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Teaching Your Children the Financial Facts of Life

twenty-dollar-billHomeESP personal finance article provided by Paul Kandel, Financial Advisor at Morgan Stanley Smith Barney LLC.

By default, parents are usually the primary source of a financial education. However, many young people may receive allowances—or even sizable inheritances—without a sound base of knowledge in saving, budgeting, investing and financial planning. To help the children in your life develop a responsible attitude about money, it might help to consider these points:

Be a Role Model
There is a significant relationship between the way children view money and your own spending habits. Instead of viewing money and personal finance as a forbidden topic, discuss your own financial goals and plans. The level and amount of information shared is up to you, but bring the younger generation into at least a portion of your plans. How you deal with money issues—from the monthly bills to planning the family vacation of a lifetime—are important and long-lasting lessons about money management and the value of money.

Encourage Savings and Investments
One of the simplest ways to encourage a responsible attitude about money is to encourage children to save. This could include designating a portion of a child’s allowance to a savings account, or making gifts of cash directly to an account in their name. Discuss account statements together, and stress the concept of “paying yourself first” with dedicated, regular deposits.

For younger children, set modest, attainable savings goals. For older children, encourage the development of a long-term savings plan for the purchase of a large-ticket item like a computer or car. Consider an occasional “matching grant” to encourage regular deposits and help keep goals visible. Take the time to explain basic investment types such as cash instruments, stocks and bonds. Make investing interesting by engaging in conversation about companies that provide popular children’s products such as toys or clothing.

Develop a Sense of Financial Empowerment
Developing responsible spending habits means encouraging well-thought-out choices. Guide and advise rather than dictate how money should be saved and spent. Keep goals visible with pictures or create charts that plot the growth of funds needed. Take children on window-shopping trips to compare prices and products and adopt the mind set that every trip to a store is an exercise leading to a potential purchase. To limit impulse buying, consider instituting a rule that prices and products are compared at a minimum of three locations.

Give Unto Others
Involve children in your financial decisions regarding philanthropy. Discuss the merits of gift applications you may have received and weigh the advantages and limits of each. Explain the tax advantages of charitable giving but, at the same time, stress the altruistic goals of giving. Even a contribution to a canned food drive or the creation of a holiday basket for a needy family can grow into a family-wide event. By helping children contribute time or money to a charitable cause, you can teach them that money is important in ways other than personal consumption. 

Developing a sound knowledge of basic financial practices can often go a long way toward helping the children in your life achieve lifelong financial security.



Paul Kandel is a Financial Advisor at Morgan Stanley Smith Barney located in New York, NY and may be reached at 212-643-5908 or http://www.fa.smithbarney.com/paulkandel/

Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. 

© 2009 Morgan Stanley Smith Barney LLC.  Member SIPC.

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