Parents try to teach us the best way they know how. Unfortunately, they do not always know best, and sometimes they can inadvertently teach their children bad habits without even realizing it. Simply by observing what their parents do, children can pick up bad habits, including financial ones, that can last a lifetime.
A 2017 survey from T. Rowe Price illustrated how this could happen. The survey analyzed parents’ attitudes and behaviors associated with kids’ financial habits, and it found that parents with troubled financial histories tended to have kids with their own troubling financial habits.
Children can absorb an amazing amount from parents without anyone even realizing it, so it’s important to set a good example. Certainly, the adage “The apple does not fall far from the tree” has some merit when it comes to finances.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The study showed that parents aren’t always the best role models for their children when it comes to money. For example, among the findings was that parents who have $5,000 or more in credit card debt are more likely than those who don’t have such debt to have kids who spend money as soon as they get it. The challenge is to determine which parental habits children should emulate and which ones they need to avoid.
It isn’t easy, especially when you grew up in a household with parents who did not learn good financial behavior. Keeping all this in mind, parents might want to avoid the following:
1. Spending too much. If your spending is greater than your income, you may end up in debt, bankruptcy or foreclosure. Living within your means is easier said than done, of course; there’s always some new purchase beckoning you to give in to temptation. The problem with instant gratification is that the gratification you receive from buying on impulse is transitory while the specter of paying lingers. It is possible to train yourself to save and not give in to the temptation to buy items that you have to pay for later. Once you have remained disciplined and you see your bank balance grow, the long-term satisfaction will prevail over instant gratification.
2. Not automating. If you have resolved to get your financial house in order, building up your willpower takes time. That’s why it makes sense to delegate to technology as many financial tasks as possible. For instance, if you set up automatic deposits into your 401(k) or other investment accounts, you don’t have to rely on memory or willpower to get the job done.
3. Paying just the minimum. In the good old days, if you didn’t have the money to buy something, you didn’t buy it. In our age of plastic money, however, you’re encouraged to spend more than you can afford and worry about paying later. If you get on this treadmill, you can quickly find yourself paying only the minimum on those cards, a very precarious position to be in. Not only are you paying more for each item thanks to interest charges, but you are also setting yourself up for disaster. All of this should encourage you to get rid of high-interest debts.
4. Not planning for retirement. Racking up credit card debt is one side of the carefree, live-for-today coin. The other side is not planning for the future. What happens when you can no longer work because of age, health or downsizing? According to the 2017 Retirement Confidence Survey (RCS) by the Employee Benefit Research Institute, many workers lack confidence they will be able to retire and are now stressed about retirement preparations. If you haven’t begun your retirement planning, do it now. There is no time like the present.
5. Lifestyle creep. You may have seen this problem when you were growing up. Your father got a raise and immediately ran out to buy a new car. Lifestyle creep, according to Investopedia, is “a situation where people’s lifestyle or standard of living improves as their discretionary income rises.” Sure, it’s tempting to celebrate that year-end bonus with a fancy cruise to the Bahamas. After all, you earned it, right? Even if that’s the case, you have to be careful. Make sure a portion of any raise or bonus you earn goes into your savings.
6. Paying unnecessary or high fees. This one is an easy fix. Although the dollar amount may seem insignificant, over time, these types of fees can add up. Among the most common fees that you are paying include bank fees (late fees and overdraft charges) and ATM fees. Careful bookkeeping can help you avoid the former, while a simple check of your bank’s fee-free cash machine locations will help you avoid the latter. Don’t pay for something you don’t have to.
7. Being underinsured. Insurance products can play an important role in retirement and financial planning. Insurance can come in many forms: disability, long-term care, life, health and more. Evaluate your insurance needs and make sure any policies you hold are up to date. For example, while disability insurance may become less of a need once you reach retirement, coverage for long-term care may be a new consideration. Different kinds of insurance are important at different stages of life, so regularly reviewing your needs can help keep you on track and fully covered.
By avoiding those habits, besides being in a better position themselves, parents will help ensure their children will be better prepared for managing their finances. At the very least, these are simple steps parents can take to be sure their children have a head start when it comes to managing their money.
Kevin Derby contributed to this article.
-
The Retirement Bucket Rule: Your Guide to Fear-Free SpendingForget market declines or rising inflation. With this strategy, you won’t have to worry about any of that during retirement.
-
How Big Will the Fed Rate Cut Be This Fall?A dismal July jobs report has lifted expectations for fall rate cuts. But just how low could the fed funds rate be by year's end?
-
Five Ways to Maintain Charitable Giving During Volatile Times: A Giver's GuideWhen the economic outlook is uncertain, charitable giving is even more important — and impactful. You can be strategic by using donor-advised funds, diversifying assets and prioritizing unrestricted gifts.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
Five Questions to Help Ensure a Happy, Secure RetirementYou need to drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
I'm a Financial Adviser: This Is How You Can Save for Big Goals Even if You Feel Like You're Barely Getting ByLearning good financial habits — building an emergency fund, paying down debt, saving consistently — gives you flexibility, options and a path to security.
-
How to Buy an Annuity Online (Without Regret)You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
-
How Much Income Will an Indexed Annuity Get You? An Annuities Expert Lays Out the NumbersGuaranteed lifetime income sounds great, but how much will it be? Several factors determine your future payout on indexed annuities with an income rider.
