Kids can often be quite a pain to handle, but parents who ignore their children must know that doing so can harm their future finances. It is also true that parents may pass on bad financial habits to their kids and thus harm their financial health as adults.
As per the 2017 survey ‘Parents, Kids & Money Survey’ conducted by T. Rowe Price in the US, it was observed that parents with a history of poor finances did pass on bad monetary habits to their children. Parents who have not already changed from bad money habits and are still to become involved in creating good money habits in their kids need to sit up and start the correction process.
The main disconnect between kids and parents is the fact that parents often are not aware of their own poor and incorrect financial habits. This is the reason why you have to check out the information provided below and find out specific habits which can help or harm the financial future of your kids.
The two major disconnects between children and parents with regards to money habits are that some parents may not be aware that their own money attitudes are incorrect and that there is a distinction between what they speak and do.
It is also important to note that several well-meaning guidelines may also lead to long-term harm. The kid may become averse to money; not comprehend the process of saving, investment, and spending; and even find it difficult to carry out the daily routine tasks involved with running the home. Parents need to avoid the poor money habits and inculcate good ones to avoid such a situation.
Five main good financial habits
Presented below are 5 good monetary habits that need to be followed by parents and imbibed in their kids:
- Talk about finances and money
Communication by parents with each other about expenditures, household finances, investing, savings, and future financial planning tends to subconsciously and slowly become a financial guideline for the kids to use when they become adults. If parents do not talk about money, then the kids will be ill-equipped to maintain, earn, and multiply their monies. This may eventually lead to under-saving and over spending.
Troubling behaviors of parents with regards to money often passed onto the kids, unless the children are somehow able to understand the truth of good financial health on their own.
It is also vital for parents to talk to their kids, explain them the varied reasons for saving and expenditures, and begin the process of managing their finances by offering them pocket money and allowing them to take care (manage) of that money.
There are some parents who not only plan and discuss their finances on a regular basis, but also explain the different facets of finances, the advantages of saving, and the power of compounding to their kids. Children who observe parents and talk with them about investing money often begin the process of investment early on, before they even begin working and earning money. Such kids may save a part of their pocket money, Diwali gifts, money given by elders, etc., and invest some of it in gold, stocks, etc.
The financial habits of parents can impart a variety of habits in children, directly or inadvertently. For example,
- Kids of parents who do not leave a will are most likely to face procedural issues. Such children, when adult and married, are mostly likely to write and register wills as a couple so that their kids do not face any problems.
- Financial problems and conflict (as to who should get how much) can also arise when life insurance is taken in a group. It is therefore advisable for parents to purchase different term plans for each of them. Children will subsequently understand the benefits of taking separate term plans.
- Kids of parents who make investments in mutual funds, stocks, etc. will be better equipped in the art of investing as they have watched their parents do so.
- When kids see their mother (and father) budget and keep a ledger, they will also get into this good habit. If such an arrangement is absent, then kids are not likely to know the process of handling money after growing up.
- When parents say something and act differently, then it sends mixed signals to kids. For instance, if parents talk about the goodness of charity but haggle with vendors and maids about small sums, then children can become confused about what is right and what is wrong.
The overall impact of talking about money and finances will be that kids will not regard money as a secret or a taboo subject which need not be discussed with other members of the family. They will also gain fair knowledge about how to handle money, avoid being a miser, or indulge in overspending.
- Being prepared and organized
It is important to maintain a money budget, periodically compare the influx of money and its outflow, avoid missing deadlines for payments of premiums and bills, and keep making investments and checking them on a regular basis. When a firm check is kept on the finances and it is managed it an orderly fashion, then it will lend financial security and stability to the finances of the household.
As you will be aware about the exact money that is available for expenditure and saving, some kind of financial discipline can be imposed on the children. This will also ensure that you do not relent to the kids’ random demands for gadgets, toys, apparels, etc. Keeping and working on a strict budget will be noticed by children who will also consequently start maintaining a monthly budget and according spend and save.
Budgeting by parents can impart a variety of habits in children, directly or inadvertently. For example,
- If kids notice that the investment bias of their parents is towards property and debt, then they may also follow the same method when they begin investing.
- When parents are very well organized with regards to investments and maintenance of finances, then kids will also imbibe such organizational traits. As adults, they will ensure that there is no idle unused money lying around and immediately invest it.
- When children observe their parents being organized and working with a budget, then kids will also start maintaining a budget and use their pocket money, etc., within the limits of that budget.
