The third annual Personal Finance Index (P-Fin Index) released by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) last April, showed that still many Americans continue to lack the personal finance knowledge necessary to make sound financial decisions. And this lack of financial literacy is not just an American problem. In Germany almost 15% of young adults (under 30) were classified as being heavily in debt by Creditreform 2018, and about 60% of German households has less than € 3,000 in savings at their disposal according to the Onlinebank ING-Diba. Almost a third hasn’t saved anything at all.
Taught by Example
The way we think about money, the way we handle our money has been taught to us by our parents. In many cases this was not an aware teaching/learning process. We learned by example: by what we heard, by what we saw. Think of it, regardless of the degree of financial education you received from your parents: are your money management skills similar to that of your parents?
Sandy, financial assistant at Beacon Global Group Europe, explains: “I definitely had some form of financial education although it wasn’t that deliberate. I was given pocket and clothing money and was allowed to make my own decisions (although often after some discussions). From an early age I was an observer and I had a good sense of responsibility. I saw my mother keeping a housekeeping book. My father had his own business until I was eleven, and I recall him doing his administration on this big calculator during the weekends. I saw them opening their post and filing away their bank statements and other financial post. Both had folders for their bank affairs, insurances, pay slips and pension plans. Everything was neatly organized. With both of them.”
Sandy adopted a large part of her parents’ money management skills, when it comes to organizing and saving for example. But also, when it comes to “risk taking”. She remembers her father losing money in an investment and how this resulted in a fear of ever investing again. A fear she took on as well: better put your money in a savings account with hardly any interest than to invest that money and risk losing – part of – it.
First Things First
Sandy’s is just one of many examples in which children – when not receiving actual financial education – still copy their parents’ behavior. An article in Der Spiegel of March 2019 shows a different story, that of young man that copied his single mother’s spending behavior and finds himself in debt as a result of it. These are just two examples that show the importance of financial education. Real financial education. Naturally, you cannot teach what you have not learned yourself. So, the first step in educating your child(ren) is educating yourself. Being an expat, an international, and being higher educated, you might think you know all there is to know about money management. But be frank: do you really? Are you as financially healthy as you think you are? As financially free as you’d like. What are your thoughts, your beliefs when it comes to money?
Evaluating Your Own Belief System
Let’s examine your own belief system first. Are your thoughts about money and wealth supporting, or do you have some limiting beliefs when it comes to the possibility of living a rich life?
Perhaps you are not even conscious of these beliefs. Let us ask you this: Have you ever told your children: “We could never afford that! That’s too expensive for us. You cannot have everything in life!” In the Netherlands they even have the following saying “Born for a dime, you will never amount to a quarter”, representing a particular mentality with regard to money and obtaining wealth, originating from history’s social class system. A belief that is still adopted by a large part of the Babyboomers, and to a lesser extent inherited by their offspring. With limiting beliefs such as “My family has never been rich” and “The rich get richer, and the poor get poorer” you give up responsibility for your own financial wellness. Maybe you think it’s selfish to want more money, or you don’t think you can be both rich AND happy AND healthy. Think about what money means to you, whether you consider yourself financially free – and why – and what has been or is preventing you from reaching your financial goals in life.
Taking the Reins of Your Financial Health
Evaluating your money belief system, you might have come to the conclusion that you don’t always own your financial decisions. Have you paid off all your debts? Will you be able to pay for your children’s education? Are you setting enough money aside for unfortunate – small and larger – events or retirement?
Start adopting a new, supporting, belief system. If necessary, seek assistance to let go off limiting beliefs. After all, it’s the basis of financial independence. Yours, and eventually your children’s. You cannot teach, what you don’t know or understand. And you cannot inspire your kids to do something if you don’t really believe it yourself. So, take the reins of your own financial health, educate yourself and pass your financial knowledge on to your children. Be open and frank about what you’ve learned, about how you got where you are today.
