Today’s young people are more likely than previous generations to live with their parents, according to a 2017 analysis from the Pew Research Center. In 2016, 15 percent of 25- to 35-year-olds lived in their parents’ home, compared to 10 percent of Gen Xers in 2000.
Even when kids move out, it’s not uncommon for them to receive financial support from their parents. In fact, 62 percent of Americans age 50 and older gave a relative money in the last five years, with the largest sums often going to adult children, according to a 2017 Merrill Lynch retirement study.
Parents may not find those statistics encouraging, but the good news is there are ways to teach kids how to be financially responsible, and it involves raising the bar by asking kids to do more in the way of financial responsibilities. Studies have shown that when more is expected of a child (or anyone), they actually perform to that level of expectation. The same can be said of how they deal with money.
Don Roork, a Certified Financial Planner at AssetDynamics Wealth Management, has noticed a pattern with kids, adults and money. “Kids learn good money habits from just watching and being around their parents,” says Roork.
Roork also points out that money lessons aren’t always explicit verbal lectures on finance. “Kids watch mom and dad making good financial decisions, and voilà — the kids’ money behavior matches their parents’,” says Roork.
So when it comes to raising financially independent adults, it becomes clear that it’s important to start when they are kids. Here are some ways personal finance experts recommend easing your children — gently and kindly — into financial adulthood by weaning them from the family wallet.
As soon as your child begins asking for things like toys, restaurant meals or trips to the movie theater, they are ready to learn about the money it takes to support these wants. When a child expresses a desire for something beyond the basics, start the conversation then and there about how they’ll soon be responsible for these “luxury items.”
Of course, you don’t have to start charging them rent (not a bad idea, though), but you will want to follow up your expectations with actions.
For example, if your family goes out to eat, your child can pay for their meal or contribute to a portion of the bill. These expenses can be age appropriate and should increase over time as your child earns more money. They can start with things like snacks at the movies and move up to cellphone bills and car insurance.
Financial adviser Jamie Pomeroy of Financial Gusto says this should all start with communication: “Sitting down with your child and having a clear and frank conversation about who’s paying for what, can pay huge dividends.”
Another good exercise would be to show them prices on things they’ll need as adults, like a home or a car. Molding their expectations around what it takes to live will only help them down the road.
To drive this point home, Pomeroy suggests laying out a real plan designed to increase financial responsibility. “Make sure that you and your child are on the same page about what expenses they are responsible for, what you’ll continue to pay for (for now), and then introduce them to a budget to help them manage those expenses,” he says.
Create a reward system
Get-out-of-debt guru Dave Ramsey warns against giving kids an allowance and instead recommends that money given to a child should be tied to actions, like completing chores or other household projects. The idea is to get kids ready for the real world by emulating it with a system of compensation tied to work.
CFP Jeff Rose of Good Financial Cents says, “One of the first steps in teaching your kids financial independence is giving them responsibilities around the home that are both paid and unpaid.”
Ramsey is also a proponent of giving children the opportunity to earn more money in “commissions” when they find extra things to do or take initiative in solving problems around the house.
Teach them personal finance
Many kids are shocked when they get into the real world and finally begin grasping the finite nature of money. Mom and Dad spring for everything, so why would money ever run out?
Clint Haynes, CFP of NextGen Wealth, says there’s a fix for this. “Make it a point to sit down with your kids and show them what your budget looks like, how it works, and why it truly is the foundation to personal finance,” he says.
When your child asks for candy at the store, don’t deflect them with, “We don’t have the money.” Instead, let them know that the money you have available isn’t earmarked for candy, showing them how a budget works in real life.
Other lessons you can teach early on include those around saving, compound interest and even giving.
Brian Hanks, a CFP out of Idaho, has an experiment he urges his clients to conduct with their children once they are high school seniors. He suggests parents hand over their checkbook and have their kid cover all the family’s expenses for the entire school year.
“Paying a family’s bills is eye-opening, and your teen starts to develop new money habits,” Hanks says.
Let them earn real money
You can start by giving your kids an allowance that is tied to performance: completing chores, excelling in school, and having a good attitude can factor into their “compensation.” Be sure to enforce the association between what they do and how they are compensated. Once they can work legally, you can taper off their allowance.
Ed Snyder, CFP at Oaktree Financial Advisors, says children who have jobs will be more thoughtful about their spending and better with money in general. “Working will help them think through their spending and hopefully be more responsible,” he says.
Keep in mind kids don’t always have to wait until they are 16 to get a job. They can start a business or participate in gigs that allow kids under 16 to work with a permit, like modeling or acting.
Not only should your kids be responsible for expenses and make their own money, Eric Jansen of AspenCross Wealth Management says kids should be challenged in their money habits.
“Set up 90-day savings and spending challenges as a fun way to help them better understand and manage the trade-offs between spending money on what they want and what they need,” Jansen says.
No-spend or savings challenges are great ways to teach lessons about money while showing your child what they are capable of if they focus on their goals.
You can even create competitions among siblings, like seeing who can save the most money.
Trust the process
Sound like a lot of work? It is! Financial independence doesn’t happen overnight.
“Some of these [money] lessons may click sooner in some kids than in others — even within the same family,” says Snyder. “Don’t give up hope. … Just keep showing them good examples and teaching them good old-fashioned financial lessons.”
Be patient, be kind, and be confident that the lessons you are teaching them will serve them well into adulthood.