TEACHING YOUR CHILDREN TO MASTER MONEY
As children grow and progress through formal education, they acquire a range of skills that are meant to prepare them for adulthood. Despite this, regarding financial education, we hear from many of our physician clients “I was never taught any of this in school or in training…”. Let’s leave the discussion of medical education and its weaknesses on practice and business education for another article. Here, we would like to focus on early education – and the important role parents can play in educating their children on fundamental financial issues.
Financial literacy is often passed down through the values and practices that parents teach their children. This guidance, though, requires some effort. Teaching children about money is not just about numbers or budgeting, it’s about building habits and mindsets that will serve them well for a lifetime.
Starting Young: Leading by Example
One of the most effective ways to teach children about financial responsibility is to lead by example. By involving children in family discussions about how money is allocated between current needs, savings, and future goals, parents can demonstrate how to make thoughtful financial decisions. It’s critical to show children that financial responsibility is a daily practice, not just a one-time lesson.
For younger children, the focus should be on the basic distinction between needs and wants. This foundational concept can shape their spending habits for years to come. For instance, during a grocery store trip, parents can ask their children to identify which items are needs (bread, milk, proteins) versus wants (cookies or toys).
Helping children understand why prioritizing needs is essential for financial well-being can help children start to think critically about their spending choices. Give your child an example from your own life, such as how choosing a need over a want resulted in a better long-term outcome, can reinforce this lesson and make it more tangible.
Teenagers: Taking Ownership of Their Financial Decisions
As children transition into their teenage years, it’s time to begin involving them more directly in financial decision-making. Giving teenagers ownership over their own budgets fosters responsibility and helps them develop a sense of control over their finances. For instance, parents could make a teenager responsible for an expense (auto insurance, cell phone, etc.). This gives them ownership in a financial decision they are directly responsible for and helps them learn the amount of money that needs to be saved vs. what can be spent.
Encouraging teenagers to understand that every financial decision they make now will have consequences in the future is crucial. Parents can share stories of good financial decisions that paid off in the long run—like how saving a portion of earnings for a larger purchase instead of making impulse buys led to more satisfaction and security down the road.
Young Adults: Building Financial Independence
As young adults step into the workforce or pursue higher education, the focus shifts to financial independence. This is the time to teach them about long-term savings strategies, such as Roth IRAs or 401(k)s. Emphasizing the power of compound interest, especially during a time when they’re in a lower tax bracket, can be a game changer.
Parents may even consider offering to help with living expenses if their children commit to maximizing retirement contributions early, thus reinforcing the benefits of long-term financial planning.
One of the key messages to impart is that financial success isn’t instantaneous; it’s a long-term journey. Encouraging young adults to set clear financial goals and review their progress regularly helps them stay focused on their path to financial security. By fostering a mindset that prioritizes long-term stability over short-term comparisons, parents can help their children navigate the complexities of adult financial life with confidence.
Teaching the True Purpose of Money
A critical lesson that all children should learn is that money, by itself, has no intrinsic value. It’s simply a tool that can be used to fulfill needs, create experiences, or secure the future. This mindset can have a lasting impact on how they view their financial resources as they grow.
For young children, parents can use simple activities, like bartering, to illustrate that the true value of money lies in what it can be exchanged for. As they grow older, the discussion can shift to the idea that money should be seen as a means to an end—whether that end is achieving personal objectives, supporting a family, or enjoying meaningful experiences. By teaching teenagers that money is just a tool to help them reach their goals, parents can help them focus on their broader life aspirations instead of obsessing over accumulating wealth for its own sake.
Young adults, meanwhile, should be introduced to the concept of “human capital”—the idea that investments in education and skills development can lead to long-term financial returns. By explaining the time value of money and encouraging calculated risks in education and career development, parents can help young adults understand that the best investment they can make is often in themselves.
Starting the Conversation Early
Ultimately, the key to financial success is early education and consistent, age-appropriate conversations. By teaching children to distinguish between needs and wants, encouraging them to avoid unhealthy comparisons, and helping them understand the true purpose of money, parents lay the groundwork for future financial literacy. These lessons not only empower children to make informed decisions but also help them build a healthy relationship with money that will serve them well throughout their lives.
By starting these conversations early and fostering an ongoing dialogue, parents can help their children grow into financially responsible adults. And, when the time comes for discussions about inheritance or family legacy, these lessons will make such conversations easier and more seamless.