What’s important to you? For some people, it may be a nice car. For others, it may be spending time with family or going on a nice vacation. You prioritize your spending even if you may not realize it. You prioritize when you make decisions about where you can splurge and where you can cut back. You know the work it took to earn your money, and you don’t want to squander it on things that aren’t important to you.

Children don’t have the opportunity to develop this mindset until they experience financial responsibility. When someone earns his or her own money and sees what it takes to earn and spend that money, an appreciation is built for the value. As a part of growing up, it’s important that we begin thinking about the future, not just the present. How do we want to live our lives and what goals and priorities are important to us?

Sacrifice

As the Rolling Stones once said, “you can’t always get what you want.” It’s simple, but it means a lot.  I never truly appreciated what I had until I was given financial responsibility for the things that I wanted. As a high schooler, I loved playing video games online with my friends. It cost sixty dollars a year to play online, and my parents decided they would no longer pay for the access.

I was faced with a decision: sacrifice playing online video games with my friends or sacrifice my time to work and pay for it myself. This led to my first job as a summer camp counselor in my town. Having my own income (however small it was) paid for my online membership as well as provided some extra to buy candy at the gas station and ice cream with cute girls. I felt proud to be able to earn my own money. Money gave me the freedom and purchasing power that had previously required the consent of my parents. A little sacrifice and struggle can go a long way.

Ownership

All children begin by being dependent on their parents for financial support; the problem is, some never lose this dependency.

Start early to develop good habits. Giving your children small financial responsibilities for things they want can start as early as grade school. One idea is to have three jars to split their money evenly. One jar is for spending, one is for saving, and the last is for giving. Having your child split an allowance or gifts into these jars teaches discipline as well as the satisfaction of seeing savings grow and giving to others.

As your children grow, gradually giving more financial responsibility for things they want or need is a good idea to develop discipline. If they want a phone, they can pay the monthly bill. If they want a car, they can pay for the gasoline and insurance. If your child really wants something, he or she will find a way to work for it or be more selective with their birthday/holiday gifts and allowances.

Although it is possible to work part-time and go to school, many parents would rather have their children focus solely on their education without having the extra burden. It’s nice to fund your child’s college life with some extra money for social spending but providing a limitless pool of money may create unrealistic financial expectations for the future. Having your child take ownership of some financial responsibilities can help ease the way to financial independence.

Appreciation

What goes through your head when you’re about to make a purchase? There are consequences to spending. Much of our spending is positive, but other spending is to satisfy temporary desires or temptations. Ray Dalio, one of the most successful investors in history, notes that many people only think of the first order consequences to an action. For example, take eating fast food. A double-double, animal style burger with fries and a soda from In-N-Out is a cheap, delicious, and easy way to avoid having to go grocery shopping and preparing a dinner at home. The first order consequence is that you’re saving time and have a delicious meal; everything is great! What follows, the second order consequence, may be stomach pains and feeling weighed down from a large, unhealthy meal. Finally, the third order consequence could be high cholesterol or becoming out of shape from eating too many burgers and fries.

The same concept can apply to money. Satisfying first order consequences with your spending without considering how these decisions will affect your future can lead a person down a slippery slope. It is natural for young people to think this way–there are so many things to do and buy!

However, it opens a person’s eyes when spending money is connected to earning it. I went from wanting and thinking I should have everything as a child (the “but my friend has it!” attitude,) to thinking about spending it in terms of the work needed to get it. “This video game costs $60–that’s equivalent to six hours of work. Is this purchase worth six hours of my time?”. The mind becomes trained to think outside of the first order consequence of just wanting the game to the second order, which is the hours I’ll have to work to make that money back. Unfortunately, cash doesn’t grow on trees and thinking beyond immediate desires when making financial decisions is the first step to appreciating the value of money.  It’s never too early to start.

By William Masse, Associate Advisor

Download the podcast featuring William as he discusses this same topic, Preparing Your Child For Financial Independence. You can also stream it here or on your favorite podcast app.

William Masse Team Hewins Associate Advisor

You may email William here.

Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.

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