MOST OF US WANT to help our children financially. But we also want to avoid thwarting their ambition or unintentionally instilling bad money habits. And, no, this isn’t just a problem for the wealthy: All too many kids who grow up in middle-class households end up as financially irresponsible adults.
How can we avoid that fate, while still helping our children financially? Below are five strategies. The first three are cost-free and the other two don’t necessarily require serious sums of money:
1. Set a good example. When it comes to money, our children are likely to do what we do—and not what we say. If heading to the mall is a regular weekend activity, or the monthly credit card bill causes the household stress level to skyrocket, or we describe people in terms of the clothes they wear and the possessions they own, we’re telling our kids what we value and what sort of financial life they can expect—and we’re doing it more powerfully than any lecture we could possibly deliver.
2. Tell family stories. Logic and data may carry intellectual weight. But it’s stories that pack an emotional punch and that tend to shape our opinions, financial and otherwise.
How can we guide our children’s financial choices? We should pick our stories carefully and embellish when necessary. Talk about family members who have been successful—and why they were successful. Discuss your smartest financial moves, as well as the missteps you’ve made.
Also recount what it was like when you started out. Tell your children about the scuzzy one-bedroom apartment you shared with a friend when you were in your 20s. But make it three friends, and throw in a few cockroaches and mice for good measure. That’ll prepare your children for lean times when they’re in their 20s—and they might even take a certain pride in their hardship.
3. Talk about money. But don’t talk general financial principles. Instead, tell your kids about your own financial life—how much you get paid, where the money goes, the major purchases you’re considering, what your portfolio looks like today and what your financial goals are.
Use these conversations to illustrate the financial notions you want your children to grasp—and make sure it is indeed a conversation. Ask your children for their opinion of what you’re doing. Ask what their financial ambitions are. Ask what sort of money discussions they have with their friends.
4. Subsidize a Roth. If your children have any sort of earned income, seize the chance to fund a Roth IRA on their behalf. At their modest—or nonexistent—tax rate, a Roth’s tax-free growth will be more valuable than a traditional IRA’s immediate tax deduction.
Sure, it would be great if your kids invest part of their earnings in the Roth. But if they balk, I wouldn’t make their contribution a precondition for funding the account. It’s simply too good a chance to teach your kids about how retirement accounts work, how time is the investor’s friend and how to invest sensibly.
My suggestion: Use the Roth to buy one of the target-date retirement index funds offered by Fidelity Investments or Charles Schwab, all of which have no investment minimum and modest investment costs. One warning: Fidelity and Schwab have a second set of target-date funds that are actively managed. Those I would avoid.
5. Help with costs you deem important. There are all kinds of ways, big and small, to help your children financially: college costs, car repairs, house down payments, cell phones, weddings, travel, medical bills.
How much you help will be constrained by your own finances—and by how much help you think it’s wise to give. But it’ll also hinge on what you think is important. If you help your children buy their first car, but you don’t offer any help with college costs, you’re delivering a message about what you consider important—and, rest assured, your kids will hear you loud and clear.
Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Just in Time, Opening the Spigot and Humble Bragging. Jonathan’s latest books: From Here to Financial Happiness and How to Think About Money.