As an accountant, you’re well-versed in managing finances, preparing budgets, and planning for the future, and you likely want your children to develop a strong command of these principles early on. However, you may find that schools aren’t exactly providing the tools they need to succeed. While your child might learn about history, math, and science, they’re less likely to come home with an understanding of budgeting, let alone investment basics or progressive tax brackets.
Unfortunately, many young adults graduate without a solid grasp of personal finance. Since our education system often overlooks these critical skills, it’s up to you as parents—and financial professionals—to instill sound financial habits in your children. By doing so, you can help them avoid the financial pitfalls that so many Americans face right now, such as useless credit card debt, living beyond one’s means, and the importance of a financial plan. Naturally, your five-year-old isn’t ready to hear about the effects of inflation on their purchasing power, but there are steps to take at each life stage to gradually build up their financial savviness!
Involving Children in Family Finances Early On
Young children are naturally curious, especially when it comes to numbers. As an accountant, you’re in a unique position to nurture that curiosity by involving them in your family’s financial decisions. Research shows that curiosity—particularly an eagerness to learn new things—can significantly boost early academic achievement, especially in areas like math. By sparking their interest in financial matters early on, you’re not just teaching them about money—you’re also laying the groundwork for better academic performance and long-term success.
Start by comparing prices at the grocery store, showing them how much things cost, and letting them help with simple choices. Giving children a sense of involvement in financial decisions can fuel their curiosity and make financial literacy a natural part of their lives. Before you know it, they might be helping you with the grocery list!
Introduce an Allowance
When your kids are old enough, consider giving them an allowance in exchange for completing chores. This way, you can knock out three birds with one stone – teach them the value of hard work, provide an opportunity to discuss the importance of saving, and give yourself more free time to pursue your hobbies while they do the dirty work!
All jokes aside, you can take this a step further by introducing them to the concept of allocating their allowance. Give them three jars or envelopes—one for immediate spending, one for short-term savings, and one for long-term savings. This process does more than teach them to save; it helps develop an internal locus of control, where they understand that their financial decisions directly impact their future outcomes. By feeling a sense of control over their finances, they’re more likely to develop responsible money habits and achieve better financial well-being as they grow.
Help them set realistic goals and guide them in sticking to those goals. Achieving a savings goal will not only reward them with something they truly want but also reinforce the power of goal-based financial planning and instill a sense of financial empowerment.
Teach Them to Budget
As your children enter their teenage years, they often transition from being passive observers to active participants in family financial decisions. This is an ideal time to introduce them to budgeting. Sit down together and review your household budget, explaining key concepts like assets, liabilities, and different types of debt.
Encouraging your teens to get involved in these discussions not only teaches them essential financial skills but also boosts their confidence in making decisions. Over time, they may take on more responsibility, gradually becoming more engaged in managing finances alongside you. Your expertise as an accountant makes you well-equipped to guide them through this process, as you’re able to use real-life examples to make the lessons stick.
Explore Basic Investment Principles
Teenagers may have some awareness of stocks, bonds, and interest rates from the news, but they might not be as familiar with investment vehicles like ETFs or mutual funds. This stage is perfect for discussing the basics of investing, including how to manage emotions like the Fear of Missing Out (FOMO). Explain how diversifying investments through ETFs and mutual funds can help reduce risk while allowing for more stable growth.
This is also an excellent opportunity to involve them in planning for their educational costs. If you have a 529 plan for their college savings, review the current investments and allocations with them. Show them how different investment choices can impact the growth of their savings, and discuss how factors like risk tolerance and time horizon play into these decisions.
Additionally, consider opening a Roth IRA with your teen and selecting some long-term investments together. Go over key concepts such as fund management fees, rates of return, portfolio rebalancing, and dollar-cost averaging.
Reveal the Power of Compound Interest
When it comes to investing, time is your best friend. But it’s hard to get teenagers to look at a few days from now, let alone in thirty years. However, showing them the power of compounding interest and how their ETFs or mutual funds might grow in 10, 20, or 30 years might be the motivation they need to remain disciplined.
Also, compare typical debt interest rates to the typical returns on investments. Teach them that their investments won’t grow if high-interest debts, like credit card debt, are draining their resources–and it’s best to avoid those rabbit holes to begin with.
Introducing Taxes
Do you remember getting your first paycheck and seeing how much was deducted for taxes? Your children will inevitably experience that feeling of injustice when they see how much smaller their paycheck is. That moment of disappointment is the perfect time to teach them how to keep taxes low across the board and throughout their life!
Explain that while taxes are inevitable and necessary in life, there are strategies to minimize their impact, such as utilizing tax-deferred and post-tax accounts, brokerage accounts, and tax-loss harvesting.
Imagine your 25-year-old already knowledgeable about diversified, low-fee investments and tax planning! They’ll be well ahead of their peers.
Teaching the Importance of Giving
Your behavior as a parent significantly shapes your children’s approach to philanthropy. By involving them in activities like donating, volunteering, or supporting meaningful causes, you help them develop strong values, build moral character, enhance mental and physical health, and gain a better understanding of their financial resources.
Research indicates that parents who actively engage in charitable activities often inspire their children to follow suit. In fact, over 80% of parents who engage in charitable activity report that their children have also participated in some form of giving or volunteering. Additionally, charitable giving can be a powerful financial planning tool that can be used to reduce taxes and be implemented into trust strategies.
Achieve Financial Independence!
The ultimate goal is financial freedom. Many believe financial independence is tied to a high-paying job or business, but a larger income often leads to more lavish spending. It’s important to teach your children that true financial independence is about managing what they have wisely, regardless of income level.
By applying all the lessons discussed, your child can achieve financial independence, no matter their salary. There’s nothing wrong with pursuing a high-salary career or taking over the family business, but the foundation of financial responsibility will help them succeed in nearly any financial situation.
In Conclusion
We all want the best for our children. But sometimes, we may not have the tools necessary to pass down to them. If you have any questions about your own financial plan or situation, we’re here to help! Yes, you’re an accountant, but your area of expertise may be quite far from the nuances of long-term financial and retirement planning. By improving your own financial acumen, you’ll be better prepared to educate the next generation on how to achieve financial freedom. Just click the button to set up an appointment with a CPA Retirement Solutions specialist!
