And like all parents, I want my kids to be better than I was at financial stuff. While they’re still a little far off from their first summer jobs, I like to be prepared. In that spirit, I called up Ron Lieber, the author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous and Smart About Money, to ask how parents can handle this critical early lesson in money management. Below, his eight best tips.
1. Be clear about what this money is for. “Especially with kids under 18, figure out what the point of the exercise is,” says Lieber. Is the money to be entirely socked away for college? Donated to charity? Put towards a car? “Maybe parents will chip in for the basest of baseline vehicles, for example, and any upgrades have to be contributed by the kid. It needs to be clear at the outset what the goal is, and that will dictate how the money is to be set aside.”
2. Spend, save, give. “If your family is lucky enough to have more than you need, you may have some choice in a responsible way to divide up the money, say, an equal division between saving, spending and giving.” Hopefully, it’s an extension of the “jar system” parents have started for the weekly allowance.
3. Let them decide how to spend the “spending” portion. “I’m a big believer in allowing kids to have a fair degree of say over the spending part. As long as they’re not buying items on your household’s ‘banned item’ list, let them spend it as they see fit.”
4. Put them in charge of new categories of personal spending that you used to cover. For example, says Lieber, “One-third of summer earnings becomes clothing money for the year, or transportation costs. It’s good to give them ever-larger lump sums to manage for themselves”—which, after all, is what they’ll be doing as college students and as adults. As Lieber says, “It teaches them patience.”
5. Don’t worry about mistakes. At this stage, “Money is for practice. Mistakes are inevitable and can even be kind of entertaining. But we want them to make mistakes while they’re still under our roof, and not later on when the consequences are more dire.”
6. And let them live with the consequences. Run out of money for clothes? Too bad, Mom and Dad aren’t going to bail you out.
7. Help them calculate taxes. Kids’ first and most bracing introduction to the working world might be how little their take-home pay is. “I see a lot of 22- and 23-year-olds showing up for their first jobs who don’t have the faintest idea about taxes,” says Lieber. Help them do the math now—it’s important to have that conversation while they’re still living at home, and not, say, when they’re 24 and renting an apartment based on what they think their net pay will be.
8. Open an IRA. “Thinking about how much money you might need a half-century from now is hard for kids,” says Lieber. “But a little savings now will multiply.” If your kid starts socking away money in an IRA at age 19, she’ll be a millionaire by age 67. Start at age 25 and she’ll have $330,000 less. And if you have the means, incentivize them—match the money they put away in a Roth IRA.
So my takeaway? I wish I’d started an IRA when I was 19. But short of that, maybe at the very least we can implement a spend-save-give policy. Tops on our “banned item” list: Cigarettes. Three-card monte. And the Columbia House music club.