Teaching kids, teens and young adults about how to handle their money is one of the greatest gifts you can give your children. It’s an education that pays dividends (sometimes literally!), and not just when you share the knowledge. Financial literacy benefits us over the entire course of our lifetimes, as there’s never a point at which we’re not making important financial choices and decisions as adults.
While much of the education your kids receive can come from leading by example, modeling smart money habits and sitting down to explain bigger concepts and financial ideas, we also learn by failing. As your children become older teenagers and young adults, it might be worth letting them mess up just a bit.
Good mistakes that provide learning opportunities allow us to experience consequences – as long as those consequences aren’t so detrimental as to be prohibitively expensive or extremely difficult from which to recover. To be clear, “letting” your kids make mistakes doesn’t mean letting them crash and burn. It means stepping back enough for your children to actually experience their failure, but then offering the support they need to quickly regain their footing.
Here are a few money mistakes that can teach powerful lessons, if you allow your children to learn them by going through it themselves.
1. Failing to budget
No matter where you are in life, you need to understand your cash flow: money coming in, and money going out. That’s where keeping a budget – especially as you enter young adulthood and take charge of your own finances for the first time – is extremely helpful.
A budget (or budgeting system) means you maintain awareness of what your money is doing day to day. The better you track your cash flow, the more informed you’ll be about your financial situation, and the better the quality of your decisions is likely to be.
For an older teen, college student or young adult, budgeting can seem like a chore, extremely boring or both. But when they fail to budget, they miss the opportunity to truly understand their money and where it goes each month.
Living without a budget is a big money mistake, but it’s worth letting your kids make it so they understand how difficult it is to live without any kind of structure or system to keep their cash flow under control.
If they continue to struggle on their own, you could offer to sit down with them and give them a peek at your own budgeting system. Offer to help them get started on a platform like Mint or You Need A Budget. And talk to them about how their money is a tool that they can use wisely to get more of what they want … but only if they manage it well. Budgeting is a first step.
2. Getting stuck in financial disorganization
A budget doesn’t just help people spend more thoughtfully. It also introduces some organization into what otherwise quickly turns to chaos. And financial chaos can get expensive.
When you are financially disorganized, you’re more likely to miss payments, get hit with late fees, forget to move cash to savings or investments, and ignore problems that could snowball into bigger issues over time. You don’t have to let it get to that point before offering to help – but giving your kids a chance to see how expensive financial disorganization can be could provide the incentive they need to get serious about implementing and maintaining a system.
Again, you can offer support by sharing how you organize and structure your own money. Your kids may not copy your style exactly, but it can get them thinking. You can also encourage them to try out different methods, because there really is no one “right way.” The best system is the one that actually works for you.
You can also go over their finances with them and point out what they could automate. Automation removes some of the room for human error (or forgetfulness), and reduces the number of decisions your kids have to make each month.
3. Living paycheck to paycheck
It is hard to see your kids barely getting by when they live paycheck to paycheck. But before you jump in with a bailout from the Bank of Mom and Dad, it’s worth considering why they are struggling.
In some cases, they genuinely may not earn enough in their first year out of college to pay for much more than basic expenses. If your child is going through that, your own parenting and financial philosophies will inform whether or not you want to intervene. Some parents believe letting their kids go through some scrappy years is character-building; others will want to pave the way a bit so their children don’t have to fight as hard as they did when they were that age.
But there are other times when your young adult (or even older adult) children are living paycheck to paycheck because of their own choices about how they use the money they earn.
In this case, they may spend what they earn today on what they want in the short-term – leaving little to nothing left over for longer-term goals or priorities like saving for retirement, or for shorter-term desires like joining in on a family trip where they need to pay some of their own way or buying their own house.
Instead of jumping in to fund some of these bigger costs, let your children realize on their own that living paycheck to paycheck means only being able to do very short-term things. If all their money goes toward lifestyle expenses in the present, it’s going to be difficult to build wealth.
What can you do to support a change? First, avoid bailing them out or paying for bigger, more expensive things (like a house) for them. Explain that if they want something that will cost more than what they can afford between paychecks, they need to develop a savings habit for themselves and work toward those goals over time.
Then, try introducing the idea of creating a gap between income and expenses. By spending less than they earn, your kids can start to build up a little extra cash in their accounts at the end of the month. They can then use that money to save up for a goal, fund emergency savings or contribute to investments to grow wealth for their financial future.
4. Spending mindlessly and thoughtlessly
It is really frustrating to watch a kid of any age take their hard-earned allowance money, or cash gifts from birthdays, or salary from their first job and blow it on something you know doesn’t align with what they truly value.
But spending mindlessly because we can is a bit of a rite of passage. When you’ve lived most of your life not having your own resources, it’s extremely exciting to finally have money of your own to do whatever you want with … which is also the challenge! When there are no guardrails or rules anymore, it’s easy to veer off course.
You shouldn’t lecture your kids on what a good use of money looks like. Plus, that’s not nearly as effective a teacher as realizing they wasted a precious and limited resource – money – on something stupid that they later regret.
Letting your kids experience some buyer’s remorse may help them think more carefully before their next spending spree. And in the meantime, you can help … just don’t tell them what’s important. Instead, ask them about their goals, priorities and values. See if they can articulate what’s most important to them. Once they have a clear picture of that, you can suggest ways they could use their money that actually align with those stated values (rather than spending on the stuff that doesn’t matter so much).
If you see your kids veering toward these kinds of money mistakes, pause before intervening. Letting them handle the situation on their own can be painful to watch in the short term. In the long run, however, it could leave them better equipped to manage their finances successfully.
Eric Roberge, CFP®, is the founder of Beyond Your Hammock, a financial planning firm working in Boston, Massachusetts and virtually across the country. BYH specializes in helping professionals in their 30s and 40s use their money as a tool to enjoy life today while planning responsibly for tomorrow.
Eric has been named one of Investopedia's Top 100 most influential financial advisers since 2017 and is a member of Investment News' 40 Under 40 class of 2016 and Think Advisor's Luminaries class of 2021.
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