Recently our son declared to his mother that she had not bought him candy when he was little.  Surprised, my wife found objection to his statement saying, “I bought you candy.”  Our son recalled going through the checkout line and not being able to enjoy any of the sea of candy.  He continued and said he did remember getting some candy but not as much as he had wanted at the time.  But his real message was that he now appreciates the lesson his mother taught him.  The need to save your money for important things and not spend carelessly.  He finished by saying that he had saved some money and wanted to open an investment account. 

The conversation caused me to reflect on the lessons we teach our children about money.  When is the right time to begin conversations about money?  How much do we share with our children about our wealth?  How do we help them get off to a solid financial start?  How much to save, what to invest in and how much to spend?  And, the more wealth that families have, the more complicated the considerations become. 

It is fair to say that even at a young age, kids understand the concept of “currency,” whether measured by baseball cards, Hot Wheels or dolls.  The trick is to help children understand the balance between spending and saving their own money as well as their parents’ money. 

Here are a few thoughts that might help frame out these conversations: 

Younger children 

At some point, it makes sense to give kids an allowance.  Often an allowance is tied to a child’s efforts around the house.  Questions to consider are how much is the allowance, what effort(s) is it tied to and how much of the allowance needs to be saved.  At first blush, this doesn’t seem like a big deal.  However, this is likely the first time children get to “handle” money. 

Teens 

When a teenager gets his first job, it is a great time to help him understand the difference between his money and your money.  Pointing out that the teen’s efforts to earn money can be very rewarding financially and help him gain a taste of independence. This can be a great time to discuss the many costs parents cover that their children might not think much about.  These costs might include their cell phone bill, Internet connection, streaming video and the like.  

Once teens start driving, helping them understand all the “costs” associated with driving can be an eye-opening conversation.  If the car was purchased with cash, how long did it take for the parents to save enough to purchase the car?  Is there a car payment each month?  Insurance, maintenance, gas…Older children can begin to see how all of these expenses add up. 

As teens get their first job, discussions about savings can take shape.  Is there a requirement to save a portion of their income?  Or is there an incentive for them to save; perhaps the parents “match” their savings in a similar fashion that employers match 401(k) contributions made by the employee.  

Once kids have accumulated a savings account, this can be the perfect time to begin to discuss the concepts of investing.    Parents can point their kids to invest in companies they are familiar with, like an entertainment production company or a retailer they frequent.  If a child’s interest is in a certain area, you might suggest an exchange-traded fund that invests in a basket of companies in a particular economic sector.  (Vanguard Energy ETF (VDE) invests in stocks of companies involved in exploring and producing energy products like oil, natural gas and coal.)  This conversation is an appropriate time to help children understand the association between risk and return.  

And taxes.  I remember the time our oldest son saw his first paycheck.  He was quite surprised to see “withholding” for taxes.  At this point, it might be a good time to talk about taxes and tax strategy, what an Individual Retirement Account is about, and whether to fund a Roth or traditional IRA.  

If the parents have funded a 529 account, the teen years may be a good time to share this with the child.  Setting up and funding a 529 account will help kids appreciate the importance of education, as well as saving for the future. 

Late teens and early twenties 

It is a big step for parents and kids alike to transition from living at home to living at college or living on their own.  It is important that children understand what is expected of them.  When a child moves out is a suitable time to help them formalize a budget of their own.  Perhaps mom and dad will continue to pay expenses until graduation.  But at some point, the funding will stop.  It is important for parents and children to be on the same page as to the timing of this financial transition.  Kids need to find a job, develop credit and secure their independence.  Mom and dad can help by laying out a timetable that promotes financial independence.  Without a transition plan, it can be frustrating for mom and dad, as kids remain content with mom and dad paying. 

Now is also the time for children to learn what it truly takes to live the lifestyle to which they have become accustomed.  With this knowledge, they can seek a career that pays an income necessary to cover their desired expenses as well as required savings discipline. 

How much should the kids have in a “rainy day” fund that is liquid and easy to get to?  If a child has student debt, how long will it take to pay it back?  How might interest rate considerations influence how much they pay towards retiring the debt?  If their job offers a 401(k) plan, how much should they contribute?  Do they want to own a house at some point and, if so, how much will they need for a down payment? 

Parents can use this as an opportunity to share their perspectives about money and what it took them to get to where they are financially.  What lessons did they learn?  What mistakes did they make?  How would they do things differently if given a chance to do it over? 

When a child moves out is a very important step for mom and dad.  To this point, so much time and money have been spent on kids. This step can allow parents to increase their savings rate. 

Thirties

Hopefully, by their thirties, children are financially independent.  As they mature and perhaps start a family of their own, there is an opportunity to talk with kids about wealth the parents have accumulated.  Is there a family business and, if so, what is the succession plan for the business?  Do mom and dad plan to leave a legacy for the kids? Either way, talking through these considerations can help avoid misunderstandings or financial missteps later in life. 

They say money can’t buy happiness, but it can be a good down payment if we help our kids understand money and how it works at an early age and continue the conversation as they grow.