Educating Your Children
While continuing your own financial education in order to reach your – and your family’s – financial goals in the future, you can start with educating your children. We give you some tips to get you started:
Give them pocket (and later: clothing) money
Six is a good age to start giving them cash pocket money. With clothing money, you start when they start high school.
Having some money of their own will teach them to make their own financial decisions – naturally with your guidance – and will teach them about the value of money. Start with giving them real tangible money and when they are older you can also give them their money digitally, so they also learn about online banking and how to manage a digital wallet.x
Financial Education is Fun!
Make this learning process fun! Buy a piggy bank together, play games that are about handling money e.g. Monopoly or check out the internet for alternative games, make a scan of coins and bank notes, print and plasticize it for them so they can play shop with friends, make a calendar with them to hang in their room and note the dates they will get their pocket money, et cetera. Get creative and make it fun! After all, they are not in school. Yet, it’s one the most important things they’ll ever learn.
From the Beginning Make Saving a Priority
Upfront, think about how you want to handle the subject of saving. Do they have to put part of their pocket money aside? Will you set a minimum or can decide themselves? Are they allowed to save for a larger purchase, or will this money be deposited in the bank? The way you approach this will change with them getting older. However, make sure it will be part of the routine. As previously mentioned, most people only have a limited amount of money in their savings account, often not even enough to cover a month’s worth of living costs.
The Value of Money
Children need to learn about the value of money. It already starts at a young age. A euro won’t buy them a soccer ball or a Barbie doll. They will learn to understand that they need to save money, if they want to buy certain things. This isn’t an easy process, which could possibly lead to some discussions with your kids. After all, keep in mind that they are confronted with clever commercials and ads every day of things they will want to have, and do not underestimate the social pressure your child is under.
Learning the value of money can only be done if you don’t go off and buy them everything they want. If they really want an expensive toy, for example a game station, sit together and discuss how your child will be obtain this. Again, make learning about what money can buy fun! Make a budget together, calculate how many weeks your kid would have to put some money aside, and also think of ways to achieve this goal quicker. For example, they can do extra chores with which they earn some money. Or their birthday is coming up and they could ask for money or gift cards, which they could use to buy the game station.
Get Handy with the "Handy"
How old were you when you got your first cell phone? Nowadays, kids are as young as 6 or 7 years old when they get one, and by the age they go to High School less than 5% does not have a “Handy”. A good learning opportunity for you and your child. Will he or she get one of your old mobile phones? What are the conditions to get a new one? Do you get them a prepaid or subscription? And what happens when they overspend? Introduction of the phone into their lives will ask a lot of their sense of responsibility.
Let Go of the Reins
The older they get, the more responsibility they can handle and the better they can manage their money. When they are in High School they will have their own phone, have access to their bank account with a bank card, maybe even have a side job earning them some money,… time for you to let them do their own thing, emphasizing of course that you are there for them, that they always come to you for advice. It’s time for them to make their own financial decisions.
Fall and Rise
Making mistakes is inevitably part of the process. Naturally, you want to prevent your kids from making financial mistakes but remember this: overprotective parents are the number one obstacle in achieving financial independence. They will need to learn, and the only way for them to do so is in practice. Buying something that does not live up to its expectation, salespeople misleading them, impulse and bad buys, disappointments: we have dealt with it at some point or another. They will too!
Practice What You Preach
And the circle closes again… it all begins with you – and your partner. There are no bigger examples when it comes to money management skills than you, and what you show your kids. Children learn by example, they copy what they see, they will imitate your behavior, they will adopt your beliefs. Always be aware of that! Whether you will raise those happy financially literate children depends on you.
Beacon Financial Education was created with the purpose of providing individuals living abroad with the information they need for financial control, stability and simplicity. They regularly organize webinars on various financial topics for American expats and internationals living in Europe.
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Beacon Financial Education does not provide financial, tax or legal advice. None of the information on this site should be considered financial, tax or legal advice. You should consult your financial, tax or legal advisers for information concerning your own specific tax/legal situation.