Ensuring Your Child's Financial Independence
Ensuring Your Child's Financial Independence
If you're like most parents, you tend to give your kids the same type of advice your parents gave you: "Go to school and get good grades so you can get into a good college and get a good job with a good company that offers good benefits." While this advice is well meaning, in most cases it is not applicable for our children entering the workforce today.
Does this scenario sound familiar? After graduating from college, young people get good jobs and the money starts flowing; the avalanche of credit card offers arrive, and with it comes increased spending. Once married, "double income, no kids" becomes the norm, accompanied by ever-increasing spending. Now comes the house and kids, followed by pressure to buy an even bigger house and car to keep pace with their peers. Add the additional expense of college savings and fancy vacations and, well, you get the picture.
It's like running faster and faster on a treadmill; you work harder and harder, yet are getting nowhere. For the rest of their working lives, this once happy couple is trapped; they have learned nothing about money, and are forced to work like mad to make ends meet.
This insanity must stop!
The only effective way to stop this generational attitude toward money is to reeducate our children in how they think about and handle money. One of the biggest reasons why our children are facing these spiraling money woes is their demand for instant gratification. "I will put this on my credit card so I can go on vacation now." "I will take a loan on my 401k to have a new BMW now."
We have to teach our children at an early age not to succumb to the pressure of our culture's spending habits.
One of the most effective methods I have seen to teach children about how to properly handle their money comes from a couple whose teenage son was spending more money (on frivolous items) than his part-time job and allowance allowed. After many discussions and arguments, they came up with a unique approach: They figured out how much money they spent on their son over the course of a year, including clothing, sports activities, going to the movies, etc. They gave him the full amount at once and told him it was his responsibility to properly budget to meet his yearly expenses.
The first year of this experiment found this young man using all of the money to buy a top-of-the-line stereo system. Unfortunately for him, he was stuck wearing worn out sneakers and couldn't go to his favorite sports camp because he did not have the funds. This experience was painful for both the parents and their son, but the parents were determined not to bail him out.
Fast-forward to subsequent years: This young man, older and wiser, now budgets his annual expenses at the beginning of each year; he sold his stereo, and he is quite happy purchasing less costly clothes and sneakers. He only uses his credit card when he has enough money to cover the purchase; furthermore, he was able to start a savings program because of his careful budgeting!
When I first heard of this, I was shocked — it seemed so severe. But after seeing the results, I have to commend the parents on their success in re-educating their son on his spending habits.
Another suggestion is to open up a custodial brokerage account with your kids; agree they will fund this account on a regular basis, no matter how small the contribution. This will give you the opportunity to show them how their money can potentially earn money (current market conditions aside) over time. Not only will this be a tremendous learning experience, it will also give you the opportunity to spend valuable time with your kids!
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