Raising Financially Independent Children

Most parents want to do right by their children, to provide for their physical and emotional wellbeing and to ensure that they give them a good education for the best start in life. However, both schools and parents often neglect to teach skills in one crucial area - personal finance.

Worldwide there is a growing phenomenon of adult men and women who still rely on economic support from their parents, often with little prospect of ever being fully ‘weaned’. This trend is largely the result of parents failing to teach their children from an early age, to budget, save, and to value their own financial independence. Many parents then wind up feeling trapped in a cycle of seemingly endless financial assistance to adult children who have never learned to manage money.

Just a few decades ago it was a given that when you become an adult you left the family home and began providing for yourself. Economic assistance from parents was not expected and, outside of a genuine ‘emergency’ scenario, was a rare occurrence in most families. In fact, in the not-too-distant past it was more common to see adult children helping their retired parents than the other way around.

In recent times, the tables have turned and we seem to have entered ‘an age of entitlement’ where many children expect to receive continued financial support well into adulthood. In Japan it has become such a widespread problem that it has been dubbed “the parasite generation”. Yet this trend isn’t confined to Japan, it is being replicated all over the globe, but particularly in wealthy countries.

While The financial ‘crutches’ might differ between families, the more common forms include parents letting adult children live indefinitely in the family home; paying private school fees for grandchildren; helping adult children with mortgage repayments or a house deposit; subsidizing expenses such as health insurance or car payments; or giving large cash gifts.

Whatever the particular form of financial prop within a family, the theme is the same:-adult children with unreasonable expectations of their parents, demanding a certain lifestyle to which they feel entitled. Parents then become enablers when they help their offspring to live beyond their means. The heart of the issue being that these parents did not raise financially literate children i.e. that did not teach their children the basic principles of wealth creation, wealth management, and the value of financial independence.

Parents who continue to support their children well into adulthood may be trying to help, but that are actually doing their kids a huge disservice. Ongoing financial support can be hugely demotivating and encourages an attitude of laziness and dependence that can become permanent. Supplementing your child’s income in a prolonged manner discourages personal responsibility and supports the adult child to live beyond their means. It can also drain the finances of the parents, which may mean a much less comfortable retirement. It is also, not surprisingly, often a cause of friction within families.

To avoid these pitfalls, there really is no substitute for you personally educating your children from a very young age about how to value money, and to preserve and utilize it through saving, investment, and careful spending habits. A three year old can learn to bank coins in a moneybox and they can develop skills such as patience, perseverance, and planning by saving for a goal (such as a toy). Young children who practice saving are rewarded with the pride that comes with achieving their goal. Children can also learn basic entrepreneurial skills by selling their old toys, books and clothes with the help of their parent. This is also a good way for children to practice earning an income and using some of that income for a reward and saving some for the future.

You can easily incorporate important finance lessons into the everyday. Children, especially young children, are observational learners who are always watching what you do and how you do it. So modeling good money management is a big part of teaching personal finance skills. Preschoolers can help you to pay with cash in stores, and this helps them to understand simple commerce. When you go shopping with children, giving them responsibility for a little money for some of your smaller purchases and this will help to create an early awareness that money is a limited resource. By being involved in money handling and purchasing, children begin to learn that only a certain amount of money is available for family needs at any given time.

When shopping with school-aged children you can have them help you to check the receipts and the change given by cashiers. If you do online banking, you can also show your teenage children how you check your bank balance; organize direct debits for bills; and how you manage your cash flow for on-time payments. Teaching teenagers to understand interest rates on savings accounts and to check bank statements are also important life skills that you can easily teach at home.

Money rarely falls from the sky (or from other people’s pockets), so ensuring that your children understand that money is earned through work and investment is one of the most basic principles you can teach. So if you want to pay pocket money, try to align it with how the real world operates e.g. develop a simple system that links pocket money to household chores or other productive effort.

If your household has a budget, it is great to involve the kids in budgeting and acquitting for the family expenses, and the skills they learn in money management will help them as adults. A person who looks at their income and budgets accordingly for their expenses is much more likely to be in control of their finances throughout their entire life.

It is also wise to teach young children the power of investment, and a version of the ‘spend half, save half’ rule means that they routinely put aside some of their money. Children who learn to bank or investment a portion of any ‘income’ (pocket money, birthday money, sales of old toys, wages from part-time jobs); will soon see the power of compound interest rewarding them for their discipline. When regular saving becomes a habit in childhood, it is likely to continue as a habit into adulthood.

As loving parents, it can be difficult to resist the urge to give to our children, but it is important to ask yourself what is a ‘need’ for the child and what is a ‘want’, and to carefully manage how you respond to ‘wants’. Constant instant gratification quickly becomes a learned behavior that may translate into big problems down the road. Children that always have their wishes fulfilled will expect life to continue in that way. Often children’s wants are often small e.g. a candy, a little toy, and it can be easy to think it is cheap and it won’t hurt the budget. However before you rush to meet every inexpensive want, think about the expectations you are creating, because that small child will one-day be a teenager, and then an adult, with much more expensive wants, and they will be used to you fulfilling them!

The world is full of people who have never learned the difference between needs and wants; never learned to wait; never learned to economize; never learned to budget and plan. These are the children, grown into adults, who now have a lifestyle strained by unmanageable debt, a lack of financial independence, and who are in need of regular outside financial assistance, often from their parents.

If you don’t want your retirement dream to become a nightmare and if you don’t want to saddle yourself, and your kids, with a lifetime of financial heartache; then it is never too soon to begin to lay the foundations that encourage children to grow into self-reliant, financially responsible and economically productive adults.