As the parent of three young adult children I find myself contemplating the best ways to help my kids gain confidence and independence when it comes to managing money. As a financial planner, I have observed how unhealthy patterns can develop when well-meaning parents offer too much financial support to adult children. These patterns can lead to outright dysfunction and even financial disaster as overspending leads to lack of resources for retirement.
Here are a few ways parents can help their children who are moving into adulthood develop some positive money habits and begin the process of gaining financial independence:
Talk to kids about money. It can be challenging to have frank discussions about household finance within families. Many parents seek to shelter their children from money concerns when they are young and continue that practice as they get older. Try to find age-appropriate ways to have conversations about how the household budget works. When my own children were in elementary school, I would take them to the grocery store and tell them how much I had budgeted to spend on that particular shopping trip. I would have them add up the cost of each item that was placed into the cart. When we had reached our budget limit, we would look at what we had chosen and consider if we wanted to make any changes. If so, we needed to find something to “trade” in exchange for the desired purchase so that we could stay on budget. Later, as my oldest approached college selection, she had to make choices based on the amount of aid offered, the amount our family could afford and the size of the student loan she was willing to assume to attend one school over another.
Encourage incremental financial responsibility. As kids get older, it is important to help them understand the costs of things so that they can prepare to move into the world and take on responsibility for paying bills as they get older. If your child is driving age and has a job, aim to shift the responsibility for things like auto insurance, gas and parking tickets to them as soon as possible. Cell phones, extra-curricular and entertainment spending are other good places to begin to encourage cost sharing with kids as they get older.
As your kids become more physically independent, set clear expectations for financial independence as well. Whether it is going off to college or moving out of the house for the first time, most kids remain somewhat dependent upon parental support in the early years. It is important to be explicit in setting timelines and expectations so that young adults can prepare both emotionally and financially to assume more and more of their own expenses and begin practicing the art of budgeting!
Offer matching incentives for saving. If you are in a financial position to be generous with your young adult children, consider offering a match instead of an outright gift to encourage good saving habits early on. If your child has a job, they are likely eligible to contribute to a Roth IRA, which offers tax free growth for retirement. Even if they cannot afford to put much aside, you could offer to match (or double match) any amount they are able to save as an incentive to begin the savings habit young and enjoy the “magic” of compounding.
Teach by example and do your own financial planning. We all know that our kids are watching us and that we are modeling behavior whether we like it or not! Spending time working on our own financial health can provide an excellent opportunity to teach healthy financial behavior to our kids. Setting aside time to review our saving, spending and budgeting behavior will not only improve our own financial well-being, it can lead to more confidence as we put on our parenting hats and teach these skills to our children who are fast becoming young, hopefully independent adults in the world.
Jennipher Lommen is a Certified Financial Planner TM and Enrolled Agent who offers comprehensive financial planning and tax advice to clients in Santa Cruz, CA and beyond.