Financial discipline for your kids

In raising our children to become responsible adults, part of the process is teaching them to be responsible financially. The younger generation does not appear have the same work ethic or desire to save money as the older generation. They are much more apt to spend money they don’t have, even before they know where it may be coming from.

There are certain steps that should be taken in an effort to raise a financially responsible child. Two options to consider are rewarding a child for work performed, including daily tasks in the house, or giving a child an allowance. What works for one child may not work for another, however, it is very important to have your child understand the value of money. If you are merely giving him funds and directing him how to save or spend them, then he is not making his decisions and learning financial responsibility.

A child must be given some exercise of control over at least some of his money, so that if he or she loses it, spends it frivolously or decides to save it for something special, he will deal with the consequences of his choices.

As the child gets older, he should understand the benefits of opening a checking account, as hopefully he already has a savings account. If possible, it’s also a good idea to encourage your child to open a retirement account. Although he can’t fully appreciate the benefit that will provide down the road, this exercise helps to establish good savings habits. Many adults still live for today and don’t worry about their retirement, but even a small portion of earnings placed in a Roth or traditional IRA will appreciate significantly between early working years and retirement years.

In addition, it is important to stress to your child the purpose of a savings account. These funds are either to save for a particular purpose or major expenditures. If necessary, your child could open multiple savings accounts, each to be allocated for a particular purpose. Banks have “vacation clubs” or “Christmas clubs” where deposits are scheduled, and your child would have to become disciplined to deposit a certain amount every period to attain a goal by a specified date.

I recently read a projection that a 20-year-old who saved the three dollars a day normally spent on a cup of coffee until he retired at the age of 65, could have invested it and at eight percent compounded and made $350,000.00 at age 65. However, few people consider the impact that such a minimal savings can have on their financial future. With online banking, it is easy to schedule regular withdrawals from a checking account to be automatically deposited to a money market or investment account.

Possibly one of the most important things to teach a young adult is budgeting skills. Teaching the value of budgeting includes emphasizing minimizing credit card purchases to only those that your child can afford to fully pay off when the bill comes in. This is not to say that a child should not spend any money, as there must be a reward for the effort expended on being gainfully employed. However, responsible spending is an important life lesson.

It is often difficult to have these discussions with the children, since they have their own ideas about money. If you find it difficult to speak to them directly, consider giving them a book to read. Two that I have found to be quite easy and not too long, are Rich Dad, Poor Dad and Rich Dad, Poor Dad for Teens. They're easy enough to find online.

By: Hyman G. Darling, Esquire