Money Lessons for Children: The Experts Weigh In -- At A Glance

The Financial Lessons of a Depression-Era Baby

HENRY “BUD” HEBELER: I was lucky to have been born in the Great Depression and had parents who taught me many lessons about saving and investing. I say lucky to have been born in the Great Depression because it was a time where we learned to be frugal. And I was lucky because my parents taught good financial principles–both in conversation and by example.

My father always reminded me to save at least 10% of my income for retirement, and in years when we couldn’t, to save our next raise. In those days, I had lots of other things on my mind as well as other priorities, but I always saved at least 10% or my next raise plus some. We also didn’t have retirement planning programs online, and I’m not so sure but that if we did, I’d ever have looked at one. It wasn’t until I was in my 40s that I had a professional planner help me with retirement planning. The planner was impressed with my saving discipline—something I didn’t even think about.

Dad recommended that we have an emergency reserve for cash. He said you can’t foresee everything. He was right. We have had many financial surprises over our life, including things from very expensive uninsured dental care to helping distressed relatives at a time when they had no income.

My family had a budget—and we all knew about it. Mom had a certain number of dollars she could spend for groceries. When we went to the grocery store with her, she would make comments that something we might have wanted would make her run over the amount she could spend. The same was true for clothing and shoes. Dad saved for a vacation every year, and would make sure that we went to places where he had some control over the spending. Dad also saved for retirement, but he didn’t have the math capability to account for inflation or market variability, so the inflation that reached 13% during the Carter years and plummeting stock values were huge penalties.

My father also taught me some things about investing. Some of those lessons were good, like the advice to diversify. Some advice was not so good, as I subsequently learned. Dad felt he could pick a number of big companies, buy their stock, and hold until needed in retirement. I followed that advice but got bum steers from my broker. It wasn’t until my 40s that a professional planner told me to get out of individual stocks and into low-cost index funds. That was fantastic advice as I learned over the next 40 years.

My parents told us always to pay our credit-card bills fully every month. They said that credit-card interest was legal usury. They also said that it was much better to save for something than to get a loan to pay for it. Of course, they couldn’t do that for their house, but when they retired, they were debt-free. Saving before spending not only lets us earn interest on that money so that it can grow, it avoids having to pay the interest that ultimately makes items bought with debt so much more expensive. We’ve also found that during the savings process, we often wonder why we wanted some of those things in the first place.

So what can we do for our children?

Even when young, we can teach them to save for things. We can show them what we do. We can question the wisdom of buying something. Instilling the discipline of saving before buying teaches them so many lessons, particularly if there is enough time to see the savings grow or to show them how much an item would cost if we had to pay for it with a credit-card loan. We can teach them to plan, save and invest wisely for retirement. And we can show them that an emergency reserve is necessary for the unplanned things that occur in all of our lives.

Henry “Bud” Hebeler was president of the aerospace division of Boeing . He has served on the board of MIT’s Sloan School and currently focuses on the dissemination of free, sound financial planning on analyzenow.com .

Why Parents Shouldn’t Use Allowances as a Behavior Motivator

ELEANOR BLAYNEY: Money makes the world go round, right? It gets the job done, moves the needle, spurs achievement, and propels progress toward goals. A corollary to this premise is the idea that you get what you pay for. If you pay nothing, you get nothing.

Many parents set allowances for their children based on the idea that money can motivate the right behaviors. A six-year-old may be offered an age-appropriate monetary reward for picking up his toys, feeding and walking the dog, or taking dishes from table to sink after meals. This seems like a reasonable and responsible formula for getting a child to contribute to the household and learn the “value of work.”

Except it may not work.

The dog doesn’t get fed regularly and Legos remain strewn on the carpet to inflict serious harm to family feet. Mom and Dad find themselves issuing threats and delivering ultimatums, or caving in and paying the allowance anyway “just this once.” Children can get pretty confused in such situations. They may learn that money comes as a result of argument or coercion, or alternatively, it comes no matter what you do.

To get a better idea what does motivate children, consider studies that suggest that more money may not even work its motivating mojo on adults with much more fully formed brains. Business author and TED Talk speaker Daniel Pink recently called into question the effectiveness of the near-universal practice of setting incentive pay or bonuses according to the “If you do this, you’ll get paid that” rule. Pink finds that in the case of rote, manual labor–like stuffing envelopes, or picking apples–more pay for more output does seem to work. But for creative or original work, more money can actually depress performance. And given the trend to mechanize all routine, repetitive tasks, leaving to humans the work of generating ideas, this means that performance pay is becoming less and less relevant to today’s workforce.

