In this episode of the MoneyTalk with MFLN Personal Finance podcast series, Dr. Barbara O’Neill and Molly Herndon discuss the November 27 webinar from the Family Finances Series: Raising Financially Responsible Children. In this webinar, presenter Neale Godfrey talked about teaching children, using strategies that encourage accountability, responsibility and an understanding of the relationship between working and money. In this podcast, Dr. O’Neill expands on a few of these concepts.
Resources from the Podcast
We’re going to talk about the “Raising Financially Responsible Children” webinar that was the third in a Family Finances Series we hosted this year. The presenter, Neal Godfrey, talked about creating habits in children that become financially responsible at a very young age. How does an allowance system foster that?
I think that an important thing to remember is that an allowance teaches children that money is not unlimited, and there’s a need to stretch this limited resource (whatever the allowance amount happens to be) over a specific period of time, just like adults will have to do for the rest of their lifetime. That’s one important thing. An allowance also teaches long-term savings, particularly if parents encourage that a portion of it be set aside for something that’s longer-term. That doesn’t mean 50 years ahead in the future for retirement or anything like that, but it may be something that’s going to take several months to save up for. It also can teach charity particularly if parents encourage their children to include a charity portion of their allowance. That’s an important thing. Also, young children will understand the satisfaction that can come from achieving a financial goal. If they set aside a certain amount of money and then they’re able to buy whatever it is they’re saving up for, that can be very powerful and something that they’ll want to do the rest of their lives. So I think from the parent’s standpoint, an allowance can reduce the nickel and diming that often occurs when you don’t have an allowance. Then there’s these constant pressures for getting money from parents. I remember Neal mentioned that there was the whining factor and after nine different nags by children, their parents kind of caved in. I think you can avoid some of that by having some structure around an allowance.
If children only see their parents spending money, how can parents show their young child that they’re also saving and donating money as well?
I think one thing you can do is have a family piggy bank. It could be a big jar that everybody puts their loose change in. Then that money is used for something fun for the whole family. It could be pizza or going to the movies, etc. It’s got to be something very visible. That’s something my husband and I do. We have a change jar right on the table. We see it every day when we’re eating, and we know that’s the place to drop our change. So you’re modeling savings, so they can actually see the money jar grow. Also, have conversations about saving and the results of saving. For example, children should understand that the vacation they took came as a result of saving money throughout the year. Also, you mentioned charity. That, again, can be a conversation as far as different charitable organizations in the community that the family wants to support. Maybe even visiting the location of those charities so they can see the actual work that charity is doing with the money that is coming in from donations. That can be very powerful for children.
Neal talked a lot about negative communication and lack of communication about money and how that impacts children’s understanding of financial management. How can parents with a history of negative financial behavior correct some of the mistakes they’ve made and make sure their children don’t make the same mistakes?
That’s an interesting question. One thing that Neal repeated multiple times during the webinar was don’t make money be a secret in the family. In many families, money isn’t talked about. If you don’t have conversations, the only way that children are really going to learn about money is by observation. The problem is, if there’s some negative role modeling going on, that can be difficult. You’re transmitting those negative behaviors onto the next generation. What can parents do? I think the first thing you can do is recognize that you have a problematic behavior (e.g. lack of savings, overspending, debt). Whatever the problem is, recognize the problematic behavior. You might then need to seek some support. There’s a growing number of financial coaches around the country that are working with people to resolve some of their money issues (or nonprofit credit counselors if it’s a debt related problem). Recognize the problem and develop some remedying actions. That might be reducing some expenses, increasing savings, getting some financial coaching, etc. Finally, discuss with your child how you’re turning things around. Tell them your story. Tell them your bad story, but then tell them the good story because children will learn from the story almost as much as any other method. Share the bad times and the good times. They’ll learn from that too.
What about teens? How can teens test the waters of credit before they leave for college? Do you recommend debit cards or credit cards for teenagers?
One thing that you can do for teens if they’re going off to school, for example, is you could make them an authorized user on a parent’s credit account. By doing that, their credit history will be influenced, good or bad, by the history of the primary account holder. It is an option for some people. Some parents will send their young children off with debit cards, prepaid debit cards. Now, you’re talking about debit cards that are linked to checking accounts.They can be good. One of the good points is that you can’t spend more than the balance in the account. You can but cause an overdraft, so you are kind of limited. With credit cards, you’ve got an amount that you can charge up. The only thing I would say is if you’re going to have a primary use of a debit card, teach your child how to reconcile the balance. If they’re not going to be using checks very much, they’re going to be swiping a whole lot more. It’s very easy to lose track of the balance that’s in the account. You’ve really got to sit them down and say, “Look. This is how you reconcile. You’ve got to keep a checkbook register even if it’s not a physical checkbook. If most of the transactions are being done by swiping, they need to keep an ongoing accounting of where the money is going. Otherwise, it’s going to be very easy to overdraw that account.
What do you think about college students that you teach in your personal finance courses at Rutgers? What’s one financial concept that you wish more young people were learning at a younger age?
I tell my students that if they don’t remember anything else from my personal finance class, that they should remember that compound interest can be either their best friend or their worst enemy. By that I mean best friend when they’re young. They’ve got 40 or 50 years of saving ahead of them. Compound interest can grow their money even small dollar amounts in their twenties. Many of them are paying off student loans. Get started in your twenties. Put something aside, particularly if an employer will match it, and have that compound interest start growing from the day you get your first job. On the flip side, the worst enemy is when you make minimum payments on a credit card. You’re basically paying 3% of the outstanding balance, and it can take years (even decades) to pay off the balance that is owed. I model that in my class with two assignments where they literally have to create a table that shows the cost and the time that it takes to pay a loan with minimum payments. Then they also create another table that shows how money can grow with different types of interest.