The internet is replete with advice on when you should start teaching young children about money. Most discussions start with the subject of an allowance; the spending vs. saving trade-off that many of us still struggle with as adults. As a parent who has gone through this exercise with my own children, I have little to add to the discussion of the timing and amounts of allowances. Rather, my focus is on what older kids need to be taught to become financially responsible adults.
Like most of life’s lessons, financial responsibility starts at home. When it comes to topics such as checking accounts, credit cards, investing, retirement accounts, the use of debt, and the most basic tax concepts, many young adults are profoundly clueless. Our schools aren’t much of a help; only a handful of states include financial literacy within the high school curriculum. As I’ve spent a good deal of my time working with the kids of clients, I wasn’t surprised when I saw a recent survey that indicated that only 40 percent of millennials understood the concept of “interest.” I wish some of my clients spent as much time teaching their kids basic financial acumen, such as how credit works, as they do teaching them to use the correct fork at the dinner table.
I use a disciplined and hands-on approach to working with my clients’ children. You may want to consider adopting my approach directly, or delegating aspects of the education process to the financial professionals who assist your family. For example, consider introducing your teenager to your banker for assistance with setting up a checking account. If there is a problem reconciling the account, encourage him or her to reach out directly to the banker for assistance. I’ve yet to come across a banker who wasn’t willing to be helpful. Also, learning to work with financial professionals is an important skill best learned early on. While setting up a checking account, you may want to consider recommending that he or she apply for a credit card, of course with a low credit limit. (You likely will need to cosign for the card.) You may regard putting a credit card in the hands of a teenager as risky, but better to deal with issues of financial responsibilities early on when the damage can be limited.
As another example, young adults often have little understanding of the basics of how taxes work. When a teenage child of a client receives his or her first W-2, I provide an IRS booklet with forms and instructions, and have them prepare their tax returns by hand. I want them to read through the forms to develop a basic understanding of income, deductions and withholdings. If your family uses an accountant, ask him or her to monitor this exercise. (I find it interesting that this exercise has an additional benefit of arousing curiosity in a young taxpayer as to the abstract concept of “fiscal policy.”)
Educating your kids on Investments is a must. Whether you’re a do-it-yourself investor or use a professional broker or investment manager, I recommend having your teenager open his or her own investment account. All adults should be taught the basic tenets of asset allocation, and explore the world of indexing through mutual funds and Exchange Traded Funds (ETF’s). I’m also fine with kids buying a few shares of specific stocks they would like to own – hopefully the next Apple or Amazon. With individual companies, I recommend that they download the company’s annual report, and stock analysts’ recommendations, to learn some of the basics of the company’s finances. There is a vast amount of free online financial information at their disposal, which kids generally are quite savvy at navigating. When starting out with investing, all lessons are valuable, and especially so when investments go south. Understanding the basics of investing for one’s future, whether saving for the down payment on a house, paying off student loans, or funding one’s retirement, is an essential life skill. Most financial professionals would welcome the opportunity to help; it’s a productive way to cultivate a future client.
Sometimes parents will add a contribution to their children’s investment fund. Especially when children are likely to receive an inheritance, it’s preferable to have your kids learn the basics under your supervision when the dollars are small and the stakes are low. Hands-on experience educates us at a visceral level that can’t be duplicated through books and YouTube videos.
Keep in mind that every family has its own financial dynamics and every kid is different. We’ve worked with some very astute teenagers, as well as remarkably unsophisticated 40-year-olds. Not surprisingly, along the way I’ve witnessed the financial growth of parents as they educate their kids.
Along with other essential life skills, instilling financial acumen in our children is important preparation for a successful transition to adulthood.
Editor’s Note: Rob Clarfeld, CPA, CFP® and Great Barrington resident, has extensive professional experience helping people achieve their financial goals.