How to let kids fail their way to financial success
For parents, the instinct is to protect children from making
mistakes -- especially costly financial flubs. But knowing how to handle mistakes
can mean the difference between an error becoming a learning opportunity or a
"When your child makes a mistake, it can be useful to let
him suffer the consequences," says Brette McWhorter Sember, author of "The
Everything Kids' Money
Of course, financial education ideally starts before any
mistakes are made. Children begin picking up clues about money from a young age.
According to a May 2013 study published by the U.K.'s Money Advice Service, children as
young as 7 already recognize the value of money and what it means to earn
That's why it's good to start early with the fundamentals: giving
kids an allowance
so they understand the power of earning, and then teaching them to set goals
and budget toward those goals.
Katherine Bateman, author of "The Young Investor,"
recommends encouraging children to save half of their earnings for long-term
goals and half for everyday splurges and short-term goals. "Each of those
halves teaches children something very important about money," says
Bateman. "I still remember saving for a bicycle."
Helping them open an interest-bearing savings account is a
great way to keep children inspired to save. Who doesn't like to see "free"
money added to their account? "If you keep setting aside half, your money is
going to grow -- not just by adding to it, but also by compound interest,"
Michael E. Staten, director of the Take Charge America
Institute at the University of Arizona's Norton School of Family and Consumer
Services, agrees. "Whether it's saving for a bicycle, an iPhone or
college, the most important thing is setting up the structure," he says. "You
can get more sophisticated as kids get older."
As savings grow, should your child have unfettered access to all of the money they earn? "Absolutely not,"
says Sember. "You have to sign off on any withdrawals from a bank and there's a
good reason for that. A friend could talk your child into withdrawing
everything for a 'loan' that your child will never recoup."
Instead, Sember says, make a rule that your child needs to
discuss any withdrawals from the account with you. That gives you the right to
ask questions and steer your child in the right direction. This is especially important for kids who show less responsible behavior. "If you have a
child who has chosen to mess up all through high school for one reason or
another, then I certainly wouldn't give him or her their savings book and say 'Here, do with it what you want.'"
On the other hand, if your child has earned your trust by making good grades,
managing her money well and otherwise being a good citizen of the family and
school, then it's OK to go ahead and allow access to the funds, Sember says. But you should still have monthly meetings to balance the account and discuss the child's spending choices.
When to let kids fail
When kids do make bad
decisions, think twice before rescuing them, especially if the fallout is relatively
minor. For instance, if they spend all their money on candy and now don't have
enough for a movie, then it's probably best that they don't go, says Sember. "This
can be an excellent way to show cause and effect and teach your child not to
always live in the moment."
By experiencing real world consequences, "kids will learn
to designate money for certain things that are important -- do I want a
cashmere sweater or do I want to fritter my money away and not know where it
went?" Bateman says.
Accompany these lessons with an "admit, fix,
prevent" mindset, says Manisha Thakor, founder and CEO of MoneyZen Wealth
Management. For example, say your child blows his entire allowance, leaving no
pocket money for an upcoming field trip. "Turn that experience into a teachable
moment by walking through the alternate scenario of how the funds could have
been better budgeted and then letting your child experience the field trip
without extra spending money," Thakor says. "That can be super powerful.
Without the teachable actions, however, the whole exercise falls flat."
Let children make their own decisions and fail, within
|-- Brette McWhorter Sember
Everything Kids' Money
When to put the
Some consequences are much more lasting than a snack-free field
trip, though. Those are the ones you want to head off if possible. "It's one
thing for your kid to save up to buy a toy you know is a piece of junk that
will soon break or he will tire of," Sember says. It's another to let them blow
their entire savings -- especially if it's for something that involves ongoing
costs, such as a pet that a child can't take care of.
"In some families, children's savings accounts are
earmarked as college money, so that's not something to be handled lightly,"
says Sember. "Let children make their own decisions and fail, within
When to step in depends in part on family finances. Think
about how much you can afford to lose in the name of financial education. "In
some families, $20 might be a lot of money," says Sember. "In others, it's a
drop in the bucket."
The type of mistake is also relevant. If it's going to harm
the child's long-term financial track record, it's time to step in. For
example, ignoring debts could affect the child's
credit score, which will could in turn affect her ability to get a job, apply for
college or get financial aid, Thakor says.
She says a mistake that will hurt others -- such as not
repaying money owed to a friend -- is another cue for you to come to the rescue.
Teach by example
Finally, it's not just what you say -- it's what you do. Another
study by the U.K.'s Money Advice Service showed that more than two-thirds of
young people from families who are able to save for emergencies also have a
regular savings habit themselves -- contrasted with less than half from
families who are not able to save for emergencies.
"Kids are like sponges and they
will mimic the financial behavior they see," Thakor says. "If you do not
proactively teach them to save with the very first dollar of earnings, they
will understandably think 100 percent of earnings can be spent."
See related: Teaching kids good money habits by example
, 5 lessons to teach kids how interest works
, 5 credit lessons all parents should teach their daughters
Published: January 28, 2014