Anthony J. Guinta, Principal
My wife, Lisa, and I were young, naive, clueless and (insert your own adjective here) when we got married and had our first child. Our first financial plan was fumbling for loose change in the cushions of the couch we bought from the thrift store so we could buy diapers. Thankfully, our parents emphasized the importance of a good education and hard work to have a successful family and career.
Whether it was a blessing or a curse, our two children grew up with an in-house financial advisor who doubled as a father. Now, with them ready to graduate from college, I want to share some of our actual experiences as they moved through the early stages of their financial lives. You may or may not agree with the approach we took, but hopefully these tales — and tunes — spur a conversation within your own family.
‘You Can’t Always Get What You Want’
The first teachable moment occurred when my kids’ classmates got expensive gadgets and cash in their Easter baskets, while they got only chocolate bunnies. My wife told them matter-of-factly that we could afford to give them the same things their friends received, but there was a catch: If we needed money in retirement because they got everything they wanted now, we would be moving in with them.
After a sibling deliberation over that consequence, they reached a verdict: “Mom and Dad, save your money.”
I’m sure they didn’t realize it, but they got a quick lesson on how some short-term pain can lead to long-term gain. Perhaps equally important, they learned how to reduce the chance of your parents moving in with you later in life.
‘Parents Just Don’t Understand’
Every parent has his or her own philosophy on allowances. Some tie it to household chores and/or grades; some don’t. Some set concrete amounts based on age; some don’t. Some provide regular, generous payments; some give out limited amounts on an ad hoc basis.
We gave our kids a monthly amount intended to cover their entertainment (movies, music, mall trips). A monthly allowance may be hard to manage, but it taught responsibility for budgeting. If they had something special planned, they would spend very little or nothing in the preceding weeks to build up a reserve.
We didn’t advance any allowance, so they learned that once their money was spent, they had to wait for next month. This made “credit” a foreign concept to them and served as a lesson on living within their means. It may sound harsh, but any whining about being out of money was met with a simple statement, one we’ve shared with them many times: “Life’s not fair. Get used to it.”
‘Money for Nothing’
Your child gets money for his or her birthday — and you use it to pay the utility bill. It’s OK to admit it; plenty of parents have had to do it. But when we got past that point, we started giving our children some of their gift money to spend and putting the rest in a savings account. And instead of ignoring the account, we showed them the monthly statements reflecting their deposits and the interest they had earned. That’s when they shared a revelation: “So they are paying me to keep money in the account?”
To jump-start saving behavior, we offered to match any deposits they made. This ended up being a little too effective, and potentially very expensive for us, so we phased it out. To this day, when we ask what they want us to do with their monetary gifts, the answer is consistently “put it in my account.”
Just be careful when they reach a point where you can start investing their money in areas such as stocks, where they can lose money. This is a good time for the risk/return talk — a much easier conversation to have than the “special talk” I left to my wife. However, it is humbling when your son asks whether you invest clients’ money for a living when he sees the first investment showing an initial loss.
‘I Can’t Drive 55′
We’ve always stressed to our children that education is critical to achieve the goals you have in life. We were lucky that they were self-motivated to do well in school and were competitive with each other and their peers. However, when you are 16 years old, the message can easily be lost.
Shortly after getting his driver’s license, my son got a speeding ticket that required him to go to court. The time spent in the waiting area surrounded by shoplifters dressed in their finest pajamas for a court appearance made more of an impression on him than we possibly could. We also made him pay the fine out of his own money to drive home the reality that there can be costly penalties.
Sometimes seeing what you don’t want to become, and the related consequences, will give you motivation to stay focused.
‘Teach Your Children’
When the junior year of high school rolls around, exciting thoughts of college start to appear, which quickly turn terrifying when the discussion turns to cost.
We gave our children a maximum dollar limit intended to cover their undergraduate education. If they spent less than the allotted amount, they could use the excess for graduate school or toward expenses to help start their career or family. If they chose an option that exceeded the budget or extended the college term due to laziness or poor grades, the extra cost would be on them.
By laying out the parameters upfront and allowing for ownership in the process, we helped them be aware of the impact of their decisions, avoiding future conflict. This approach also allows you to allocate the same dollar amount to each child even though they may be going in different educational or career directions. All are treated equally, and each child can decide how to maximize this valuable resource.
Just pray that the first to go to college doesn’t set the initial allotment bar too high by picking an expensive private college. We fell into that trap.
‘The Kids Are Alright’
We all need or want to help our children financially from time to time as long as they are “doing the right thing” in school, work and life. But they also should know that if they slip into a pattern of bad behavior, all support can cease. By communicating these easy parameters, our children hopefully never look at $20 in gas money or an annual gift to their savings account as an entitlement.
When my daughter wanted to go to Austria for college classes one summer, we were happy to pay for it, given her initiative, but it wasn’t an automatic approval. We made her present a budget to us in order to give her ownership and understand the significant all-in cost of the trip. The partnership formed around material financial decisions is beneficial to all.
‘A Matter of Trust’
When they started college, each child had a checking account and was an authorized user on our credit cards. We gave them a monthly allowance deposited directly into their checking account. They had the responsibility to monitor it and pay for all of their expenses. Giving them full ownership of their finances was a big show of faith. But they also knew we were watching things when my daughter received the “you only have $27 in your checking account” text from me.
With them as authorized users on our credit cards, we saw every transaction, and the directive was to use the card only for college supplies and books, plus emergencies. This monitoring kept them from abusing credit or considering it a piggy bank. Hopefully, this behavior will carry over when they have their own cards.
Be careful not to assume anything. Are you sure they know how to write a check? I still have my doubts.
‘Held Up Without A Gun’
The milestones of any parent’s life include a lot of firsts: first steps, first words, etc. Another first you don’t want to miss is the look on their faces when they get a pay stub and see how much is withheld for taxes. This turns the abstract concept of taxes into reality for them.
I was sad but proud when my daughter asked to prepare her own tax return instead of having me doing it. By taking control of her own tax return, the focus shifted from “How much is my refund?” to “I paid how much in taxes?!?”
Here’s an easy test to know if the tax talk was done properly: If your children don’t complain about income taxes, you know they weren’t listening.
‘Money Talks’
When our children were in their late teens, we had financial discussions at the dinner table to introduce them to concepts like saving in a 401(k) plan, having an emergency fund, buying insurance and so on by talking about our own decisions. We avoided the “eye rolls” by not telling them what to do and instead letting them absorb stories and get exposure to the terminology. The most effective conversation starter is to share stories of “what not to do” to see their reaction.
They each got to experience real-life money decisions when they bought a car and paid for it in full. You could tell they were proud of that accomplishment since it took discipline and many years of working and saving. The look on the car salesman’s face when they wrote a check instead of financing the car was priceless, and hopefully one they will remember.
‘Go Your Own Way’
I’m sure we could have (and maybe should have) done some things differently, but it has worked so far. Understanding the primary rules to achieve financial independence is easy: Always spend less than you earn, and save your money for the future. Following those rules is the hard part. Hopefully the groundwork we established will give our children the wings they need to fly into financial adulthood.
This article was originally published on NerdWallet.com.