What Pink does find to be motivating to workers are three essential nonmonetary perks: autonomy, mastery and purpose. Allowing an employee to direct his own efforts, giving to him tasks or projects that develop mastery or expertise, and ensuring that the work carries an overarching sense of “purpose,” rather than just profit, is the new formula for getting the most out of today’s workforce.

Which brings us back to teaching our children the lessons they will need to become responsible adults. Rather than paying money for household chores, we might consider Pink’s three nonmonetary motivators: giving children tasks they are allowed to do in their own way and at their own pace, as well as tasks that allow them to get good at something and that need to be done for the good of the family. In other words, children must do chores not to be paid, but because they are important, contributing members to family well-being.

This is not to argue, however, that parents should not give a regular monetary allowance to children. They should, and the amount should go up with the child’s age. But the allowance is not contingent on performance. Instead, it is paid–and paid regularly without argument or evaluation–as a way to teach children how to manage their money. That is, what it can be used for, and how to prioritize and manage these various uses.

If our children were to carry good habits of money management into the workplace, rather than the idea that money is the ultimate weapon or tool to control behavior, just imagine how many financial problems would be resolved in this country.

Eleanor Blayney ( @EleanorBlayney ) is consumer advocate of the Certified Financial Planner Board of Standards.

Why Children Need to Learn the Benefits of Debt

TED BECK: Debt is evil. That’s the message we’re teaching our young people–and for some very good reasons. Student-loan debt in the U.S. exceeds $1.3 trillion, according to the Federal Reserve, outpacing both credit cards and auto loans. Revolving debt outstanding sits around $900 billion, according to the Federal Reserve. And a National Endowment for Financial Education poll, in which we asked people if they believe they are achieving the American Dream, finds one in three among people ages 18 to 34 say they are struggling to meet their goals due to their inability to manage debt.

Meanwhile, it’s too easy to get too much credit that comes without education and with small print that obscures fees. Some of us use debt irresponsibly. And then add in the Great Recession—a vivid and destructive event that left many individuals and families financially scarred.

So it is useful to teach our children about the dangers of debt. But we also need to make it clear that debt can also be a useful tool. Do we eliminate fire, cutting and a well-trimmed yard from our lives, just because playing with matches, running with scissors and wielding a chainsaw can be dangerous? No, we teach our children how to use these tools safely. We provide consistent, positive guidance so when our children are old enough, they can use these tools for their own benefit.

We need to demonstrate that we can go into debt and bring ourselves out of it in order to build a strong credit profile. We show creditors on paper our resolve and ability to meet our obligations, thus keeping our cost of credit low. Taking on debt allows us to reach our aspirations—to acquire assets that are of value to us–such as a house, education, reliable transportation or starting a business. These things define the American Dream, and they are difficult to achieve without debt.

Student-loan debt in the U.S. is particularly troublesome because it is so large. Yet it helps millions obtain higher education, and is completely acceptable when limited to the student’s expected first year salary upon graduation. It’s dangerous for those who don’t finish; it leaves them with debt and without a degree, in worse financial shape without prospects for a well-paying job.

We can learn from Great Depression babies, who grew up to be avid savers and cautious spenders. They made judicious use of debt while figuring out how to keep their savings/spending discipline. We can use rules of thumb to help us, such as walking away from impulsively buying shiny objects and sleeping on it to see whether they are just as appealing the next day; and keeping our consumer debt load below 15% of income.

A healthy skepticism about debt is good, and it is what we should teach our children. And if you think you can sidestep this whole debate by keeping silent, know this: By teaching nothing you are in fact teaching something. Parents, if we do not discuss the positives and negatives of finances, we leave our children defenseless to figure it out on their own.

Ted Beck is president and CEO of the National Endowment for Financial Education, a member of the President’s Advisory Council on Financial Capability for Young Americans and chairman of the Jump$tart Coalition.

Why Your Teenager Shouldn’t Have a New Car

TED JENKIN: If it is your idea, as a parent, to help your teenagers set realistic financial goals and be financially successful in life, one of the worst decisions you can make is to buy them a new automobile.

When my daughter was ready to drive, I bought my mother’s 2008 Hyundai Tucson. Funny thing is that it gets my daughter to school and her jobs just as well as any other vehicle. We focus more on teaching her how good the inside of her bank account looks than how the outside of her car looks. She is already well on her way to financial independence–and not making this mistake will help your children get there quicker as well.

Specifically, here’s why a new car is such a colossal mistake:

The laws of depreciation vs. appreciation. The fact is that cars are guaranteed to depreciate. And the financial lesson you want to teach your children is to buy assets that can appreciate over time, not those that will undoubtedly go down in value. If you explained that a $40,000 car will only be worth $25,000 in two years, do you think your child would rather drive a $20,000 car and invest the other $20,000?

