Practical Steps for Raising Financially Responsible Children

About a year and a half ago, my husband and I revamped our budget and savings plan to eliminate all debt outside of our mortgage and to aggressively pursue savings and retirement goals. This affected our children as much as it affected us as the out-to-eat nights and spontaneous purchasing decreased markedly. At first this was tough for the little ankle-biters to swallow, but we decided to seize the opportunity to help our children learn some fiscal responsibility as well.

We have seen it too often - or we have done it ourselves. You enter adulthood and all that goes with it - the workforce and marketplace - without any real planning or budgeting know-how. Before you know it, your week lasts longer than your paycheck. And savings? What is that?

Trying to undo the damage that is reaped by mounting debt and living beyond one's means is much more daunting than learning some budget and investment planning from the get-go. With that in mind, my husband and I decided we would endure the but-why's and the why-can't-I-buy-that-now's from our kids and teach them fiscal responsibility before they left the nest.

A word of warning: some of the things we have implemented with our children may seem quite strict or even harsh. We have seen, however, the grave damage done when a young adult enters the world with no financial preparation. We believe the sacrifices will be worth the dividends.

1. Use allowances to teach the principles of "earn, give, save, and spend".

Once our kids were old enough to begin taking on some household responsibilities (around 6 years old), we began giving them an allowance. In our home, we give them $.50 per year for every year of their age. For example, our 15-year-old receives $7.50 a week; at 16, she will get a raise to $8.00.

We use a chore chart with each child, and they check off their daily responsibilities as they complete them. They show one of us the chart each day, and we initial it. At the end of the week, they turn it in, much like one might turn in a time card. In exchange, they receive their weekly allowance.

In order to encourage accountability and responsibility, they have a deadline for turning in their chore sheets. They also forfeit some of their allowance if they do not complete certain chores. After all, one day they will be responsible to show up for work in order to get paid - we are trying to teach that principle through household chores and allowances.

Each child has three envelopes marked "Give"; "Save; and "Spend". They are required to give at least 10% to a charitable cause (generally, this is given to our church). They save 15-20%. The remainder is theirs to spend as they choose. Teaching our children these concepts early on will help them carry good savings and spending habits into adulthood.

2. Help them establish a savings account.

Each of our children has had a savings account for several years now. We set an initial goal of $500 in their account. In order to reach that goal in a reasonable amount of time, they were required to save 20%. Once they reached that goal, they were allowed to drop back to 15% if they wanted.

We opened ING Direct savings accounts for each of them because of the accessibility and high interest rate (4.5% at the writing of this article). Their accounts are attached to our primary checking account, allowing us to transfer money in and out for them quickly and easily while they are minors.

3. Use a clothing allowance to teach budgeting.

When our daughter turned 12, we gave her a yearly clothing allowance. You can do this in one of two ways - lump sum, which they are then responsible to manage over the year, or a monthly allowance. For our daughter, we have used the monthly allowance, though she is also aware of the yearly total. We start the "new year" in August, to correspond with the beginning of the school year.

In years past, to determine the amount, we have sat down with our daughter and compiled a list of clothing, shoes, and accessories she felt she would need for that year. Once we determined the amount of the allowance, she became responsible for budgeting her allotment each month, including keeping track of all monies spent by logging purchases in either a spreadsheet or notebook.

We saw quite a difference in attitude toward purchasing when it became "her money". This encouraged her to shop sales and clearance racks; she has become quite adept at finding awesome deals. We will be implementing this with our second child this year, while using this as an opportunity for our daughter to mentor him along with us while he too learns to budget and plan.

4. Don't buy them everything they need or want: teach them about cost of living expenses.

As parents, it is easy to adopt an "I will just do it myself" attitude when it comes to many of the necessary life-skills our children will need as they move into adulthood. This includes spending and purchasing. And certainly, when they are young, we should - and do - provide for their needs and many of their desires. If you are like me, you love providing for your kids - and not just the necessities either.

As they move closer to adulthood, however, it is important for them to learn that life costs. Food, fuel for the car, insurance, that trendy new cell phone...these are not free, as we well know! But sometimes, it seems, our children come to think so.

When your child reaches adolescence, chances are they will secure some type of employment, whether it is a regular babysitting stint, a summer-time job, or some after-school work. This is a great way for them to develop work skills and a sense of responsibility, as well as fill their little pockets with some extra cash. And as tempting as it is to say, "Well, they earned it. Let them do what they want with it", this new found financial freedom is not only a great opportunity to reinforce the good habits you have already fostered, it is also an excellent time to allow them to start handling some of their own expenses.

This summer, our daughter announced that she wanted a cell phone. We did not have the means to provide one for her, nor did we feel that it was necessary. She doesn't drive yet and she is generally one of three places - home, youth group, or her summer job at a day camp. So, Dad challenged her to research plans and come up with a way to finance a cell phone on her own, including having the cancellation fee in reserve in her savings account (above what she'd already saved to date).

She rose to the challenge and not only saved enough to cover a cancellation fee, she also developed a budget that will enable her to be able to pay for her cell phone during the months she will not work because of fall and winter varsity sports.

Allowing our children to handle some of their own expenses, or to save for something they want, also teaches the concept of delayed gratification. I have seen too many young adults and couples enter adulthood believing that they need, and should have, everything their parents have accumulated over twenty or more years. This is an unrealistic expectation and is often the driving force behind amassing credit debt. By teaching your children that they really can wait for that new Ipod - and that they can save for it themselves - is great preparation for their financial future.

5. Be real with the household's finances.

By keeping it real with your children concerning your household budget and savings goals, your children will have a greater understanding of the cost of living. We do not hide our financial situation from our children. We have shown them our own budget spreadsheet not only to help them develop their own, but also that they might see what running a household involves.

Are these things easy to do? Of course not. We want to give our kids every opportunity, and often we translate that into giving them everything. But by teaching them to sacrifice now so that they might have more later, as well as encouraging them to set savings and spending goals, our children will enter adulthood more than ready to navigate the often daunting waters of financial responsibility.