Spoil Your Kids With Love, Not Money

Child with money

We all want the best for our kids.

All too often, though, parents fail to provide one of the most important tools for real world success—financial literacy.

Worse yet, many parents are bad models, which sets their kids up for failure upon leaving the nest.

“I think as parents we are all still learning about money management ourselves, sometimes alongside our kids,” says David Reagan, senior vice president of private client services with City National Bank in Irvine, Calif. “Communication about finances in the household is sometimes more of a one-time lecture in high school rather than a process that teaches them how to save, spend and make charitable gifts as they grow.”

Here are eight common money mistakes parents make.

1. Too Quick To Help

It’s hard to watch your children struggle, especially when you have the means to make their worries disappear.

But jumping in with an offer of assistance, sometimes before you are even asked, can do more harm than good.

Whether it’s a teenager who overspent on a snowboard and now can’t go to the concert of the year, or an adult child who can’t get a loan, it’s best to let them figure it out on their own.

That teen may surprise you with a part-time job, and the older child will learn a valuable lesson about the importance of keeping one's credit clean.

“Many parents want to help their children with the down payment on their first home, but this can often create a standard of living that the child cannot afford on their own,” says Evelyn Zohlen, a certified financial planner in Huntington Beach, Calif. “Homeownership entails much more than just paying the principal and interest on a loan. The cost of insurance and taxes, maintenance and ‘keeping up with the Joneses’ in their neighborhood can quickly overwhelm the child and set them up for financial ruin.”

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Acts of generosity, of course, can also hurt your own financial future, especially if you drain your emergency fund or co-sign on a loan that your child may not be able to repay, which becomes a black mark on your credit score.

“Because they have money or the ability to borrow money, parents often feel guilty saying no to their children when they ask for help,” says Melissa Motz, a certified financial planner with Motz Wealth Management in Harleysville, PA. “Be it a 45-year old child or a 25-year old child, this sets up a sense of dependence that breeds resentment on both the part of the child and the parent.”

If you have the resources and feel compelled to intervene, at least make your generosity in the form of a loan, with a written contract, terms for repayment and interest.

2. Saving For College Instead Of Retirement

Parents who fund a 529 savings account for their kids without maxing out their own 401(k)s (and supplementing with an IRA) may never be able to retire.

“Don’t be so generous that you disadvantage yourself in your retirement years,” says Reagan. “Recognize your own limits, which include the need to save for projected expenses in retirement, like rising health care costs.”

Remember, your child can always get financial assistance for their education, but there are no loans for retirement.

3. Not Teaching Them To Save

Most parents also fall short when it comes to teaching their kids how to sock money away, says Erika Safran, a financial planner with Safran Wealth Advisors,

As soon as they start getting a paycheck, help them open a bank account and save at least 10 percent of their monthly earnings in the hope of establishing a lifelong habit.

To up the ante, some parents even agree to match their child's savings, much like an employer’s 401(k).

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Remember, it may be their money, but absent any guidance most kids will blow it on impulse buys.

“My first job in high school was as a supermarket cashier,” says Safran. “I took my weekly earnings and spent every cent by the next week. I wish my parents told me what to do because they were good savers and never accumulated credit card debt.”

4. Catching Their Fall

That said, impulse buys can be instructive, especially when your child is young.

Many parents try to micro-manage their kid’s piggy bank by not letting them spend the money they get for birthdays and holidays on trinkets at the toy store.

Let them blow it and live with their decision two days later when they see something that they can’t live without.

It’s far better than watching your big kids stumble when the stakes are high.

Most planners agree that an allowance, when your child is ready, is a great tool for flexing your financial muscle, as well as teaching them to prioritize and start to save for things they really want. (It also stops the steady stream of handouts in its tracks.)

5. Never Saying No

When you cave to your toddler who is screaming for candy at the checkout counter, you’re not only encouraging bad behavior, you’re fueling a sense of entitlement.

The same is true when you buy your teen a pair of UGGs you can’t afford, the iPhone they don’t need and the overpriced college that forces you to raid your savings.

Help But Don't Coddle

An occasional splurge is fine, so long as your child is aware that it comes at the expense of other items on their no doubt lengthy wish list.

Saying no and sticking with it, even when you know and they know you can afford it, will help them learn to distinguish between wants and needs.

6. Too Much Handholding

Parents who handle their children’s finances for them, however well intentioned, also do their kids a disservice.

If you file their taxes for them, fix their credit mess, deposit their paychecks at the bank or allow your college grad to move back home without paying rent, they’ll never gain the skills they need to become fiscally responsible adults, says Melissa Motz, a certified financial planner with Motz Wealth Management in Harleysville, Pa.

That’s not to say you can’t be there for support.

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When it’s time to file their taxes, for example, explain how the system works and show them where they can find the information required on the forms—or at least direct them to someone who can.

“Sit down and have an adult conversation about what their responsibilities are and involve them in the process,” says Motz. “They will learn that they can figure it out on their own; that they can go to their parents for guidance, but not with the expectation that you’re going to care take of it for them.”

7. Modeling Bad Behavior

Kids learn money management skills by example.

If you’re maxed out on your credit cards, blowing your budget on a brand name car, or filling up your grocery cart without comparing prices, you’re teaching your children that it’s OK to live beyond your means.

Instead, use those moments when you’re paying with plastic as a learning opportunity.

Explain (in age appropriate terms) how credit works and the consequences of carrying debt.

Smaller children can help you compare the price of milk or their favorite snack at the grocery store, and older kids can be given a budget for back-to-school shopping, as you help them set priorities.

Such skills will help them become savvy consumers when they’re out on their own.

8. Keeping Finances A Secret

There’s a limit to how much kids should be privy too when it comes to your household finances.

After all, you don’t want your 8-year old stressing over whether Mommy and Daddy can cover the mortgage.

But don’t let kids think your budget knows no bounds either.

“Discuss financial goals in the family and include the child’s goals if they are still living at home,” says Safra. “Telling them that you can afford this summer camp, but not that one is a fair statement to make and it gives them an understanding that all activities have a monetary value.”

Ironically, that lesson can be harder when you know (and they know) you can afford it.

“Kids need to see limits,” says Reagan. “They grow up thinking ‘we’re affluent’ and they are, but they don’t know that mom and dad were in a one-bedroom apartment before they came along scrapping together nickels. Let them know your family history.”

A healthy financial start is one of the best gifts you can give your kids.

Help them learn to prioritize, explain the consequences of carrying debt, and let them do for themselves—even when it’s hard to watch.

They’ll thank you for it later when their friends are wondering how they racked up $10,000 in credit card bills.