How to Teach Your Children About Money

Long time readers of this blog know the story of how my husband and I have changed our money lives: We got out from under $30,000 of debt, set up an emergency fund, funded a bunch of sink funds, and have started aggressively saving for our retirement.

That’s the good news.

The bad news is that we didn’t do this stuff until we were in our mid to late 30s. Which means that we spent the first 15 or so years of “being an adult” acting rather child-like, when it came to money.

We never budgeted, we didn’t save systematically, and we swiped our credit cards without considering the consequences. Our income never exceeded our expenses — in fact, we were falling at least $1000 short of that each month!

That sad thing is, there really is no rocket science to managing your money. I just wish I’d know that before we got married, started a family and dug ourselves into a hole.

I suspect we aren’t alone in these short-comings. Which is why it’s so important to me to impart these life lessons to my children while they’re still living at home. I’m sure they’ll make their own young adult mistakes when it comes to money, but it’s my goal to at least ensure that they understand how money works before they fly the nest.

There are a number of strategies that we’ve used over the years, but one that’s especially important — particularly with my oldest, who at 12, is really capable of grasping these concepts — is to talk explicitly with them about money.

Vague notions such as “save as much as you can” or “pay yourself first” aren’t very helpful unless you have real-world, tangible examples of what this means. Here’s one example of how we took a money concept and made it concrete.

My oldest is becoming increasingly aware of the stuff other people have — particularly as it pertains to the stuff we don’t have. For several months, he’d been somewhat fixated on wanting us to get a new car.

We have two cars — a 2000 Camry with 147,000 miles on it (a hand me down from my dad and step-mom) and a 2004 Honda Odyssey with 160,000 miles on it (a 2nd-hand purchase five years ago). It’s my hope to drive both of these vehicles until they have close to 200,000 miles on them, so I’m not planning to replace either one for at least another two years.

Mind you, we’ll be replacing it with another second-hand vehicle, probably in the range of $12,000.

This is not the kind of car my 12-year had in mind. He was speaking longingly about gadgets and screens and I-don’t-know-what-else. My priorities are automatic closing doors for the van – and leather seats if at all possible (because they are so much easier to clean). Clearly we weren’t on the same page.

One option for dealing with my son’s incessant questioning would have been just to say, “Sorry, kiddo, but we can’t afford the kind of car you want.” Period, end of story.

But this response didn’t sit well with me for a couple of reasons:

#1. In general, I try very hard not to tell my kids “we can’t afford” something because I don’t think this phrase is accurate. Sure, a private jet is out of the range of possibility, but most things that my kids — and even I or my husband — can dream about wanting (a new car, a new computer) are potentially do-able. Instead, spending is a question of priorities. One of those priorities, for example, is the tuition for our three children’s private school. Another priority was moving our family to Cleveland, where our cost of living is higher than it was in Kansas City (not to mention the move itself, which was pretty costly.) It’s not that we couldn’t afford a new car, it’s that we choose to spend our money on other things.

#2. The kind of car my son wants is not the kind of car we want. To dismiss his request with the “We can’t afford it” answer doesn’t tell the whole picture. What we spend our money on is also about our values. To us, the job of a car is to safely get us from point A to point B. Sure, we want to be comfortable, but there’s a big spectrum between comfort and luxury. Even if we had unlimited funds, I don’t think we’d spend $50,000 on a car. It’s just not who we are. (I’m not judging anyone who does – different things are important to different people.)

#3. Being able to afford something is as much a function of priorities as it is a function of time — it takes time to save for something. Just because we can’t afford a new (to us) car now, doesn’t mean we’ll never be able to. My son’s new car question was actually a huge teachable moment for me to impart some lessons about the value of regular and consistent saving.

The first few times I heard his, “Why can’t we get a new car?!” request I responded with something like: “You know what, kiddo? A new car like you’re describing is not something we have in the budget right now. If it’s really important to you, let’s talk about the trade-offs.” (For the record, that was such a turn off that he just rolled his eyes and walked away.)

He kept bringing it up, though, and I finally realized that perhaps a different approach would be more effective.

So here’s what I did: I said, “Son, I hear that you really want a new car. And I know that you think this is something we should be able to do sooner rather than later, so I want to ask you to do some of the research.”

He got very excited.

First, I told him exactly how much money we have in our “new car sink fund” and how much money we contribute to that fund every month, so he could calculate it’s future value as well. Doing so provided an excellent opportunity to discuss car loans — and how our view on spending is that we save for future purchases rather than pay off past ones.

Then, I showed him a few websites where he could look up new and used cars for sale in our area. {He quickly realized that a new car was well beyond our reach, and spent most of his time searching for vehicles on CarFax.com.}

Lastly, I showed him how to look up the value of our cars on KellyBlueBook.com, so he could figure out how much more we’d be able to add to our new car fund by selling one or both of them (with 10 and 14 year old cars, the answer is: Not very much.).

He spent a good hour or two on the computer, researching vans and SUVs (he wanted an SUV, but conceded that a van would be more practical for our often-road tripping family of five).

He asked a lot of great questions along the way, including:

“Why can’t we trade in both of our cars and just have one really good car?” This led to an interesting conversation about being a one-car family, which we were until five years ago (when our third child turned one).

“Why can’t you just save more money each month into the ‘new car sink fund’?” This opened up a really good conversation about trade-offs. Since we balance our budget down to zero every month — as he now knows — spending more on one category means spending less on another. We tried to brainstorm for which trade-off we could make to increase that budget, but in the end, weren’t able to carve out more than $50 or $100 a month — certainly not enough to get the entertainment system he thought we needed.

He continued to ponder this over a couple of days, and we kept having good conversations. In the end, he came to the unsettling conclusion that we’d have to wait 5-6 more years to be able to have enough cash to buy the kind of vehicle he was thinking of. (I pointed out that I wasn’t even sure we had 5-6 more years of life in either of our cars.)

Plus, as he said, “in 6 years, I’ll be 18 and won’t even get to enjoy the benefits of the car!”

Obviously this wasn’t the answer he wanted. But it was HIS answer, which he was able to reach independently. He owned this answer and the knowledge that came with it.

Taking his “I want” and turning it into an opportunity for him to explicitly grapple with real money choices was pretty mind-blowing for both of us.  Going through this process at the age of 12 gave him a better grasp on the financial reality of trade-offs than I had when I was 32.

I’m the first to admit that I’ve made a ton of parenting mistakes, but this experience was one of the best I’ve had in 12 years of being a mom.

Have you had any good talks lately with your kids about money? What financial lessons do you want your children to learn before they fly the nest?

Want to learn more about financial education with your children? Last year, I joined parenting expert, Adina Soclof, to share our advice on how to talk to your kids about money. We don’t always have the same approach, so I think it’s a really interesting watch.

And here is a post a wrote a few years ago — when my children were just 5 and 7. If you have younger children, this money dialogue might be helpful.