- Parents, who encourage kids to assist the domestic help with minor chores, etc., will help imbibe a sense of charity in them. They will keep aside old toys, clothes, etc., on their own and begin donating to it to domestic helpers, charity, etc.
The impact of being organized will be that money and finances will never create tension or chaos in the life of children. Money will be regarded as resource that empowers and provides security and stability. As adults, they will be efficient at management of their finances due to the prolonged practice they have had at money management when growing up.
- Saving and investments for financial/personal goals
When parents engage in systematic saving and investment all through their lives for achievement of goals such as education and marriage of their kids, etc., then the children are also most likely to follow the same process for their families after growing up.
The only way to achieve one’s goals is by planning correctly. It is vital to select the correct tools for specific goals. One cannot stash their money in bank fixed deposit for 20 years and use that for reaching the goals; it will not work!
It is also vital for parents to keep their kids in the loop and teach them the process (how and whys) of savings and investment. For example, parents can invest in mutual funds and schemes like the Sukanya Samriddhi Scheme for girl child’s education.
When kids are involved in the process, then they will get to experience firsthand the different risks, losses, and wins. When children reach 16 years of age, then parents have to discuss with them the varied ways of paying for their higher education.
The impact of saving and investing and involving the kids in this process will be that children will learn to shoulder responsibility and become financially mature and disciplined. They will also learn about the importance of savings, the power of interest compounding, and achieving different goals in a well-thought out manner.
- Healthy appetite for risk
There is no doubt about the fact that the kind of investments made by parents tends to influence the investment choices of their kids. Thus, if stock markets and equity are seen as risky by the parents, then kids will also generally stay away from them.
The last generation viewed the markets as a risk and a gamble and did not explore them. They only invested in debt platforms such as gold, fixed deposits, and property as they considered them to be safe. This is the reason why most of the children of the past generation are extremely conservative in the investment approach. However, many changes in the policies of the governments of the near past have made the above debt options really unattractive. Hence, a lot of adults are moving into mutual funds and other equity associated options. The parents of past generation stress a lot on saving; the 30+ adults of today are opting for a good balance between savings and taking vacations/having fun.
The risk appetite shown by parents can impart a variety of habits in children, directly or inadvertently. For example,
- Parents who have a conservative approach towards investment often chose secure debt instruments and most kids usually followed the same approach till the changes in government policies. Now most are opting for equity linked investments to get a high return ratio.
- Kids of parents who were high spenders and outgoing also turn out to have a similar approach to finances. But it is important for such kids/adults to learn to curb spending and keep it in line with the current financial status of the family.
- Parents who are self-employed have to take extra care and efficiently plan their finances. Such parents also need to inculcate good financial management skills and practices to their kids, and it can begin by allowing children to independently handle their own pocket money.
- Parents should avoid buying things for their kids when they demand those things on the excuse that their friends have it. The better option would be for parents to imbibe the habit of saving in the kids and help them work towards the process of buying those things with the money thus saved.
The impact of low risk appetite of parents on children will that they will avoid investing in equity, which in turn is going to prevent them from getting increased returns and thus make it hard for them to reach their goals. Conversely, parents who invest only in equity instruments will most likely have kids who make very high risk investments.
- Securing the risks
One cannot be sure of financial security if sufficient insurance is not purchased or if there is no contingency fund. It is also important to have a will so that your money safely passes on to your loved ones without any issues. Absence of any of the above options can expose the kids to unwarranted hardships in the near and late future.
An example: Person A’s parents passed away when he was very young and they did not have a will. Subsequently, person A was adopted by his uncle. The uncle also passed away when person A had just begun earning; the uncle also did not leave a will. After this experience Person A realized the importance of securing risks and later registered a will, took out separate term plans with his wife, and started saving a contingency fund.
The impact of not securing risks is that the kids will have to suffer from tedious and troublesome paperwork and keep running around from one place to another. It is important to have adequate life as well as health insurance. In case of sudden death of the parent, the child may incur a significant medical expense or acquire debt for repayment of loans.
Five main bad financial habits
Presented below are 5 bad monetary habits that need to be avoided by parents. It also needs to be taught to the kids on how and why to avoid:
- Acquiring a significant amount of debt
Parents who are seen to be continuously repaying varied debt acquired due to causes such as poor financial management, taking lots of loans to live a specific lifestyle, or paying only the minimum amount due on credit cards, etc., generally cannot balance their overall income and the outflow, adhere to a planned budget, or even save a sufficient sum of money to achieve the life goals.
