Smart Money Smart Kids: Raising the Next Generation to Win With Money

by Dave Ramsey

  When you implement those limitations in your family, your kids will learn a powerful word. It’s a word that has practically been removed from our culture today. A word that has no place in the realm of political correctness. A word that many parents today are too scared to use with their kids. The word is NO. That word is such a precious gift to children, even if they don’t realize it. Let them hear you say no, not just for stuff they want, but also for stuff you want. “No, we can’t afford it.” “No, it’s not in the budget.” “No, I don’t need that today.” Young kids usually won’t see the value in the word, but I promise, it will make an impression. They’ll start to learn financial boundaries, whether they know it or not.

  BUDGETING FOR TEENS

  Whenever I talk to a group of high school students about budgeting, I always get the same response: “Do a budget? Are you kidding me? I don’t have any money!”

  And I always say the same thing: “Yes, you do! Some of you have part-time jobs, and some of you get money from your parents. So you do have money coming in every month. Now you need to be intentional about where it goes.” If you and your teenager are talking for the first time about how to handle money, there might be some confusion about how they should budget. Some parents pay for everything their teen does, and some parents make their teens pay for a majority of their expenses. Neither is right or wrong, but there are a few guidelines to go by when it comes to your teen and his budget.

  Be Intentional

  DAVE: Remember, whether you are fourteen or fifty-four, a budget represents intentional living. In his book The 7 Habits of Highly Effective People, Stephen Covey says the first habit of people who win is that they are proactive. People who win learn to happen to things rather than to react when things happen. Proactive people are forward-thinking people, mature people, so they are seldom victims of circumstances. Teaching children to budget is simply teaching them to plan. John Maxwell says, “A budget is telling your money where to go instead of wondering where it went.” Zig Ziglar used to say, “If you aim at nothing, you will hit it every time.” If your three- or thirteen-year-old child looks at you with a confused expression when you ask where her money went, you know that she was not intentional or proactive and she did not have a plan.

  Learning to look forward and plan is a skill set that will translate into every area of your children’s lives: Planning out the writing of a term paper so they are not up all night the night before. Planning what classes to take in college to ensure they graduate in four years. A young gentleman planning an evening with his girlfriend and communicating that plan to her father when he picks her up at her front door. These are impressive kids you are growing. Children who can learn to plan and be forward-thinking are more poised and confident because life is not always happening to them—they are happening to life.

  The Five Foundations

  RACHEL: Younger kids have simple spending, saving, and giving goals. That’s why the Spend-Save-Give envelope system works so well for kids. But as your child hits her teen years, things start to get more complicated. To keep your teenager focused on the right priorities, we’ve come up with five specific steps to help her take control of her money and look toward the future. We call these The Five Foundations:

  THE FIVE FOUNDATIONS

  1. Save a $500 emergency fund.

  2. Get out of debt.

  3. Pay cash for a car.

  4. Pay cash for college.

  5. Build wealth and give.

  The first foundation is all about emergencies, as we discussed in Chapter 4.

  We recommend teens put $500 in the bank just for emergencies. Go back and review that part of Chapter 4 if you need a reminder on what an “emergency” might look like for a teenager.

  The second foundation is crucial for long-term success: Get out of debt. We’ll talk about debt in the next chapter, but for now, let me clear it up for you: Debt is owing anything to anyone for any reason. That includes car loans, credit cards, and yes, even student loans. Your child needs to know as early as possible that debt in any form will wreck his future financial success.

  The third and fourth foundations deal with paying cash (and avoiding debt) on the two biggest expenses a teen and young adult will likely face: buying a car and paying for college.

  The fifth and final foundation is the most important and usually the most fun: Build wealth and give. For teens, this mainly means preparing for future wealth building. If your child is busy saving up for a car and preparing to go to college, then he may not have money left to invest in a Roth IRA. That doesn’t mean you shouldn’t start the conversations, though. Remember, my dad spent time with me explaining how a mutual fund works. That was back when I was in high school, years before I ever invested a dime of my own money. Those conversations gave me a mindset of investing early on, so when I started my first real job out of college, I knew exactly what to do.

