Planting the Seeds of Financial Wisdom in Kids

Over the years, I’ve asked many people I considered good with money, or who worked in the financial sector, how to teach kids about investing.

The best I got was, “Open a savings account and add some money each month to show your son how the money compounds.”

WHAT?!?!

Well… that sounds really boring even for an adult, not to mention a child. First of all, savings accounts don’t really earn much, not even above the inflation rate (some banks offer as low as a 0.4% rate, where the inflation stands around 1,5% – 2 %, on average).

Secondly, abstract concepts don’t really work for children. Kids base their judgments on hard facts they can see, which are preferably delivered at the speed of light, not over a year of sluggish growth. It’s tricky for adults to stick to their savings goals, watching the agonisingly slow growth of their savings account, but for kids who only see money for its spending power, it’s an impossible task.

As a parent, the Eureka moment came after I discovered the FIRE movement, which led me to open an ongoing conversation with my son about money and finances.

He is a very clever boy, and even if he doesn’t say anything right away or ask questions, he usually retreats to his “cave” to internalise everything we discussed. Out of the blue, in the most unexpected moment, he will follow up on parts of our conversation from days or weeks ago. For me, our conversations are a huge step towards recognising what money can offer. My son used to see money as a commodity to spend only. But now he talks about becoming financially independent as soon as possible to focus entirely on being a YouTuber (his current dream, which I’m sure will change).

Since children learn from copying adults, they also pick up our financial and spending habits. Whatever they observe growing up, they will most likely carry into adulthood.

For instance, if I make poor financial decisions, my kids will see me struggling, stressed, and anxious about money as I figure out how to pay off credit cards or cover rent and bills. Unwillingly, they will pick up on anxieties around money. Even after becoming adults, they often unconsciously/follow the same script, regardless of how much money they earn. If I show my kids that the moment I have money in my account, I go off and spend it all, they would most likely follow that path.

If I make my kids believe that credit cards are to “help” inflate a lifestyle and pay for goods that I cannot afford to pay in cash for, this is, of course, what they will do once they get their first jobs.

Children copy our behaviours, and managing finances is part of the behaviour children will copy. Hence, it’s imperative to be mindful around kids, regardless of what family-related actions we take (finances, shopping, mental health struggles, family meetings to resolve problems, etc.). Having children is a never-ending adventure. Part of that journey is being mindful of our actions and what signals we send out (our expectations match our actions).

However, mindfulness is often challenging, especially for busy parents; below, I’m sharing with you my cheat sheet on how to tackle finances with kids (the list is based on ongoing trials and errors):

1. Teenage M. can keep only 10% of the money he receives as gifts; the rest goes into his investment portfolio.
2. We stopped buying Lego and other toys. We only buy books or games. If he wants something else we aren’t willing to pay for, he needs to save up for it or do some extra chores around the flat (the chores route is still a struggle, but hopefully it will kick in once he needs more money).
3. When/if he sets his mind on buying something, I try to delay this purchase for as long as possible. Often, it works, and he either finds cheaper alternatives or forgets about it altogether.
4. From time to time, I run the numbers to show him how much money he will have in 10 or 20 years if, instead of buying something he doesn’t need, he invests that same amount now.
5. We talk about how much money he would need to become financially independent and how to arrive at that figure.
6. I ask him how much something costs before we put it in our shopping trolley. If it’s too much, he needs to find an alternative. (This is in the case of non-essential shopping.)
7. He always had a budget for sweets. So he knows that anything over £1.50 (it used to be £1 only, but since the lockdown, prices have gone up) isn’t an option.
8. I also try to make him aware of sustainable choices and choices that impact our environment and the sustainability of life. This is an essential part of the process, which I believe goes hand in hand with financial independence.
9. I’m trying to be a good example and spend less by being a more mindful consumer.
10. If I’m not going to buy him something, I try to give him a good reason why I’m not going to pay for a music library, £20 or £30 a month (that was the recent craze).
11. We calculate how many hours I have to work to purchase something I don’t consider essential.

Don’t get me wrong, he is still a child, and when we are out, he wants lemonade, ice cream and a cake, preferably all at the same time. So we make him choose, and he may have either ice cream or cake, but not both. Those small steps we have been taking create habits, and since we are all creatures of habit, those habits will help him build lasting, positive change.

Talking about financial independence as a family opens many doors without pushing the money conversation into the murky, uncharted waters of shame.

PS. I’m #MadeByDyslexia – expect big thinking & small typos.