Teaching Your Children Well

“The self is not something ready-made, but something in continuous formation through choice of action.”

- John Dewey

We do love children around here. So much of what we do, in the tax preparation process, influences families, children, and their futures — well, it’s simply a huge part of our clients’ lives, and we take it very seriously.

However … I’ve been around the block, once or twice, with families whose children have gotten themselves in financial hot water, and it’s not always an easy task to get them out.

So, this week, I’m taking some time to offer you some lessons “from the trenches” on helping your children launch into the real financial world with a firm foundation.

But before I get to that, one thing I wanted to remind you of:

You should have received your W-2′s by now, but in case you haven’t, here is a good resource for you:

http://www.bankrate.com/finance/money-guides/what-to-do-if-you-don-t-get-your-w-28-116632.aspx

So now, to raising your children’s financial future …

Jon Neal’s

“Real World” Personal Strategy

How To Raise Financially-Savvy Children

I’ll spare you the stories, but needless to say: I’ve seen so many otherwise-loving and wise parents somehow forget to ready their children for the financial realities of adult life. Instead, they simply hand them credit cards, pack up their cars and head to school.

I’ll go out on a limb here, but I believe that it is this deficiency in financial education which has led, in part, to an adult population that spends beyond its means, engages in unsafe borrowing practices, and accumulates record amounts of  debt.

Still, if we decide to instruct our kids how to responsibly manage their money — much as we teach them how to read, tie their shoes, and ride bikes — then perhaps they might avoid a Great Recession-like event in their own adult lives.

Sure, that all sounds good in theory, but how do you go about instilling proper financial values into your children?

1) Tackle the task as if you are once again teaching your kids to ride bikes. You first need to let them get comfortable on training wheels, and prepaid cards are the training wheels of personal finance. So co-sign for prepaid cards, load a certain amount of money biweekly and allow your children to spend freely. This will force them to learn how to budget and, since most prepaid cards allow online account management, you will be able to review their purchases with them.

By the way, I did some online searching, and these are some good choices for pre-paid cards for teenagers, etc.

Visa UPside: http://www.upsidevisa.com

MasterCard Facecard: http://www.facecard.com

American Express Pass: http://bit.ly/heWJRS (shortened link)

Visa Buxx: http://usa.visa.com/personal/cards/prepaid/visa_buxx.html

2) Once you are confident that your kids have exhibited responsible prepaid card use for at least a year, you can graduate to monthly cash allowances. This progression, which is tantamount to taking one training wheel off their bikes, will provide them with greater financial independence (given that you cannot monitor their spending with cash). It will also more thoroughly test their responsibility because the odds of losing money or exhausting too quickly are heightened with a monthly cash allowance.

3) If your kids demonstrate the requisite discipline after a year of cash allowances, you can take the other training wheel off. Do so by co-signing for and opening checking accounts in their names and depositing slightly higher monthly amounts while requiring them to pay for more of their own expenses.

With checking accounts, children will garner much needed experience writing checks and purchasing with debit cards. They’ll learn how to avoid overdrawing their accounts and bouncing checks –  and if they can’t learn these lessons quickly enough, you can screw that training wheel back on and regress to cash spending. After all, when you took that last training wheel off, you didn’t let go of the bike completely! You still had a grip on the handlebars and were providing assistance as needed.

4) If your kids’ financial balance seems solid after 6-9 months, you can release the handlebars and either co-sign for student credit cards or give them small lines of credit as authorized users on your credit card accounts. Doing so will help teach them the principles of responsible credit use, such as spending within one’s means and paying bills in full each month. Remember though that you are simply taking your hands off to see if your kids can ride. If they wobble, catch them.

This financial education progression will instill within your children various skill sets that will surely serve them well when they leave the nest. It’s important to employ such a practical approach because it lets kids learn and inevitably falter while the stakes are low. Additionally, you can ensure that your children know how to handle their money before becoming independent, providing yourself with the kind of peace of mind that is valuable to any parent.

So before sending your kids out into the world, make sure they are ready for the financial implications of that independence!

To your family’s financial and emotional peace!