Helping children grow into financially capable adults is an important part of setting them up for future success. The Consumer Financial Protection Bureau’s research into what leads to financial capability in adults identified three key building blocks. One of these building blocks is what we call “Habits.”
Good financial habits are important because so much of what we do, financially and otherwise, happens on auto-pilot. Think about your spending over the last month – how much of that did you sit down and plan out and how much of it is pretty much how you spend your money every month? Helping kids build healthy financial habits and practices early means making their default behavior a positive one. It’s about taking the ideas from the healthy financial mindset that we talked about last week and turning those into actions. The key components are:
1) The ability to view planning, living within your means, and saving in a positive light. If you treat saving money and budgeting as chores, your kids will too. Being responsible with money shouldn’t feel like a punishment.
2) Decision making that reflects their own values and goals – not everyone else’s. Spending on things just because everyone else does is a dangerous habit and can leave you without enough money to accomplish the things you truly care about. A habit of being intentional with money is important.
3) Establishing healthy routines for money management. Routine matters – it’s what your kids will fall back on when their lives get busy and more complicated. Setting aside money for savings before spending, staying aware of how much and where they’re spending, and having a plan for their money should be second nature, not something they think of as what they’ll do “someday.”
4) Self-confidence in their ability to handle age appropriate money tasks. Your 10 year old doesn’t need to be able to choose stocks for your retirement portfolio. But if they get some money as a gift for a birthday or other holiday they should feel like they know what to do next, whether it’s put it in a savings account or spend it on a goal they’ve had for a while. Self-doubt leads to inaction and frivolous spending, while confidence lets them feel assured in the healthy decisions they can make.
As with mindset, one of the best ways to help your kids learn these habits is to model them yourself. Talk with them as you practice these yourself, let them be involved as you make small scale decisions. It can start as simply as letting them “help” pay your credit card bill every month – that’s a great opportunity to talk about spending within your means, paying the card off in full every month (if nothing else, if you can help them build that habit, it will be worth it), and the movement of money from one account (checking) to another (credit card). A trip to the grocery store together is an opportunity to talk about how you might want some things but you’re not buying them because they’re not on your list. As they get older, a savings account of their own is a good way to let them see how their money grows as they save and encourage spending intentionally on what they really care about. Many parents keep everything money-related hidden from their kids; they don’t want them to worry about how things will be paid for. While well-intentioned it can leave your kids without any positive habits in place, leaving room for plenty of bad habits to take root.