Raising kids to be smart about money requires creating an environment where they are neither insecure, nor overconfident about family finances.
As a father of three young children, I find it fascinating to watch them engage with financial concepts. My son, age four, currently loves to fix toy cars from his tool bench and will give me money from his cash register just so I can give it back to him for payment. My now nine-year-old daughter, when she was only two, was very upset with my wife for needing to leave for work one morning. My wife explained to her that work paid the bills, and a light bulb went off, “they pay you money?” My wife said that, yes, they do and that we needed money to support our lifestyle. My daughter nodded wisely and said, “Go ahead.” We’re still confused about where that came from, but it seems clear that kids begin formulating an understanding of money and finance from a very early age.
It’s early yet, but I think we’re doing pretty well so far teaching our kids to have healthy, but realistic attitudes about money.
I monitor this closely since a key part of my role at Morgan Stanley involves thinking about, not just how people should handle their finances, but also how they shouldn’t. Academic research has shown that when it comes to investing, individuals are often their own worst enemies, buying at peaks and selling at lows. My team here is tasked with building digital tools that can help our clients make smart decisions and avoid making mistakes that are all too common. We dive deep into research around behavioral finance, an academic discipline that looks at how money and psychology intersect.
As any student of psychology knows, it’s almost impossible not to think of your own childhood when studying influences on human behavior. While I look back with great fondness on my time growing up in California, there was a period of financial insecurity around my parents’ divorce that affected me at the time and has stuck with me. It is one reason I became interested in finance and why I am so engaged in topics around smart asset allocation and managing risk.
It’s also a reason I’m very careful now when my wife and I discuss financial matters around our children.
I think parents have to walk a fine line when it comes to raising kids that hopefully won’t end up feeling too secure about their finances or too insecure. Clearly, it’s not a good idea to raise children that feel entitled to wealth and are sheltered from the reality of how quickly financial circumstances can change. That attitude both hampers their ability to understand those without such good fortunes, and just as importantly, limits their ability to perceive risks and make sound decisions.
But teaching kids about financial insecurity, without making them feel anxious, is difficult. Go too far and it can create unnecessary anxiety in a young child and may lead to poor decision making later on.
One example: Many young people are afraid to invest their 401(k) plan in stocks, fearing that losses will set them back. But I consider it essential to take portfolio risk, especially early in your career, if you are to maximize your potential to reach a retirement goal.
Another example: I’ve read about the current trend of high school graduates forgoing college because of fear about paying back student loans. While some kids can fulfill their dreams without a college degree, I think many would find higher education critical to attaining the level of success they envision
For my family, our plan is to stay involved in our community where we have the privilege of being able to interact with a diverse group of families, some of whom have run into financial hardship and some that are quite wealthy. Our kids are learning already that a family’s financial situation can take a turn for the worse through nothing more than bad luck and that there are neighbors as well as institutions that will help when that happens.
My plan is to volunteer with my kids as they get older and use our interactions with people in need as an opportunity to instill empathy and also to explain what we are doing to protect against the same sorts of financial problems for our family—like buying insurance, setting aside money early for their college education and doing our best to stay healthy.
Opening a 529 plan for your kids is a no-brainer. You benefit from setting aside money that can grow tax free and, in some states, you can get a tax deduction. Contribution limits are quite generous and plans are more flexible than you may realize.
Tell your kids about it. Even young children will appreciate that you’re saving for their future. Plus, it shows you value education and have high expectations for their achievement that they are likely to want to live up to.