12 Ways to Make Your Kids Financially Savvy (Advice From Jonathan Clements)

December 18, 2007

Jonathan Clements wrote a great article in yesterday’s WSJ titled 12 Ways to Make Your Kids Financially Savvy ($). I have highlighted Jonathan’s “12 Ways” and added my thoughts to each one. Jonathan does state at the beginning of his article that not everyone will agree with his methods, so keep that in mind when you read the following.

1. Waiting Until Later – Kids have to learn self-control and figure out that they simply can’t have everything NOW. I taught my boys this (my daughter’s still too young to grasp the concept) in the bookstore. My oldest son wanted to buy a book at Barnes & Noble. He was going to have to pay full cover price plus tax. I told him that we could go home and order the same book off the internet for nearly half the price that he would pay at Barnes & Noble. He didn’t like the idea at first but I talked him into it. He ended up ordering two books from BooksAMillion.com for about the same price as one book from Barnes & Noble. He did have to wait for the books to be shipped but it gave him something to look forward to (what kid doesn’t like getting a package in the mail?).

That experience stressed the benefits of waiting until later.

2. Asking Themselves – Instead of your kids asking you for everything, start giving them an allowance so that when they want something, they have to ask themselves. Almost magically they learn the power of making choices – but ONLY if parents don’t give in and bail out their kids when they make a dumb choice.

3. Talking the Talk – Jonathan recommends talking to your kids about what life was like when you were “poor.” Kids need to understand that they money won’t just magically appear in their lives once they become adults. They need to understand that struggling financially is a way of life (although they can make it a lot easier on themselves if they make good choices).

4. Scoffing at Wealth – Not scoffing at wealth but the appearance of wealth. Lots of people can look wealthy. I think about this every time I see a “young” person driving a $40,000 + car.

5. Compounding for Decades – Jonathan actually purchased low-cost variable annuities for his kids when they were young. They grow tax-deferred and have decades to compound.

6. Growing Free – As soon as your kids have jobs, consider helping them fund a Roth IRA, which has the potential to grow tax free over their careers. All those years of compounding can really make a difference!

7. Heading Home – Jonathan states that he has set aside money to help his kids come up with a down payment on a house. While I don’t think think it is necessary for parents to help out like this, I did think it was kind of cool that he used target date funds to meet these goals.

8. Keeping Score – If your kids are trustworthy, consider adding them as a joint account holder to your credit card account. Doing so will help them build a credit history. Just be sure they are TRUSTWORTHY!

9. Vowing to Help – I agree 150% with Jonathan that is crazy for families to spend $20,000 – $30,000 on a wedding! I say spend less and help the newlyweds out in other ways.

10. Lending a Hand – Whether or not parents foot the bill for a college education is between them and their kids. That said, it’s important for the kids to know at what point the parental financial aid ends. In other words, you don’t want to support a career college student.

11. Setting Expectations – Kids need to know what will be expected of them. Talking with them about finances is a great way to set those expectations. They need to know where and when mom and dad’s financial support ends.

12. Getting Educated – Teach your kids how to build a low-cost index fund portfolio. If they can manage this without hiring a financial advisor, they’ll save thousands of dollars each year in management fees and expenses.

After going through and looking at each of these points, I think a better title for the article would have been, “12 Ways to Give Your Kids a Financial Headstart in Life.” Clearly if Jonathan follows-through on all his financial committments to his kids, financially-speaking they will be lightyears ahead of their peers.

I will add that all the points mentioned above that require a financial committment should only come from parents who have their own financial house in order. In other words, make sure your retirement plan is in order before you go above and beyond for your kids.

12 responses to 12 Ways to Make Your Kids Financially Savvy (Advice From Jonathan Clements)

  1. That was a really good read. I am a long way off from having kids, but I hope that when I do, I can teach them how to properly manage their money so they don’t make the same mistakes I did.

  2. Much like Jordan, I don’t have kids but one day hope to pass this down.

    Teaching kids about money, making money, gifting money and saving money simply isn’t being done to the extent it needs to be.

    People have far too many excuses nowadays. The fact is everyone should save for their children and teach them about it. I was never taught and like an epiphany I said no more being poor for me when I was about 24-years old, I wish I had known more when I was younger.

  3. I thought Fair Isaac was removing the authorized user accounts from FICO calculations?

  4. The waiting suggestion in the most important in my opinion. Kids these days, mine included, are all about instant gratification. If that means buying everything you want right away then that is a recipe for disaster.

    Good post and interesting read.

    The Dividend Guy

  5. Wow. That’s great.

    With a seven year old living with me, I need to do as good a job of modeling what I do with money as I can.

  6. Bobby: Joint account holder =/= Authorized User. Authorized Users have no liability for the charges, and therefore no reporting to the credit bureaus should occur. Joint account holders are jointly liable for the debts, so it does reflect on their credit reports. It’s the same thing as a cosigner. You just don’t want your kid to go out and charge the card up to the max, because you’re going to have to pay it off.

  7. One of the smartest things I did was to have my teenagers learn how to balance a checkbook—with my checkbook. You need to do this when they are old enough to have some discretion about what they talk about. High school Junior seemed to work out the best. When they actually see what your bills look like they suddenly start to “get it” in a really big way. As a bonus the unreasonable and insatiable demands of the average teenager suddenly cease, and their college choices will become much more realistic.

  8. My parents did most of the things on that list for me. I am evidence that these things work. As an adult, I didn’t rely on help from my parents for my wedding, buying a house, or even finding an apartment. When they offered to help with my wedding expenses, I took it gladly, with the knowledge that I didn’t need their help, though it did make life a lot easier!

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