Thursday, 22 December 2011

Should parents open their financial books for their children?

Money is a touchy subject in itself. To that pot you add the family dynamic and you have yourself one spicy drama. A lot of families don't really talk about money. Whether they have a little or a lot. And we always wonder what the best strategy is.

Kids often want to know everything - finances included. They want to know how much you make, how much you have and I guess how much they will have when you pass on. But should parents share all this information?

When kids are young and dependent on their parents, I don't think they need to know any more than is necessary. I think it is important to share with your kids if you have little or no money. That way you can temper their expectations. And more importantly teach them the value of every dollar. They can appreciate that while the parents may be able to provide the basics, there isn't much around to throw away. And this is a valuable lesson.

If you are the stereotypically middle-class parent, making enough to meet the basic needs of your family with some left over for the future, perhaps all the kids need to know is that you have a comfortable financial situation but not enough to blow it on regular ski vacations and spa retreats etc.

What if you have done well and are perhaps in the high income low spending category with a decent net worth and no financial troubles to speak of? Perhaps you are saving well for retirement and at the same time have your home paid off (or are close) and are also saving for your kids' education. How do you teach fiscal responsibility to your kids? Even in this situation, I would simply indicate to the kids that there is enough for needs but not necessarily for all kinds of wants.

If you see all the scenarios above, it is clear that I tend to be in the "its better to under-represent your financial situation to the kids" camp. And of course this is coloured from my personal experiences and situations as I grew up. But the reasoning is simple ...

You want your kids to value money. You want them to think before they spend. You also want them to not spend what they don't have. As kids, they do not have a lifetime perspective. Talking about retirement savings and saving for emergencies is pointless because those are alien concepts for a teenager.

You sort of want them to be careful with money while still being there for them if the situation demands it. For example, just because my child has $500 saved from gifts or baby sitting or lawn mowing cash, its not necessarily the best idea to blow it all on an iPad when there are better uses for that money. On the other hand, if its time to go to University and it would be beneficial in the long term for them to go to a pricier place or take a more expensive / longer program, you don't want to force them to take the local admission or a shorter course simply to save money.

So there is a delicate balance there. I would not want to underplay my situation so much that they stop considering options just because of the money. But at the same time I don't want them to assume that I have the Rockefeller fortune behind me and that they should go and lead the most expensive life.

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