By Jenna Goudreau, Forbes Staff Self-made millionaire and personal finance expert David Bach created a career based on what he learned around the dinner table: money. His grandmother helped him buy his first stock in McDonald'sat age 7. His dad was a financial advisor. Now, the author of bestsellers like Smart Women Finish Rich andDebt Free for Life hopes to instill the same money curiosity in his 7-year-old son.
Bach started teaching his son the basics as early as age 3, and now he owns stock in Disney and is saving up to purchase shares in Apple. Recently, Bach mentioned to him that pop star Justin Bieber reportedly earned $100 million last year. His son’s response: “Wow he’s going to owe a lot in taxes, huh?”
One thing is clear to Bach: “Kids soak up everything.” And when it comes to money, he says, most parents are teaching the wrong lessons.
According to a 2010 survey by the National Foundation for Credit Counseling, conducted by Harris Interactive, 34% of Americans (77 million people) gave themselves a grade of C, D or F on their knowledge of personal finance. Meanwhile, 41% said they learned about money from their parents.
Financial experts say communicating with kids about money and leading by positive example is crucial to their children’s financial future. However, parents frequently send mixed messages that threaten to stunt their kids’ financial growth. Here’s what not to do.
Theresa Harezlak, a financial advisor with Savant Capital Management and a mother of two, says the biggest money mistake that parents make is silence. “Every time my kids go outside I tell them to be careful crossing the street and not to talk to strangers, but we never talk about money.” In reality, she says, the chances of her children being abducted are very low, but the chances of her children using money are certain.
According to Harezlak, few parents actively talk about how money works or share details of their household finances with their kids. In some households, parents squash money talk, saying that it’s “rude” or “not your concern.” She advises parents to use every opportunity to teach their kids how to use and save money, starting from as soon as they can understand.
Meanwhile, Bach says the No. 1 concern for most Americans is their finances. “Millions of people have lost their jobs and are in jeopardy of losing their homes,” he says. “Don’t stress out in silence.” When parents are worried about money but not communicating their financial situation, children pick up on the anxiety and associate it broadly with finances. Rather than learning money lessons from their parents’ mistakes or situation, children instead learn that money is “bad” and “stressful.”
Teach The Wrong Lessons
Many parents are actively teaching their kids about money—but their children are learning all the wrong lessons. Bach believes the biggest mistake that parents make is not saying “no.” He says, “I’ll go to someone’s home who is $50,000 in debt, and their kids have piles of toys.” This creates children who don’t know how to hear the word “no,” he says, and they become adults who want instant gratification and live beyond their means. Plus, they miss crucial lessons like budgeting, prioritizing desires and saving for something valuable.
It’s not just things that are the problem. Harezlak says that parents also teach their kids through their own actions that spending is fun. Family outings might revolve around expensive 3-D movies, dinners out, pricey vacations or trips to amusement parks. Kids may also see how shopping sprees and new gadgets make their parents happy, passing on a consumerist mindset that leads them to associate spending with happiness. She suggests parents also emphasize free or low-cost activities that teach kids to value time spent together rather than money spent together.
According to Stuart Ritter, a financial planner with T. Rowe Price, one of the worst mistakes parents can make is saying one thing and doing another. “Kids pick up everything you do,” he says. If a parent preaches the benefits of savings but then has nothing saved when the car breaks down, the child learns that saving isn’t that important. “Parents have such great influence,” says Ritter. “You can’t have just one talk. It’s the accumulation of all the day-to-day activities.”
Lead By (Bad) Example
Because children are more likely to learn from what their parents do more then what their parents say, Ritter believes setting a bad example is one of the biggest mistakes a parent can make. Credit use is rampant, he says, and many kids may believe the magical card will grant their every wish. They may watch a parent easily swipe the plastic or open up high-interest department store cards, without realizing that a bill will be sent at the end of the month.
Ritter once talked to a class of college students, and a 21-year-old didn’t understand the concept of carrying a balance. Her parents had never explained how her credit card worked and paid her bill every month.
At the same time, Americans’ rate of savings dipped as low as 1.5% in 2005, according the U.S. Bureau of Economic Analysis. It has since climbed to about 5%. If parents aren’t saving, their children won’t learn how or how much is enough.
In fact, kids may make assumptions about gender based on the way their parents divide financial tasks, says Ritter. If Mom is always doing the grocery shopping and Dad takes care of all the investing, kids might believe they are inherently good at those tasks and that it’s the norm in every household.
The easiest solution, says Ritter, is to explain in detail how money works, why you do things the way you do, lessons you’ve learned about money and goals you’ve established. Then, keep talking. Try to mirror the behavior you want your children to learn. Eventually, they may be the next generation’s self-made millionaires, talking money at the dinner table.