TEACHING CHILDREN ABOUT
MANAGING MONEY 

“We teach children to save their money. As an attempt to counteract thoughtless and selfish expenditure, this is a value. But it is not positive; it does not lead the child into the safe and useful avenues of self-expression or self-expenditure. To teach a child to invest and use is better than to teach him to save.” – Henry Ford

“With the amount of money I have, it’s difficult raising children the way I was raised.”– Adam Sandler

In 2018, U.S. Trust conducted an annual survey, Insights on Wealth and Worth®, which examined wealth management challenges confronting high- net-worth individuals in the United States. The survey included 640 individuals with at least $3 million in investable assets. The findings from this survey indicate that while six in 10 wealthy parents say it is important to leave an inheritance to the next generation, only one in five agree strongly that their children will be able to handle the wealth they receive, and fewer than one in three have discussed details of an inheritance with their children. In fact, only a third of wealthy parents have fully disclosed their wealth to their children, while just under half have disclosed only a little.

The primary reasons for not discussing family wealth are concerns about negative repercussions on  work ethic and family privacy and the fact that they were taught to never discuss wealth. Nearly 20% of parents with children over the age of 25 haven’t discussed family wealth because they think their children aren’t old enough or mature enough.

Managing an allowance is another way. Many parents provide an allowance as payment for chores or as a reward of some kind; others provide it without attaching specific requirements. A child is ready to receive an allowance if he or she can count small sums of money, demonstrates an interest in it and understands the concept of saving. There is no single correct philosophy— what matters most is creating a learning experience.

From Piggy Bank to Community Bank

A child in elementary school may be ready for the next step: a savings account. Many banks still offer the traditional savings account that allows children to record their balance and transaction history in their own passbook.

A savings account can be a good and versatile tool, for several reasons. First, it can be useful in teaching children about the transactional aspects of saving and the power of compounding interest. What’s more, a trip to the bank is a great opportunity to reinforce the importance of saving. It’s also a chance for kids to hone existing skills, such as math and learn some new ones, such as interacting with the teller and completing necessary forms. These types of experiences can help a child develop a sense of ownership in the savings process — and a sense of pride and accomplishment in their ability to manage it well.

Setting the Right Example: Giving Back

Charitable giving and community service are also important lessons that can be taught early. Children remember what they see and live, so although talking to them is a good beginning, including them in actual community service helps them to learn firsthand about philanthropy — what it is and how

it works. Whether it’s volunteering to read at nursing homes or collecting cans for a food drive, the direct experience of serving those in need is a powerful way to teach children. It’s also an indelible lesson that will likely make a significant impact on their future financial decisions.

Three Envelopes…Budgets Explained

Once children step through the doors of middle school, it’s important to start discussing budgets, savings goals and some of the more detailed aspects of the family finances. The Three Envelopes strategy can be an effective way to help young people think about expenses that have different time horizons attached to them. For many, compartmentalizing money can be the easiest way to organize their finances. Each envelope can be funded by the parent alone or in partnership with the child using money earned from an allowance or job. The purpose of this approach is simply to learn how to make good decisions and correctly allocate money based on the immediacy of the need:

• Envelope One: Immediate expenses, such as lunch money, gas money or entertainment
• Envelope Two: Short-term goals, such as buying a laptop or going on a senior trip. Charitable giving also belongs in this category
• Envelope Three: Longer-term goals, such as buying a car or saving for college

The Three Envelopes strategy can also open the door to larger discussions about the family’s finances. Now that children are being asked to allocate money based on their own anticipated spending, a parent can begin showing how the family allocates money each month for utilities, groceries and other immediate expenses.

To understand the potential power of investing in a Roth IRA, consider the following hypothetical investment scenario in which a 15-year-old child makes $1,000 working a summer job. Assuming he or she contributes the full $1,000 into a Roth IRA, makes no further contributions, and invests in an equity mutual fund with an 8% average annual rate of return, that original investment would grow to $46,900 by the time the account owner turns 65. And, if that same child contributes $1,000 each summer until they turn 20 years old, assuming the same 8% average annual rate of return, he or she will have an account balance of nearly $250,000 when they turn 65. In addition, a Roth IRA does not have a required minimum distribution. He or she will also have the option to pass these funds to children or grandchildren.

Finally, by giving children exposure to investing through retirement accounts, such as a Roth IRA, they become familiar with both concepts — investing and retirement planning — and may be more likely to adopt an employer-sponsored retirement plan once they start working.

529 Savings Plans

Another way to engage children in investing is to include them in the planning and funding of their own higher education. The 529 college savings plan has become popular because it’s accessible, easy-to-understand, widely available and has attractive features.

Anyone can contribute to a 529 account, regardless of who owns it. That means that a friend, aunt or grandparent can add to a child’s account at any time. Contributions for holidays and birthdays make great gifts. These investments can grow tax free, and money intended for educational purposes can be withdrawn tax free.

Beyond teaching the child how to make investments and plan for college costs, these accounts also give parents the opportunity to talk with kids about other types of college funding, including grants, loans and scholarships. These discussions help parents and children reach a clear understanding of how college will be financed.

The sample budget below shows common expenditures based on a household income of $40,000. While it’s important to create a monthly budget that reflects the specific needs of that household, this example provides guidelines of allocations for each item.

Teaching personal finance in schools is critical to raising high functioning adults. The lack of financial literacy skills can lead to poor spending choices, increased debt and a generational wealth gap.

Learning to be financially literate has immediate results and also helps individuals over the long term to be responsible with the money they earn.

While schools can teach financial literacy, there’s no replacement for what your children can learn at home from their parents and grandparents.

Reach Out With Questions

If you have any questions about teaching children how to responsibly manage money, or if you want further information about strategies that can be used as learning opportunities, please contact your wealth advisor.