If the earning parent suddenly passes away, then the kids may not have any money and will have to fend for their own daily needs. Parents with lots of debt are teaching their children that it is ok to not live within one’s own means as well as providing justification for unhealthy burrowing and instant gratification. It is best to avoid any unnecessary loans and to never engage in revolving the credit card payments.
The impact of taking in lots of debt is that kids will form the perception that constant repayment of one or other kind of loan is a normal aspect of life and they will eventually end up as adults who live beyond their means. They may not feel any regrets about incurring debt as they think that taking on debt is the only method to enhance and pump-up their lifestyle.
It may also be noted that inability to make debt repayments can result in unpleasant and bothersome situations which can result in stress and anxiety. It may however be noted that such unpleasant situations can also make kids rebel and snub all kinds of debt after growing up.
- Being a miser or spending heavily
Parents who sport a grand lifestyle, fulfill all the wishes of their kids without question, and overspend on them, are laying the foundations of disappointments for the kids in their future. It is not a given that as adults the kids will have the necessary means to keep living the kind of life that they have become used to. This can result in them becoming heavily indebted, or extremely frustrated, or cause them to engage in foul or illegal methods to maintain the king-size lifestyle.
Parents who are unable to spend sufficient time with their kids generally tend to overcompensate by giving them what they ask for. Children will not learn to value things if they keep getting all the things that they demand. Hence, parents should avoid buying expensive things for their kids, from time to time, even if they can afford it. As opposed to heavy spending parents, if you live very frugally and run the household on a tight budget, then the kids may over-compensate the lack of money during the growing up years with splurging as soon as they begin earning as adults.
The impact of overspending by parents is that kids may develop a sense of entitlement as adults and demand a lifestyle that they cannot afford. A child with frugal living parents may resort to lavish spending and lack focus in investing or saving, thereby preventing him/her from reaching the goals of life.
- Spending impulsively or recklessly
Being an impulsive or reckless spending can adversely affect the budget and eventually impact life goals. Parents who regularly engage in impulsive purchases of expensive items or indulge in frequent outings or excessive number of holidays will most likely not be able to adhere to the budget or adequately manage spending and saving. This may lead to sacrifice of vital goals or shortage of money for necessities.
If either the husband or the wife is prone to making impulsive purchases of items like watches, clothes, shoes, etc, then it a better option for the couple to talk about such purchases and coordinate these decisions. This will help prevent any significant impact on the budget.
The impact of impulsive buying is that the kid will not imbibe any financial discipline and will not learn to lead a life within one’s means and the budget. The child will lack control over expenses; he/she may not have the ability to smoothly run the household; and may keep running out of money days before the next salary. This will lead to increased dependency on loans which subsequently will cause him/her to fall into debt traps.
- Fighting over finances and money
It is important to never fight about money or argue about other problems when the kids are around. Children are in the learning phase of life and arguments and fights will inculcate subconscious learnings and messages in them. It is important to discuss the financial issues in a fashion that is conducive towards participation of kids. One-on-one arguments and confrontation may cause the children to side with either of the parent and result in distress and anxiety.
If the money issue is such that it cannot be discussed with kids, then it should be avoided altogether. It is important for couples to talk about the issue. However arguments about money need to be kept away from the ear of children. Parents can debate about the finances when they are alone or when they are travelling by themselves only in the car.
The impact of fighting about money and constant bickering in the house is that children will avoid taking about financial problems when they grow up. They may perceive such discussions as a source of stress and anxiety and may even avoid taking responsibility for management of monies. Additionally, kids may even arrive at the incorrect conclusion that money always causes friction in relationships or leads to breakups, divorce, etc.
- Being excessively charitable or never donating
Parents who are charitable and give financial assistance to others in need, whether such help is to charity organizations or their employees/workers/domestic help, tend to pass on the message to their kids that people who have the resources should make the effort to give some of it to the society.
Kids are usually very possessive of their things and find it hard to give them away to others. However, continuous stress and education by parents about the importance of helping the less fortunate can result in changed behavior in the children. Subsequently, kids will begin keeping aside things that they do not want and later donate them on their own without any prodding by the parents.
Children who do not see their parents engage in any acts of charity tend to assume that life is supposed to be lived in that manner and also that they do not have any obligation to help the less fortunate in the community. It is also important for parents to remember to avoid engaging in excessive charitable acts as doing so can disturb the budget and adversely affect vital goals.
The impact of lack of charity by parents is that the kids will also mostly likely never donate. External influences may however trigger positivity and cause the children to become charitable as opposed to their parents. Conversely, excessive charitable acts may pressure children to follow the practice as adults, which can result in imbalance between income resources and outflow, thus causing distress.