So you've made the decision to be more open about money matters with your child. Good for you! Whether or not you're entirely comfortable with this decision, you need to decide exactly what information you're going to share—and when. You don't have to share everything, and what you do share is dictated in part by the age of your child.
You'll want to consider two general areas when sharing information:
- The family's daily finances
- When a family crisis arises
After you see the kinds of information to be shared, you'll get some idea of when you should share it.
Growing up, I heard my father routinely say, “Turn off the lights when you leave a room; I don't own the electric company.” The message from my parent was clear: We didn't have money to waste. I, in turn, complained to my children each month that the phone bill was more than $100. It wasn't until after my daughter started to work that she understood what a $100 phone bill really meant—before that, I could have said the bill was more than $1,000 or more than $10, and these numbers wouldn't have meant anything to her other than the fact that her mother was angry.
The point of these stories is simple: If children are aware of family finances, they can better understand how to behave. This will cut out the need to nag and can make your children more responsible.
What information should be shared? Does your child have to know your annual salary, the dollar amount of the monthly mortgage payment, or the size of the family savings account? The answer is probably no—the numbers are meaningless because there's nothing to compare them to. You child doesn't know what his friend's parents earn or what their mortgage payments are.
What your child does need to know is where the family stands financially. This means telling a child certain things:
- Who makes money decisions in the family. Usually, parents work things out together and present a united front to children. But the days of “ask your mother” or “wait until your father gets home” are still common enough. Money decisions may still be made by the parent who earns more.
- How money-related decisions are made. Children want things now, but parents know they need to save for things later. There's always a tension between spending and saving.
- The family is on a budget. Children need to understand that in most households, money isn't an unlimited commodity. There's only so much to go around, so decisions need to be made on how to allocate the money that's available.
If your family is like most, money doesn't flow like the mighty Mississippi that can run forever. It's more like rainwater collected in a pail that can be ladled out as needed. Explain that if a cupful is taken for one thing, it's not there for something else.
Sticking to a budget means that there has to be give and take in deciding how the family's money will be spent. Some families are more willing than others to make sacrifices to accommodate a child's wants—just ask the parents of our Olympic hopefuls what they had to do without so that their children could pay for the costs of training.
Very few families can claim to see their children grow to maturity without experiencing some family crisis along the way. With the divorce rate in the United States at about 50 percent, the dissolution of the family is by far the most common crisis that many children experience.
Divorce brings many financial changes to the family. It may mean that the mother has to work full-time, that there's less money in the child's household, and that money may be a serious issue between parents.
Children of divorced parents shouldn't be in on the details of child support payments: That's something between the parents, and wrangling about it usually results from the parents' broken relationship. This information should have nothing to do with the children; bringing them in on the issue only forces them to take sides and makes them feel conflicted about doing so.
With any family crisis, there's usually an important aspect of money involved in the events. Consider the following crises (besides divorce) that can happen in any family, and think about how each one can impact the family's finances (positively or negatively):
- Unemployment of a parent. The family may be put on a bare-bones budget. Unemployment compensation may cover necessities, but extras are now out of the question. The other parent may go to work. Roles within the family may be upset, with the former breadwinner acting now as the bread baker.
- Bankruptcy. Personal bankruptcies are in record numbers today. Some of this may be because of poor money management, such as overcharging on credit cards that can't be repaid. But some bankruptcies result from forces beyond one's control, perhaps if a fire or other natural disaster wipes out a business, or if a lawsuit against the family results in a staggering judgment. While the bankruptcy laws are designed to allow a person to keep certain things—a home and furnishings, a car, and a wedding ring—other assets are used to pay the debt and give the debtor a fresh start. Bankruptcy isn't the time for taking vacations or making frivolous purchases.
- Job relocation. A relocation can mean the family has more (or less) money to spend, depending on the new town or city. For example, if the family moves from a small town in the Midwest to New York City, the sticker shock of a family meal at McDonalds may be astounding. The family may have to spend more on housing and, as a result, have less to spend on entertainment and other extras.
- Remarriage. As with a job relocation, a remarriage may be positive or negative, from a financial point of view. The nature of the situation depends on the new spouse and whether new children are coming into the family. When children from two families come together in a remarriage, issues arise over how much money there is to spend and how each set of children has been raised so far to regard money.
- Serious illness of a family member. The emotional cost of a serious illness is paramount, but the financial cost cannot be denied. Even with medical insurance, a serious illness brings financial consequences, especially if the one who's sick is the parent who used to be the main provider.
- Death of a parent. As with a serious illness, the emotional price of death can't be minimized. Unfortunately, there may be a financial price on it as well. Some parents may carry adequate insurance to support the family and even provide for a college education for the children. Others may leave some assets to help, but the other parent may have to work, incur child-care expenses, and struggle along. Still others may not leave anything to help the family.
What children need to know in a crisis is that it's not their fault and that you're taking care of things. When they're little, they want their routine to continue unabated. If they've been getting dance lessons, they want to know that the lessons can continue. You, in turn, should keep this in mind when deciding what you're going to spend money on during the crisis period.
As children get older, you can bring them into the inner circle of money matters during the crisis. For example, you might tell a child that her college savings is safe and will be there for her when she needs it. Or, you might have to say that the savings will have to be used now to support the family and that payment for college will have to be worked out later.
The prospect of death is particularly scary for children. They fear not only losing their parents, but also ending up an orphan like Oliver Twist begging for more food. It may be reassuring for children to be told that if you die, they'll be taken care of, both personally (with a guardian you've named in your will) and financially (with life insurance and other property).
Information for Your Child's Age
The time you share certain financial information and the way you do it depends on your child's age. Obviously, a 6-year-old won't understand the technicalities of bankruptcy, but he can grasp the concept that things are tight and that he can't have an expensive birthday party.
You may want to follow some guidelines in sharing family money information with your kids:
- Elementary school age. For daily finances, tell them about limits on family spending in general. Explain that the family is on a budget (if it has one). Children should know some specific things that they can understand, such as whether your home is owned or rented, and whether you're saving for certain anticipated expenses that means doing without for now. Let them contribute ideas to a family wish list. In a crisis, share the fact that a crisis will impact the family's money. Tell them whether it's temporary or whether it requires re-engineering the family's finances.
- Middle school age. It's time to get more specific about money. Children can—or should—understand at this age what things cost. Let them listen in on discussions about money. Encourage them to ask questions about anything they don't understand. In a crisis, children of this age also can handle more details. For example, in a divorce, they can understand why you need to move to a smaller home and why everyone must get along with less.
- High school age. At this age, you can't keep things from them any longer (they probably already know the money score at home). Depending upon your situation, you might want to show your children your monthly budget, explain how much you spend for items such as groceries, and whether you're committed to saving for your retirement. You may want to involve them in your budgeting process, taking their input into account. Be sure to tell them where you keep important papers that may be needed in a crisis. As a minimum, they should know about your will, records of financial accounts (banks, brokerage accounts, mutual funds, and so on), and the names and numbers of financial and other advisers (your accountant, attorney, life insurance agent, stockbroker, and others).
Capitate Your Kids: Give Your Kids a Financial Head Start
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