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How to Raise Financially Responsible Children

When our children go to school, they learn about a slew of subjects. History, math, economics, biology, you name it. But how often does your child come home from school with a personal budget worksheet? Or a tax bracket worksheet? 

Unfortunately, many Americans graduate high school and college financially illiterate. And since our public education system isn’t providing it in most cases, it’s up to us to instill in our children sound financial habits so they don’t get trapped in the debt cycle many Americans find themselves in

And since we’re in the season of giving and there’s a fair chance your child will make a tidy profit, now’s a great time to help them set up a budget, dive into charitable giving strategies, and formulate strategies to reduce their lifetime taxes. Oh wait, that’s for us adults. But we’re sure there’s a financial conversation worth having – depending on their age.

Involve them in Family Finances From an Early Age

Little children love numbers. Why not expand that interest to the numbers they see in the store and your receipts?

Compare prices at the grocery store, show them how much money you have, and involve them in simple decisions. Giving them a feeling of control will help spur interest in your family’s finances and help make it a natural part of their thinking. Pretty soon, they’ll be making the grocery list themselves!

Give an Allowance

When the kids are old enough, introduce an allowance in exchange for chores. Besides teaching the value of hard work and the satisfaction of earning one’s keep, it also gives the perfect chance to discuss the importance of saving. 

Give your child three buckets – one for immediate spending, one for short-term savings, and one for long-term savings. Help them set some realistic goals and help them stick to them.  

For each savings goal they achieve, they’ll be rewarded with the item they saved up for and, hopefully, an understanding of the power of goals-based financial planning!

Budgeting and Money Management

As your children head into their teenage years, dive a bit deeper into the budgeting process. Sit them down with you, go over your own budget with them, and teach them the difference between your assets, your liabilities, and the kinds of debt you owe (or hopefully don’t owe!). Explain how easy it is to fall into debt traps, how vital it is to live within your means, and how easy you can avoid those pitfalls by sticking to your budget.

Basic Investment Principles

Most teenagers are aware of stocks – we always see them in the news. They may even be aware of bonds and interest rates. But how about ETFs and mutual funds? Teenagers are fueled by emotion, so it’s a good time to address the Fear Of Missing Out (FOMO) and how, by diversifying our investments via ETFs and mutual funds, we can reduce the chances of losing everything while maintaining slow but steady growth. 

At this point, you may want to open a Roth IRA and choose some long-term investments with them. Go over the importance of fund management fees, rates of return, portfolio rebalancing, and dollar-cost averaging and how their assets will grow more effectively when combined.  

The Power of Compound Interest

Teenagers often focus more on the present than the distant future. However, the magic of compound interest may pique their interest and extend that short attention span to the distant future. What will those ETFs and Mutual Funds they purchased for their IRA look like in ten years? Twenty years? Thirty years? What if they keep putting money into their IRA each month? Go over the various scenarios and show how far ahead they’ll be by the time they are forty. 

Meanwhile, compare the interest rates of potential debts they could incur. Their investments won’t go anywhere if they have a 20% credit card interest rate hanging over their head every month. Of course, taking on some debt may be inevitable, but use that to teach them the investing order of operations, i.e., how to balance their debts against their investments based on the interest rates they can provide.

Tax Awareness

When your teenager gets their first paycheck, goes over their W2, and sees that chunk taken out for taxes, they’ll finally feel the pain all taxpayers feel when they realize how much they’ve given to Uncle Sam. But there are ways to keep that sum (and that pain) as minor as possible. But your average taxpayer isn’t aware of the multitude of ways the IRS gives us to keep our taxes low. 

Tax-deferred accounts, post-tax accounts, brokerage accounts, tax-loss harvesting strategies, and other methods let us choose when we pay taxes – and by doing so, keep our tax bills low. The knowledge gained at such a young age will put them well ahead of the pack – imagine your 25-year-old implementing tax-reduction strategies aligned with diversified, low-fee investments! We just might be out of a job. 

The Importance of Giving

Building wealth is more about just buying what you want or achieving financial security – it’s about molding the world according to our individual values in what ways we can, about having a positive impact on something we care about. Our generosity may even align with our investment and tax objectives, as well. 

Teach your children about charitable giving – encourage them to volunteer, donate, and get involved. They’ll end up with a stronger character, more moral fiber, and a stronger appreciation of their position in life. And they’ll probably save a lot of money in taxes, too! 

Financial Independence

Finally, we get to the ultimate goal – financial freedom. Frequently, Americans think the only way to gain financial independence is through a high-paying job in a prestigious career. However, a higher salary usually just means more lavish expenses. It’s likely that just as many doctors struggle with their monthly finances as factory workers. Alternatively, there are a lot of hidden millionaires around us, those without high-paying jobs but who learned the principles of financial success at a young age and stuck with it. 

Of course, there’s nothing wrong with having a high-salary career, and we certainly don’t mean you should dissuade your child from obtaining that law degree. However, by bringing all of the above points together, your child can achieve financial independence regardless of the size of their salary.

In Conclusion

Typically, wealth accumulation results from a specific mindset and a consistent, deliberate process that begins early and perseveres through various challenges. And it’s not a skill they teach you in school or even college. As parents, it’s up to us to imbue into our children a fiscally sound mentality. With that in place, nearly everything else will also fall in place – a healthy attitude to money, social responsibility, deliberate decision-making skills, and the ability to think over the long term. Things like that simply can’t be taught at school. 

About the Authors

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

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  • Jose Joia

    Jose M. Joia is a Wealth Advisor at Walters Strategic Advisors, LLC. As a member of the team, Jose’s responsibilities involve comprehensive wealth management, planning and customer service. He has over 6 years of industry experience specializing in planning and solving unique issues his clients encounter. Jose has experience serving individual clients, business owners and non-profit organizations.

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