Money Talks

RON LIEBER, in his book The Opposite of Spoiled, describes a 2012 conversation between Chris Rock and Jon Stewart. In an interview on Stewart’s show, they got around to discussing the challenges both faced in raising children who could remain grounded amid wealthy surroundings.

Rock described how his own modest upbringing differed from the comfortable life his children enjoy. “My kids are rich,” he said. “I have nothing in common with them.”

Stewart agreed. “I had jobs since I was 14 years old.” That, he said, cemented his work ethic. But his own kids, for better or worse, didn’t have to work. They faced no hardship. As a result, he worried whether they’d ever develop a strong work ethic. “Maybe there should be like an Outward Bound that we should send them on,” he mused.

Rock concurred. There should be a camp, he said, where kids “get their lunch money taken and get beat up….”

On the one hand, this was good natured banter between two successful people. But their concerns were also real. As Lieber notes, you don’t have to be a Hollywood star to share these concerns. In the absence of an Outward Bound—or “Camp Kick Ass,” as Rock put it—what can strengthen children’s financial skills? Below are five strategies that have worked well for many families:

1. Big picture. When it comes to financial details, many parents—myself included—are wary of sharing too much with their children. I wouldn’t show my kids my tax return, and I wouldn’t expect most parents to. But that doesn’t mean you can’t share some details—the mortgage or the car payment, for example. This can be educational, I think, because it gives kids some sense of what life costs.

It’s also an opportunity to educate kids on basic personal-finance concepts. I’ve walked my older children through my mortgage statement, explaining key elements. If you have a 401(k) or 403(b), that’s something else you might share. Show them a statement so they can see how these plans automate the saving and investing process.

2. Credit cards. Banks are notorious for inundating college students with credit card offers. More than one parent I’ve spoken with has described seeing their children get in over their heads. The solution? It’s unrealistic to prevent children from ever signing up for a credit card. Instead, and maybe counterintuitively, I suggest getting them started before college.

That’ll give you the chance to keep a close eye on things while they’re still at home. It will also give you—rather than the credit card company—the opportunity to teach them how to handle that piece of plastic in their wallet or purse. A possible first step: Some financial companies offer debit cards, and associated apps, specially designed for kids, including Chase, FamZoo, Greenlight and GoHenry.

3. Allowance. In most families, allowance is pretty straightforward—a few dollars every weekend, for example. This is fine, and it does help build budgeting skills. But there are steps you can take to make allowance even more educational. In The Opposite of Spoiled, Lieber suggests this setup for young kids: Give them three jars, labeled “spend,” “save” and “give.” It’s up to each family to decide how allowance is allocated among these three categories. But however you choose to split things up, the exercise itself provides kids an invaluable lesson in managing money.

Also, Lieber says, the jars should be clear plastic. That’s to help kids see their progress. Some parents take additional steps to maximize the educational value of allowance. One idea: Let kids decide how much to allocate to each jar, but encourage saving by paying interest each week on the balance in the savings jar. It’s also important to give kids periodic raises, to further prepare them for the day when they’ll need to manage a real paycheck.

4. Taxes. When your kids begin to receive real paychecks, they’ll need to file their own tax returns. That’s an excellent opportunity to give kids an introduction to income taxes. You may not feel comfortable sharing your tax return, but you can definitely walk your kids through their return. A child’s return is usually simple enough that you needn’t be a tax expert to understand it and explain it to your child. I’ve done this. I’ll confess that my oldest son didn’t find it the most fascinating conversation. But I still think it was worthwhile, and I’ll keep doing it.

5. Major purchases. Another way to help kids learn to budget is to take a partnership approach to big purchases. For younger kids, it might be a special toy. For older kids, it might be a cellphone or a first car. Even if you can afford to—and are willing to—buy these items outright, you might consider splitting the cost. It needn’t be 50-50. Even if a child has to contribute just 10%, it’ll give him or her an incentive to save and become more familiar with the idea of making trading offs. You could also apply this idea to an investment account—ideally a Roth IRA—for your children, matching the dollars that they contribute.

Over the years, I’ve asked parents with adult children what factors contributed to their children’s success. In most cases, the answer has been the same: “I really don’t know.” It’s possible that these parents were just being modest, not wanting to give themselves too much credit. But I think there’s another interpretation: In the end, there really is no single magic formula. As Chris Rock and Jon Stewart lamented, it would be difficult to artificially impose hardship to build resilience. Instead, what many parents have told me is that they simply employ strategies like those above whenever there’s the opportunity for a teachable moment.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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