The best way to raise financially responsible children is to teach them cause and effect.
This means giving them logical consequences and explanations for your decisions. Give them choices when you can. When possible, let them in on your economic decisions (which affect them personally). For example, ‘We can go to Hawaii instead of the mountains this year. But it will cost 3 times as much. Is it worth it to you to give up something else during the year?’
Or: ‘I’ll buy you those expensive shoes. But if we’re going to spend all that extra money on shoes, then I’m going to have to take that extra amount away from some of your other clothes. Are you sure you want to do that? Let’s think about this.’
Cause and effect, in practice, simply means: ‘If A, then B.’ If we do ‘A,’ then ‘B’ will result. This teaches kids how to think. In order to become fiscally responsible, they first need to know how to think. This is true of many areas of life, but particularly money.
None of this is to imply that kids can or should make the final decisions. The point here is to teach them thinking about the logical consequences of spending decisions. Don’t shield them!
Too many parents don’t reason with their children about money. They tend to make one of two mistakes. Some try too hard to give their kids everything they want, never telling them of the consequences and stresses involved. This has the effect of giving the child unrealistic expectations, and growing up to expect money to come into existence more easily than it does. Or, some parents will go in the other direction—being authoritarian, without giving the reasons for why they’re saying ‘no,’ or providing any ‘if-then’ propositions. In such families the focus shifts to how ‘mean’ the parents are rather than the simple nature of reality.
Don’t simply preach to your children that money doesn’t grow on trees. Of course it doesn’t. But include them in on decisions involving their own spending as early as possible so that they can start to grasp that money doesn’t grow on trees. Do this from at least the age of six—if not even sooner, in simple terms they can understand.
Older children can benefit from having a part-time job, if they can juggle it with school. This will give them some spending money and an increased sense of psychological ownership over their lives and finances. Ideally, kids should have their own checking accounts (with parental supervision, if needed) by late high school or early college. Savings accounts can start earlier.
Younger children can be given an allowance, sometimes for doing extra chores—but also for the purpose of learning how to conceptualize and manage money. Don’t focus on telling them what to do with their money. Instead, teach them to ask intelligent questions of themselves like: ‘Do I really want this toy badly enough to pay for it? Will I still want it tomorrow, next week, and next month? Or do I mainly want it now—and will I be tired of it once I bring it home?’
Also, encourage them to wait 24 hours before making a bigger purchase. They should have time to think out the consequences of the purchase so they won’t buy on impulse. Never let a child or teenager pressure you, the parent, into buying something big on impulse either. Give yourself time to think about it.
Quite honestly, few things nauseate me more than the sentiment expressed by parents, “I want my kid to have everything I never had.” This, more than anything else, is what leads to grown-ups who don’t have nearly the rationality about money and spending they otherwise would have. Post World War II parents were particularly guilty of this error, as were parents into the 1960s. Those children now run the world today. Need I say more?