A friend called me up the other day to discuss how to set up a structure for his teenager that will teach him now to handle money responsibly when he’s an adult, without parents to guide him. As a parent myself and someone that is constantly meeting adults that have never learned how to handle money, I get pretty excited about this type of call. By the end of our conversation, I felt like we both learned a lot from our back and forth dialogue considering a range of financial and spiritual issues. This once again validates that regardless of how much you think you know about a subject, seeking wise counsel always produces fruit for all parties involved.
The beauty of working with teenagers is that they’re finally to the age where they have plenty of dreams and desires to motivate them financially. It could be the purchase of a first car or saving for college. On the other hand, it could be things much less exciting for their parents like trendy clothes or that latest, crazy-expensive gadget all their friends have that will be outdated in a few months. Regardless of what it is, the motivation presents us with opportunities to teach important life lessons.
Lessons are Cheaper When We’re Young
Failure is one of life’s greatest teachers. It’s how we learn some of the most valuable lessons in life. Consider these two quotes:
“The only real mistake is the one from which we learn nothing.” ― Henry Ford
“The person who failed often knows how to avoid future failures. The person who knows only success can be more oblivious to all the pitfalls.” ― Randy Pausch, The Last Lecture
It’s difficult as parents to see our children fall and hurt themselves. That’s why we need to understand how important the lessons of failure truly are. When we grasp that reality, we stop looking for ways to keep our kids from falling and instead look at how we can provide them with an environment that keeps them from getting hurt when they fall. Have you ever seen the inside of a gymnastics facility? It’s an ideal environment for letting our kids learn otherwise dangerous moves without the fear of serious injury. That’s what we should want for our kids financially as well – a playground where failure isn’t dangerous.
When it comes to financial lessons, we can measure the degree of danger by the consequences that follow a mistake. The price tags on dreams are smaller for kids than they are for adults, which makes mistakes easier to survive. I hear parents all the time asking what they should do when their kid wants to buy a piece of junk at the dollar store that they know won’t make it home in working condition. My suggestion is that from time to time you simply offer your advice and then let the child make the decision. If he or she buys it and it breaks like you predicted, you can gently point out again why it was not a wise decision. It was well worth the dollar for your child to learn a valuable life lesson about product quality and impulse buying than to go into adulthood without that wisdom. That dollar lesson may prevent a much more expensive mistake later in life. Don’t undervalue the lessons learned from poor decisions.
Structure is going to be key when putting together a plan for your teenager. All kids need to learn the three basic uses of money – giving, saving and spending. Here’s a brief explanation of each:
· Giving – While true giving is a form of worship for the believer, it is a discipline that is enjoyed by the unbeliever too. So, whether your teenager is saved or not, it’s a practice they need to learn and perform regardless of their desire to do so. Hopefully, giving will be motivated by the desire to glorify God, but it may need to start as an act of obedience to you.
· Saving – Saving is simply the act of not spending money now so you have more to spend later. Delayed gratification is a great quality for all of us to possess and we should want our children to learn the reward that comes from waiting. For kids, I prefer to use the savings account for short-term purchases they plan to make in the next 1 – 2 years to help them experience the payoff more frequently.
· Spending – This is money used for normal expenses incurred between paydays. It could be for gas, food, entertainment or whatever else they have in their budget. Just like money adults spend on monthly bills, this money is expected to be consumed each month unless they figure out how to reduce spending.
The three jar method is a great tool for teaching younger kids and if your teenager hasn’t learned that lesson yet, it can still be a good initial lesson. Label three jars giving, saving and spending. The first dollars go into giving, then to saving, then to spending. They can choose to move money up that list, but not down. If they want to give some of their saving or spending money, that’s fine. They can also save some of their spending money, but they can’t spend their giving or saving money.
Outside the 3 Jars – Simulate Real Life
If our teens are going to learn lessons that transfer to adult life, we need to set up a scenario that simulates real life. Be careful with situations where your teen is making more money than he or she needs for the three categories listed above. It’s a great problem to have, but if not dealt with, it can present a new set of problems. Just like anyone that has more income than they need, temptations and reckless spending can start to enter the equation. I find it best for parents to help their children skim any extra money off the top and use it to fund a long-term savings account. There are two purposes behind this account. The first is to reduce their cash flow to an amount that allows them to experience the realities of managing a budget with a finite level of income. The second is to help them set money aside for their adult years. It’s important that we help them save for things like college or position themselves to be financially ready for marriage someday, even if they don’t see the value in it today.
To decide how much should be directed to long-term savings, calculate the amounts needed for the current giving, saving and spending accounts. Anything beyond those amounts should be set aside. By having limited resources, teens will need to learn to manage their spending well. Foolish decisions will bring consequences just like they do in the real world and that’s a good lesson for them to learn. Without a limited income, they may never learn how to make wise spending decisions.
If you want to teach your children about debt, feel free to play the role of the banker for them. If they find themselves in a situation where they have a want they can’t afford and don’t want to wait until they can save up for it, let them come to you for a loan. Make them show you their budget and explain how they intend to pay you back. If you approve, loan them the money on typical bank terms. That means monthly payments with interest and penalties if they’re not able to come up with the payments on time. What you do with the interest and penalty money is totally up to you. I would probably take it and deposit it in their long-term savings account so it ultimately benefits them, but still feels like it’s gone to them. Hopefully, when they find themselves still making payments on something that no longer has the luster it once did, they’ll learn one downside of borrowing money.
Children need us to prepare them to take care of themselves and their families when they’re no longer under our watch. Most of the financially uneducated people I see struggling to make ends meet were raised by parents that either took care of everything for them or didn’t know how to handle their own money. Your kids will ultimately learn how to make financial decisions by watching you and if you’re not good at it or don’t feel qualified to teach them, you need to start by getting educated and seeking wise counsel for your own life first. Your kids will thank you for it someday because the best inheritance you can leave your children (outside of a love for the Lord) isn’t money, it’s wisdom that allows them to provide for their families and wisely steward the money that is entrusted to them.
Brad Graber, CFP® has been working with clients on personal financial planning and investment issues since 1996. He invests his time mentoring and educating individuals on ways to be better stewards of the resources God has entrusted to them.