  The value of The Five Foundations is that they teach teens how to prioritize their budgets. They lay out a sensible goal-based plan that comes alongside their monthly budgets and shows them where they’re heading. Most of the students I talk to don’t know where they’re heading. They’re wandering through their teen years, letting every dollar they have slip through their fingers. Worse, they’re losing the best opportunity of their lives to learn how to handle money, save themselves a world of trouble, and set themselves up for incredible success.

  Open a Checking Account

  By age fourteen, it’s time for your child to graduate out of the Spend-Save-Give envelopes and into a real checking account. That may sound scary, but it’s an important step. Keeping up with a checking account as a teenager can teach them so many lessons. They’ll learn how to interact with a bank, check their account online, actually reconcile their account, write checks (yes, they still need to know how to do this), and take responsibility for their money in a more adult manner. Sure, they may make some mistakes along the way (just like I did), but this is the best time in their lives for them to make those mistakes because you’re still there to catch them when they fall.

  Here’s what my parents did for me, and it’s what I suggest for you if you are financially able: Think about all the money you spend on your teenager each month. This includes things like clothes, club and sports fees, lunch money, and even car insurance if your child does not pay for that himself. If you’re doing a regular, monthly household budget, you should already know what expenses are coming up for your child. But instead of simply paying for all those things yourself or giving him a check for each one individually, I want you to add up the total of all those things coming up for the next month, deposit that one lump sum into your teen’s bank account, and then let him pay for each of those things out of the account. That means managing the money—doing a budget and making sure the money does exactly what it’s supposed to do—becomes your teen’s responsibility, not yours.

  Coach Your Kids

  DAVE: I agree that budgeting and managing money should be the teen’s responsibility, but your role is to watch over your children’s shoulders until they prove competency. You do not simply open a checking account, throw money in it, and hope for the best. You would no more do that than toss them the keys to a car, having never seen them drive. Watch them, teach them, and gradually back away as they prove they can handle the account and you see that their decision-making skills are developing.

  Balancing their checkbooks (reconciling the account) once a month, every month, was a mandatory chore for each of our teens. I looked over their shoulders to ensure that the account was reconciled. This gave me the opportunity to see every transaction (I could also view these online during the month if I wanted), and it gave me the opportunity to coach them on doing a better job managing the account. Were all the deposits and debit card transactions recorded? Did they know how to connect online for easy reconciliation? We never even showed our teens how to check their balances throughout the month. They didn’t need to because they kept track of their
transactions, so they knew what their balances should be.

  It is your job as the parent to teach, coach, and make sure your child knows how to handle a checking account before she leaves home. All three of our children have attended four years of college living on what we budgeted monthly. We almost never had emergency calls for money from our college-aged kids. Why? Because they managed their own accounts under our wing all through high school, and when they went away to college, they were already better at planning for expenses, budgeting their money, and balancing checkbooks than 98 percent of American adults.

  Provide a Safe Place to Fail

  RACHEL: Sometimes when I explain the checking account method to parents, I watch their jaws drop as they say something like, “You want me to do what? But if I put all that money directly into their account and they can do whatever they want with it, they’ll blow all my money!” This is a scary idea, I know. But just think about it: Your child is going to be responsible for his or her own bank account someday. What’s scarier: you teaching them to do it now under your supervision, or them learning it on their own? They are going to have free reign to make all kinds of really, really stupid decisions and huge mistakes! But here’s the good news: They’ll get to do it in the safety of your home and under your protection. This is truly the safest time in your child’s life to learn how to master a checking account. Trusting them with your money now may seem a little risky, but it’s nowhere near as risky as sending them out into the world with no clue how to manage an account with hundreds of dollars in it. Dad always told us that if we were going to fall, he wanted us to do it while he was still there to catch us. That’s a great plan, parents. Besides, we’re not just giving them a big pile of money with no instructions, right? We’re going to teach them how to do their own budget.

