creativity within a well-defined structure. This is especially important when you teach your kids about money. You need to help them establish a consistent regime of allowance, saving, and spending. This type of structure will help them learn faster and with more confidence.
How to Make Allowances
As you work through the Making Allowances System with your kids, keep a sense of humor. When the unexpected happens—and it will—go with the flow. Improvise. Let your kids make mistakes. Let yourself make mistakes. Make allowances. Most of all, enjoy your relationship with your children.
As you read, take note of the ideas that particularly grab you. What ideas make sense to you and seem reasonable to try in your family? You may want to implement the concepts slowly and limit yourself to one concept per month. Or perhaps you have teenagers and feel the need to jump in and implement many concepts at once. Whatever your situation, there is help to be had.
You may find that some of the concepts will not work well for you or may not apply to your particular situation. The important thing is for you and your children to talk about money and learn how to manage it—both independently and together. I hope you and your children enjoy this book. I am excited about the adventure ahead of you and wish you well as you begin to “make allowances.” Please enjoy exploring my website, download and print off copies of the various worksheets I use throughout all my books, and be sure to check out my blog section, which has a few extra tidbits you won’t find in any of my books. You can also e-mail me at [email protected].
©Paul W. Lermitte