Are you teaching your child to drive? Not a good idea. How about teaching your child to dance? An equally poor idea. What about teaching your child or grandchild how to handle money? Excellent idea!
Susan Beacham, founder of Money Savvy Generation, tells parents that their children’s financial habits are set “by the time they are 7 and most certainly by the time they are 8 years old.” During our last conversation, however, she and I agreed that it’s never too late to try to instill sound financial habits in our children and grandchildren.
Beacham created the Money Savvy Pig to show children the four uses of money: save, spend, donate and invest. She now has a cow, as well as a football and a soccer ball for older children. See www.msgen.com
Ideally, financial literacy training can start around age 3, by which time children will normally have stopped putting money in their mouths or swallowing it! The idea is not to turn a child into a Wall Street trader; rather, it is to gently talk about money, teach simple concepts and be good financial role models by exhibiting good financial behavior in the presence of children or grandchildren.
Too often, grandparents think they shouldn’t help with their grandchildren’s financial education. However, if the parents agree and give it their blessing, grandparents can make a major impact on their grandchildren. Usually grandchildren will listen to grandparents over their parents. After all, it is said that grandparents and grandchildren have a common enemy — the parents!
Start off with simple concepts such as tracing coins to understand the denominations. How many little children think a nickel is worth more than a dime, due to its size? Have you ever asked a 4-year-old where the money comes from when you are withdrawing funds at an ATM? They think it’s a vending machine.
Let them know that there has to be money in the account in order for you to be able to withdraw funds. One more easy teaching point is to explain why you leave cash on the table after taking a grandchild to lunch — that you haven’t forgotten the money, but it is a tip, or payment for excellent service. This also leads to a discussion about working hard and doing one’s best while serving clients or customers. Children as young as 4 can “get it” when you cover this kind of information.
As the child or grandchild ages, talk about “need” versus “want.” We have certain things we need like food, gas in the car, shelter, clothing; however, things like toys, trips, eating out are wants. Learning this difference at a young age makes budgeting a lot easier when the child or grandchild becomes an adolescent or an adult.
If the child receives an allowance, consider using the Money Savvy Pig or Money Savvy Soccer Ball that each has four slots — for saving, spending, sharing and investing. By simply helping a young child put some money in each of these slots, you are starting them on the road to allocating funds for future use. With a young child, four quarters work very well, and they love the sound of the coins falling into the bank!
If they are saving for a special item, consider helping them shop online to price compare, and if they are a bit short, help them figure out how much more they need to save to reach the price for the desired item. This helps them grasp subtraction as well as the concept of delayed gratification, which seems to have eluded a lot of adults (and members of Congress) these days. Or, with their parents’ permission, consider incentivizing them by telling them you will match what they save toward that purchase.
With older grandchildren, you can talk about investing. If you have started a 529 college savings plan for that grandchild, share a recent statement. This gives you the chance to explain that there are only two things an investor has to choose from: being an owner or a lender.
Give examples of owning something, like real estate, parts of companies, a doll or baseball collection; for lending, examples are lending their money to a bank that in return pays them interest for the use of their funds, or a bond, which is money they lend to a city or a corporation for which they are paid interest.
You can use the 529 statement to show the benefit of dollar cost averaging and why it’s a good idea to periodically invest in stocks, so the price fluctuations work out over time to provide a more average cost per share of the stock or mutual fund. Explain a mutual fund as a “basket of stocks”.
Allow the child or grandchild to decide how much to put in the “share” slot. Forcing philanthropy may backfire. Instead, share with the young person how you donate and explain the concept of sharing time, talent and treasure. You can take them with you to volunteer activities or explain why you put money in a collection basket at church. Stress that not everyone has what your family has and that giving to good causes really can make a donor feel good about helping someone less fortunate than they are.
One grandfather/client of ours gave each of his grandchildren $500 and told them to select a cause in which they believe and donate to it. The only requirement was to write to him to let him know what they had done with the money and why.
Interestingly, all seven of his grandchildren responded within the year and the donations they made were varied. One grandchild gave the money out in cash to a number of homeless folks on the street; another gave all of it to the Make-A-Wish Foundation as she had seen a news story about a wish fulfilled for a dying little boy; another little boy wanted to help build toilets in Africa. He did some online research and found a number of organizations that do this; he then asked his grandfather to help him “check out these places to make sure they will spend the money for real where I want them to.”
These are all great lessons in philanthropy around which the grandfather could have meaningful conversations with his grandchildren without lecturing them.
As children get into their adolescence, shift some of the items you or their parents buy for them to their spending list: grooming products, tickets to the movies, etc. This way, they learn to budget for things they enjoy and actually feel better doing so, as they have more “skin in the game.”
Before the child or grandchild reaches junior year in high school, talk about what funds you have set aside, invested or allocated to help with their college costs. Talk with them about which extraordinary expenses you will cover or if they are responsible for intersession ski trips, social club dues, vacations or lab fees.
Discussing expectations regarding the funding of college, a wedding or family vacation beforehand allows the child or grandchild to do a better job planning. For example, if there are additional college costs you will not be able to cover, the student can then get a summer job to help raise the money.
One of the questions we ask clients when they first meet with us in our office is “Tell us what money was like for you as a child.” The answers are sometimes heartbreaking. “My parents argued about money all the time.” “We never had enough money and at the end of the month, my Mom really stretched to come up with decent meals.” “We never talked about money, so I am terrible at managing my own.”
These types of negative money messages learned very early in life can stifle the ability to become financially adult. Be aware that what you say about money, bills, credit cards, insurance, investing, salaries or other money matters can really influence a young child — for better or worse. Additionally, how you behave with money also sends very strong messages.
Financial literacy training should be one of the main responsibilities of parents and grandparents. As a life skill, it is every bit as important as learning how to read or how to manage basic math and language. There are plenty of resources to get you started giving a gift that continues to give over a child’s or grandchild’s financial lifetime. Are you ready to begin?
Eddy, CFP, is president of San Diego-based Creative Capital Management Inc. and co-founder of the Family Business Forum at USD. She can be reached at firstname.lastname@example.org. Comments may be published as Letters to the Editor.