3 Tips to Teach Your Children Responsible Spending
As a multi-family office, our job often goes outside the normal bounds of typical financial advice. One of the most important areas in which we spend time is helping parents prepare their children for wealth.
Practically speaking, for a family of means there often are no spending limits. The parents of the families with whom we work often grew up without significant wealth and learn lessons about spending like most people–having to make choices and prioritize what is the most important use of limited resources. Because they didn’t grow up with a financial safety net, they often made mistakes with money from which they learned valuable lessons.
But what happens when you grow up in a household where money seems like an unlimited resource?
The greatest gifts wealthy parents can give their children are the tools to make responsible spending decisions, which include:
1. Explaining the Concept of Opportunity Cost
You can’t have your cake and eat it too. For many wealthy children, it can seem like they live the exception to this rule. Parents at every wealth level are bombarded with requests by their children for toys, gadgets, clothes, and technology. For many parents, it’s easy to say, “no, we can’t afford that.” For wealthy families, this response typically doesn’t ring true. Without that easy dismissal (and taking into account how persistent kids can be!) the default answer to those requests can easily go from no to yes.
No matter how much money a family has, it is a finite resource. Consumption today does limit consumption tomorrow. Cash that isn’t spent can be used in the future to buy something bigger, through investing and compounding. When put in the context of “would you rather buy this today, or save the money and get something bigger/more in the future?” parents may be surprised at their kids’ choices.
If delaying consumption for a greater future opportunity isn’t a motivating factor, another way to frame opportunity cost is, “what could be bought instead for the same amount of money?” Yes, you could buy those earrings, or you could go to the movies with your friends four times– which would you prefer?”
Forcing children to make choices exercises their decision-making muscles and allows them to start to develop values around what is important to them.
2. Sharing Your Values
Whether consciously or not, your spending decisions are based on what you value. People who value ease may spend money on convenience items or technology. Those who value family togetherness or experiences will spend money on travel or family homes. A passion for art can translate to putting wealth into building a collection of pieces that speak to you. When you are making decisions about how to spend your money, consider talking to your children about why you spend what you do and, even more importantly, why you don’t spend on certain things.
By pulling back the curtain on your thinking, you are giving your children context around spending, which they hopefully can use to guide their decisions about money in the future. Perhaps you feel good about sparing no expense for an excellent dining experience, but you don’t feel the need to buy a new iPhone every time the latest model comes out–or replace the new one they just got because they dropped it. Instead, you can explain that even though you can afford to replace that phone, you won’t be making the purchase because of the opportunity cost and because you value people being responsible with their belongings.
3. Allow Your Children to Make Mistakes
It goes against most people’s parenting instincts to let their child fail. For children who will control or benefit from significant wealth in their adulthood, learning from mistakes with money early and on a smaller scale can be critical to their long-term financial health.
First, we encourage parents to come to financial agreements with kids in their teenage years on what expenses the parents will cover and what expenses the kids will be responsible for paying themselves. Typically, the parents will pay for food, clothing, health and school-related items, and the kids may be expected to pay for their own social activities with friends, leisure activity purchases, and birthday gifts for their family members, for instance. The money for the kids’ responsibilities can still come from the parents– what is important is that it comes as a fixed, recurring amount over which the kids will have 100% control.
For example, you agree with your 16 year old that you will transfer $200 to an account for them each month. They can then spend it however they want: on gas, eating out with friends, in-app video game purchases–or not spend it at all and keep it. The critical piece here is that if they run out of money, you do not give them more until the next month. This action forces first-hand learning of:
- Opportunity Cost–I regret spending all my money on that pair of sneakers I didn’t really need, since it means I’m going to miss out on seeing the latest new movie with my friends.
- Prioritizing Values–I want to make sure I save enough gas money so I can go to my friends’ house, so maybe I’ll skip that daily coffee at Starbucks.
It is always easier to spend someone else’s money than it is to spend your own. A child effectively having access to a parents’ bottomless wallet has the potential to result in that child never having to think about consequences or priorities–in other words, never having to decide to not spend money. By giving teenagers and young adults full dominion over cash from which they make spending decisions and allowing them to experience the consequences, you are giving them the greatest gift–the gift of responsible spending.