3 ways to teach kids financial responsibility

Financial Planning

Spend enough time in Silicon Valley and you’ll likely hear the mantra “Fail often, fail fast, fail forward.” The idea is that one failure can guide the next attempt away from previous mistakes and towards success. In that sense, failure is a learning tool.

This same approach may be valuable when it comes to giving your children an opportunity to “fail” with money. For parents, seeing kids fail can be challenging. But letting them experience some financial mistakes can help them develop financial responsibility and independence.

“When parents swoop in and save their kids financially, they’re putting out a safety net,” says Jamie Vandergriff, vice president and wealth strategist for Ascent Private Capital Management of U.S. Bank. “If there is no net, kids will figure things out faster to save themselves.”

How to structure failure: Three ways to help teach financial responsibility

Not all failure is helpful, of course. Reckless actions or disastrous mistakes are poor learning opportunities. For example, you wouldn’t want your children to wipe out their college fund simply to give them a lesson in managing money.

On the other hand, failure can be constructive when a person takes a calculated risk, falls short and gains skills and experience for the next attempt. “Constructive failure comes when you use the failure to propel yourself to greater things, and you truly take the lessons you learned to heart,” Vandergriff says.

Relatively low-stakes financial experiments can give your children an opportunity to learn from failures without you having to risk major financial losses. Here are three examples.

1. Provide a work-based allowance

Requiring children to work for their allowance teaches them money isn’t just given. While there are different ways to structure an allowance, Vandergriff suggests paying children – usually starting around age 6 – for extra chores, not for their basic household responsibilities. She recommends establishing a system of “spend, share and save” with children, dividing their money into three separate funds.

To help children learn how to budget, parents may have to let kids make questionable spending decisions they wouldn’t choose themselves. “As kids get older, it’s important to teach them opportunity costs — if you buy this, then you can’t have that,” Vandergriff says.

One experiment to help children practice managing money would be to pay them their allowance upfront for one month. If they run out of money before the month ends, they might have to pass up an activity with friends. “If they’re allowed to make those mistakes, they’re going to eventually incorporate some smarter analysis into the way they spend,” Vandergriff says.

2. Practice using a credit card

Credit cards are a good opportunity to learn how to budget and practice money management. Credit cards also come with real and negative consequences if not used properly.

Since you must be 18 to apply for a credit card, most teens can only apply for one jointly with an adult. Doing so means your credit is tied to their spending habits, making it even more important for you to emphasize good spending habits with your child.

To keep the potential for failure small, start with a low spending limit; this way, you can still give them some room for error. “It’s important that parents don’t hover too close,” Vandergriff recommends. You should also emphasize that your teen must pay the bill, either from their bank account or by paying you directly. Set out clear consequences for failure to pay and hold children accountable. Stress that credit cards should only be used for things that have already been saved for since using a credit card is essentially using borrowed funds.

“Mistakes with credit cards can be meaningful,” Vandergriff says. “They can affect your credit score, which can affect getting a job or an apartment in the future.” Before children start using a credit card, explain that they will be responsible for interest charges or late fees. Then, stick to your plan.

Keep in mind that while you don’t want to establish a pattern of covering for your child if they make mistakes, you still need to ensure the card minimum is paid each month to protect your own credit.

Finally, review every credit card statement with your child. If they spent too much, how will they adjust? If your child forgot to pay the bill, what reminders could be set up for the next time?

3. Open a small investment account

As your high-school age child grows and becomes more comfortable managing money, another productive experiment can be to set up a small investment account to help them experience investing. You can open and manage a custodial account on behalf of your child through the Uniform Gifts of Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). It then transfers to their name when they reach the age of 18 or older, depending on applicable state laws.

Children will learn how to research investment opportunities and determine whether a potential investment is a good value. “Parents should be involved to teach the big lessons about concentration and diversification,” Vandergriff says. “But after that, stand back and let the kids truly execute on the decisions and see the ups and downs.”

“When parents swoop in and save their kids financially, they’re putting out a safety net. If there is no net, kids will figure things out faster to save themselves.”

Through this experiment, children will understand more about risk, diversification, fees and the role of advisors. They can develop strategies for making informed and logical, rather than emotional, investment decisions.

Discuss financial lessons learned

Instead of avoiding constructive failure, celebrate it. Your child took a risk, and even if it wasn’t the best outcome, good things can come from the process. “You’re helping them envision and commit to a goal no matter what,” Vandergriff says. “One of the greatest gifts you can give a child is that can-do attitude and the ability to pick themselves up and learn from the past.”

Reflect on the experiment with your child:

  • What was the goal?
  • What choices or mistakes led your child to achieve or fall short of that goal?
  • What did your child learn that might be helpful next time?
  • What skills might you work on together to improve the odds of success?

By designing controlled experiments and allowing your children to fail (within reason), you will better prepare them to accept financial responsibility as adults. Your children will be more informed, creative and resilient, confident that they have the skills to cope with uncertain situations. They’ll learn to transform failure into success.

Having an open dialogue about money as a family can be intimidating. We offer three suggestions for how to talk to your kids about money.

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