Teens don’t see the cost of ongoing maintenance.It’s likely that if you paid for the new car, you are also picking up the tab for the insurance and maintenance (maybe even the gas). If that’s the case, when your child has to ultimately take over these expenses they won’t have any idea of how to budget for them. And what will happen if gas goes back up to $4 a gallon? But if they had to pay for those costs with, say, the $2,500 they earned from a summer job, they may have rethought the shiny new car with the bigger price tag–and higher accompanying expenses.

You give them unrealistic growth expectations. If your child is driving a brand new Mercedes, BMW or Range Rover, what will be the growth trajectory for getting a “better” car? It is important to instill in them that some of these things can be attained by hard work when they are earned, but being gifted expensive possessions such as a fancy car is not something that is likely to happen in the future.

Ted Jenkin ( @tedjenkin ) is the co-CEO and founder of oXYGen Financial , a financial advisory firm focused on the X & Y generations. He also blogs at yoursmartmoneymoves.com .

Parents, Beware: Your Children Will Invest Like You Do

WESLEY R. GRAY: During the financial crisis, some investors exited the market at the bottom, and never came back. The scars were permanent. Many of these investors left their capital in cash and short-term bonds while the market went on to enjoy an epic bull market. One might assume that the children of these skittish risk-averse investors would recognize the folly of their parents’ financial decisions–“Hey dad, we can’t afford college because you blew it in 2008″–and move in the opposite direction.

Turns out that isn’t the case. Children tend to clone the risk-taking behavior of their parents.

To get a better understanding of how investing behavior is passed from one generation to another, consider a working paper titled, “On the Origins of Risk Taking.” Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi set up a nifty experiment that controls for innate differences in risk taking. The authors use data from 1950-1980, and look at portfolio choices of a sample of adopted children. Due to a quirk in the Swedish adoption system, the researchers can compare these portfolio decisions to those of both 1) the biological and 2) the adoptive parents of these adopted children. This allowed them to disentangle the role of nature versus nurture in transmitting risk taking behavior.

The authors found that an adult’s stock market-participation increases their child’s participation rate by 34%. In other words, the apple doesn’t fall far from the tree when it comes to portfolio construction.

What might this imply? If the parents became fearful during the financial crisis, and are modeling poor investment behavior to their children, those children may pick up a bad lesson — that is, they may panic when the markets goes down the tube. On the flip side, if Dad has the temperament of Warren Buffett, perhaps the children will follow suit.

Bottom line: Parents should recognize that their investment behavior will likely have a strong influence on the investing approaches taken by their children.

Wesley R. Gray ( @alphaarchitect ) is the CEO and CIO of Alpha Architect , a quantitative asset manager based near Philadelphia.

Why Everyone Should Fill Out the Fafsa

TED JENKIN: It’s that time of the year when parents of high-schoolers consider filling out the Free Application for Federal Student Aid (Fafsa). But many well-off families don’t even bother. They tell themselves that it will take hours to complete, they make too much money to qualify for any help, and the Fafsa is only for families who don’t have any means or resources to pay for college.

This falls into the you-don’t-know-unless-you-try category. And not trying could end up being costly, especially since some schools use the form to dole out various types of aid. Here are three things to keep in mind when filling out the Fafsa.

Don’t overstate assets. I am not suggesting at all to fabricate numbers on the Fafsa in any way, shape or form. However, many people don’t read what the form is actually asking so they inadvertently include retirement assets, value of businesses and the equity in a primary residence. By overstating assets, you can severely hurt your chances of getting financial aid.

You don’t make too much money. Income is only one of seven factors that are used to determine financial-aid eligibility. The others: Cost of attendance, dependency status, parents’ qualifying assets, children’s assets, the number of children in college and parents marital status. It’s is a big mistake to bypass filling out the Fafsa on income levels alone.

Waiting until the spring is a bad idea. Financial aid typically is given on a first-come, first-serve basis, so the longer you wait to fill out the forms the worse of a chance you will have to qualify for federal aid. Don’t wait until your taxes are done in April and you have all of your financial documents in-hand to complete the Fafsa. It’s much better to use estimates. Then, once your taxes are filed, you can use the IRS retrieval system within the FAFSA system to update those estimates. The federal aid application deadline for this year is June 30.

It takes about 23 minutes to fill out the Fafsa, according to the U.S. Department of Education. Isn’t 23 minutes worth the potential savings?

Ted Jenkin ( @tedjenkin ) is the co-CEO and founder of oXYGen Financial , a financial advisory firm focused on the X & Y generations. He also blogs at yoursmartmoneymoves.com .