How We Fail Our Kids Financially


Whether you like it or not, you will be a primary force in how your kids handle finances as adults.

In these increasingly difficult economic times, you probably wish your parents had spent more time teaching you about the personal-finance basics before having to learn them the hard way. If you aren't careful, you could be setting up your own kids for the same financial trouble. Here are some of the ways you may be financially failing your kids:

You don't teach your kids not to spend everything they earn: This one lesson can make up for not teaching a lot of the other lessons, especially when combined with teaching them about compound interest (see below). Even better, it's one lesson you can begin teaching them when they are small and continue until it has become an ingrained habit when it's time for them to live on their own. If you have been financially failing your kids up to this point, this is the place to start.

You don't teach your kids the power of compound interest: Kids want to be rich, and the easiest way is to let money compound over a long period. If you teach them this, they will listen. The sooner the compounding begins, the easier it is to create wealth. By showing your kids that putting aside a little money in their early years will mean they won't be panicking at the thought of what to do about retirement when their own kids are the same age, you will save them countless nights of stress and fighting.

You assume your kids will learn personal finance at school: While it would be wonderful to be able to trust the school system to educate your kids in personal finance, that is not the case today. They didn't do it when you were a kid and things haven't changed since then. While there are 40 states that include personal finance to some extent in their educational guidelines, the reality is only seven states require students take a personal finance course in high school to graduate.

You assume your kids will learn personal finance on their own: It is true that if your kids don't learn personal finance from you, they are likely to learn it on their own. The problem is they aren't likely to learn until they have already made some huge mistakes you could have helped prevent. If you don't feel you have the knowledge to teach them, get some books from the library and make it required reading for the entire family.

You let your kids have everything they want: While there is a parental desire to give kids all the things they want, this is one of the worst things you can do because they will assume that it should continue to be that way even when they become adults. It's important to understand that in order to keep your personal finances in order, you often have to make a choice and you can't have everything you want. This will require some time and patience to explain why they can't have certain things and that money is not an unlimited resource that can be found anywhere.

You don't make your kids work: You may believe that, because your family makes enough money, you can spare your kids the hardship and annoyance of finding a summer job or part-time work in the last years of high school. This would be a mistake. Making your kids earn their own money teaches them how difficult it is to make the $50 they want for the latest video game. They will quickly learn that Uncle Sam takes his share as well.

Your kids don't have to contribute toward what they use: When your kids get old enough to start using expensive gadgets, they need to pay their share. Letting your kids use a cell phone and paying the entire bill for them, or allowing them to drive the family car without buying gas or defraying insurance costs is a fantastic way to fail them. Teaching them early may mean you don't also have to bail them out for four years of college as well.

You don't have any "you will thank me later" moments with your kids: Decline to give them the amount of allowance they want or make them pay for their own car if they want one. When they are responsible for the payments, they are forced to learn how to use the things they enjoy within their budget.

Your kids don't know how to take care of what they own: When something your kid has suddenly stops working, it doesn't mean you should automatically replace it. The worn look of the cell phone isn't only because it isn't this year's model, it's also because they expected to get this year's latest model and therefore didn't feel it was necessary to take care of it. The things your kids own should be properly maintained and taken care of so they don't need to be replaced every year -- a lesson that can save tens of thousands of dollars on car purchases (and smaller things) when they are older.

You don't teach your kids how credit cards work: At some point your kids are going to be exposed to credit cards, and when they are, it's best they understand exactly how the credit card works to avoid a lot of unwanted debt. Credit cards certainly have a lot of advantages, but those won't make up for using the credit card in a poor financial manner. If they learn nothing more from you, they must know to pay off the credit card bill in full each month.

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