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The Importance of Teaching Kids About Money

How to help your clients discuss finances with their children

Morningstar Staff

 

Money is a tricky topic to navigate even as an adult. So how can financial advisors help give their clients the road map they need to teach their children about money?

“Dealing with money is complex,” said Morningstar behavior economist Sarah Newcomb. “It affects our social lives as well as our material lives. And if your clients don’t discuss that with their children, and let them see how money really affects their lives, then the children will find out the hard way.”

By helping your clients teach their kids about money, everyone wins: Your clients get peace of mind that their children will be better equipped for life on their own; the children get a financial head start to prepare them for financial independence; and your practice benefits from stronger client relationships and, potentially, a new generation of clients.

Simple steps to help teach kids about money

Teaching kids about money starts with the parents being financially fit and comfortable with their own financial knowledge. Advisors can help their clients get to the point where they are ready to be financially transparent and discuss finances with their children. This might include having practice conversations with the client, or helping them identify which elements of financial management are the most age-appropriate for the client's children to learn.

From there, clients can start introducing their kids to the mysteries of personal finances—and there are plenty of ways to do this.

A first step can be to familiarize kids with a few rules of thumb early on and reiterate those shortcuts as they grow.

Newcomb gives the example of the “rule of 72.”

“Divide 72 by the interest rate, and that tells you how many years it will take for your money to either double if it’s invested or get cut in half if you’re talking about paying interest or just letting inflation erode its value,” she said. “Teach the rule of 72, because it’s so simple a kid can understand.”

If the child is not yet ready for division, tell them that prices double about every 25 years, Newcomb said. Give an example that he or she can relate to, such as what a movie ticket would cost when they are older.

“Getting kids to understand the time value of money from a young age can help them plan their careers, to understand why they need to continuously get raises and increase the value of their labor over time."

Experience is the best teacher

Letting children get involved in financial decisions can help them understand the rules of personal finance better than any textbook. For your client, this could mean having their kids help organize the grocery budget, or even the household’s budget all on their own.

Newcomb also recommends what is known as “just-in-time” financial education.

“People seek information about financial transactions when they need it. When they’re buying a home, that’s when they learn about mortgages. That’s when they’ll pay the most attention, be the most receptive, and retain that information the longest, because it’s personally relevant,” she said.

“Your clients can take family moments, like when the family is buying a new car, and use them this way,” Newcomb said. “They can easily bring the kids into the purchase and help them see everything involved in it. It’s the same with buying a home, or figuring out the family budget for vacation. Those types of things can be just-in-time moments because the children have a vested interest in the outcome, but they will see the importance of tradeoffs as they learn more about all the factors involved. If your clients keep their eyes out for when their kids are having just-in-time moments, it can be really effective.”

This blog post is adapted from the white paper, “Financial Turning Points: The Parent’s Dilemma.” 

Read the full paper for more tips on helping your clients raise financially fit kids.

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