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Holy trinity episcopal academy

Teaching Personal Finance at Home

By David Bonanza, Upper School Teacher (AP Statistics, College Algebra & Statistics, AP Computer Science), Coach-Math Modeling and Academic Team
What do I know?
A decade ago, I was financially illiterate (despite having a degree in economics) and, with a new baby soon to come, very unprepared for the challenges ahead. My wife and I struggled to pay bills, and I decided to make a change. After a lot of reading and learning, my wife and I (both teachers) made some tough changes. While raising two (now three) children, we went from stressed and in significant debt to a point now where we have paid off all debt except our mortgage, increased our net worth by six figures, and enjoy building wealth. We've had some bad luck (graduating college in the worst economy since the Great Depression) and some good luck (buying a large home near the real estate market's low point). However, I'm convinced that many of our improvements can be attributed to what my wife and I have learned and done over the last five years or so.
"Why didn't I learn this?"
We aren't born knowing how to manage money, and I often hear people, especially young adults, asking, "Why didn't I learn this (personal finance) before now?" While many propose teaching personal finance in high schools, I'm skeptical about how effective that would be and fear that, if not taught well, such a course might actually convince people that managing money is boring. Regardless of what the American education system is doing, there's a lot you can do at home to prepare your children for a life in which money is primarily viewed as a tool, not as a source of worry.
Foster Motivation
Before teaching your kids how to manage money, you should create an environment that encourages children to learn about personal finance. Dan Pink's book Drive explains that there are three things needed to motivate: autonomy, mastery, and purpose. I will address autonomy and mastery later, but here I want to focus on purpose. In my opinion, this starts with letting your children experience the discomfort of wanting something they don't have, and, rather than getting it for them, teaching them how to solve their own problem. Of course, the solution is to earn some money by helping others solve their problems. This could be something unskilled like weeding the neighbor's garden or skilled (and more lucrative) like tutoring children of family friends. It could also be doing extra work around the house, although I would avoid paying for basic responsibilities that go along with being part of the family. My rule is that I only pay my kids for work if they're doing a quality job for less than I would pay an adult for that work. As a side bonus, this will give them a chance to practice negotiating, an important skill that's underappreciated in the United States.
Pay High Interest
My son and I like to say to each other, "working hard, and working smart." Hard work is a vital part of building wealth, but you can do much better if you invest and start investing young. The trouble is that, for many children, a six percent annual return in the actual stock market isn't enough to get them excited. So, create your own "stock market" in which your children can earn much higher returns. I suggest you allow your kids to deposit money at the bank of mom and/or dad at an artificially interest high rate. You could offer (twenty minus age)% interest and pay it monthly instead of annually. So, if your 13 year old deposits $50 at (20 - 13 = 7)% interest, you would pay $50 x 0.07 = $3.50 interest at the end of the month. If you start going broke because your kids are taking advantage of the high rates, you may have to adjust, but I'd consider that a good problem.
Family Budgeting
If you're not already doing so, start tracking your spending very carefully using something like Mint.com (or Excel if you prefer). Show your children where your money comes from and goes to, and schedule a monthly meeting in which you evaluate your spending. As a family, brainstorm ways to reduce spending on things that aren't delivering good value to your family so that you can make the most of your income. I also suggest limiting temptation by opting for ad-free media (like Netflix) and implementing a wish list that is used to record things family members want to include in the next month's budget. Such a wish list reduces impulse buying significantly and gives the whole family a chance to discuss purchases.
Explore Careers
After instilling a sense of frugality and as your children grow older, help them evaluate career paths. "Follow your passion" may be good advice for some, but the trouble is that your favorite hobby is probably enjoyed by many people, which means it may be difficult to find work in that field. It may be more rewarding to do something less glamorous that does more to help others solve problems in their lives. My generation grew up watching CSI, and many of my peers pursued careers in forensic science. The trouble is that there is not enough work in this field to keep a large number of forensic scientists busy, and this means that, if those people can find jobs, they are often for surprisingly little pay. A better alternative would be something like data science, which is a blend of statistics and computer programming. Very few people have both of those skill sets at a time when virtually all major companies could make great use of the vast quantities of data they collect.
Be Transparent
One of the biggest challenges in terms of teaching children about personal finance is that, even for teens who have jobs and some expenses, their financial lives are far simpler than those of adults. The difference in complexity (not just expenses but also income, assets, and liabilities) is so large that it can be hard for children to imagine what lies ahead in adulthood. I think a great way to solve this problem is to get children actively involved in managing the family's finances, including giving them some minor decision-making authority.

Even if you're just starting your journey, I think you should still be open with your family. Seeing parents demonstrate the courage to confront a problem and persist until it's been resolved would be a great learning experience for children in a generation that, as a stereotype, lacks problem-solving skills. If you have teens who are mostly clueless about the family's finances, the transition may be awkward or even painful, but I'd rather deal with some difficult conversations now than a financially incompetent young adult later.
Money's Role
Teach your kids that money isn't everything, and that, while wealth isn't immoral, it does carry responsibility. More important things like health and safety should always be top priorities, and managing your money well can allow you to spend more time building relationships and doing things you find fulfilling.
I am not a professional financial counselor, and these are just what works for me personally. You should consult a Certified Financial Planner before doing anything I've suggested.

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