  The Dangers of Debit Cards

  DAVE: I am from the check generation. We wrote checks at grocery and department stores, and we paid the electricity and water bills with checks. Now most of us pay our utilities and other bills online. In fact, our culture today uses debit cards for purchases more than both checks and credit cards combined. When our kids opened their own checking accounts and became responsible for managing their spending, I was horrified that they never wrote checks; 99 percent of their transactions were using debit cards. I wanted them to learn to write checks, and they did. But the methods in the marketplace had shifted, and I soon accepted that the debit card was the new way of life.

  Whether your teen uses checks or debit cards, the key is to make sure they emotionally feel the money. Talk with them regularly to emphasize that this is real money, not just digits in an account. When teens do not handle actual cash, there is a huge danger of out-of-control spending because money doesn’t feel real to them. It’s just like another video or computer game. But debit card transactions take place with real money, so when you see spending that is over the top, step in and course-correct. Remind your teen of the emotional danger adults face as well when using debit cards or credit cards, and how not using real cash often causes them to overspend.

  On Paper, On Purpose

  RACHEL: Whether he uses debit cards, checks, cash, or online payments, home base for your child’s money will be the monthly budget. We recommend the same kind of budget for teens that we do for adults: the zero-based budget. That means you want to spend every single dollar on paper, on purpose, before the month begins. That’s the best, most effective way to budget at any age. When your income minus your expenses equals zero, you know for sure that you’ve accounted for every single dollar. If you leave any money sitting in the account without actually assigning it to a category in your budget, it will disappear. A budget should tell your money what to do.

  Having the budget discussion with a teenager can be a challenge. Trust me, I’ve heard all the excuses. “But Rachel, I’m in high school. My entire net worth consists of a half-empty Starbucks cup and an iTunes gift card I got for my birthday!” I get that. But if your teen has a part-time job or actually works like we teach, and you’re putting money in her bank account for her own monthly expenses, then she’s going to have a big pile of money to manage. That means she must actually budget that money, just like you and I budget our paychecks. Getting into the habit at this age reinforces the fact that budgeting teaches boundaries.

  The simplest starting point is a basic paper budget. For years, Mom and Dad ran our entire household budget on nothing more than a yellow legal pad. You can get a lot more sophisticated than that if you want to, but the truth is, a piece of paper is really all you need. We even provide a basic Student Budget form in the back of this book to help you and your teen get started. Whether you use our form, software, online tools, mobile apps, or even a legal pad, the process is pretty simple.

  At the start of the month, your teen should add up all the money she will earn or receive that month. This includes income from work outside the home, the commissions she still may earn for chores, the money you add to her account for her basic expenses, and money she receives from any other source. Add all that up and write the total at the top of the page. That’s your child’s income. That number represents the total amount of money your teen will have available to spend that month, so make sure it’s correct.

  Then she will write down every single thing she knows she’ll want to spend money on that month. We’re talking everything here, from clothes to club fees to gas for her car. If she plans to see a movie with her friends, it should be on the paper. If her best friend has a birthday coming up and she knows she’ll buy a present, it should be on the paper. Help your teen think of everything she plans to spend; if it’s not on the paper, it’s not in the budget! It’s also smart to have a miscellaneous category for things that pop up unexpectedly, expenses she may not have been able to plan for.

  It’s worth noting that we always put “Giving” and “Saving” at the top of every one of our budget forms. God owns it all, remember? That means giving should be the first thing we do with our money. After that, your second priority is to pay yourself, so saving money goes next in the budget. If those two categories are not at the top of the budget, many teens—and yes, even adults—say, “I can’t give or save because when I get to the end of the budget, there isn’t enough money left!” I simply show them that their budget is upside down.

  DAVE: The beauty of teaching children to plan their giving and saving is that it actually causes them to give and save. We never give or save until that becomes a bigger priority than the worries of the day. And giving and saving almost never become a priority until they become part of our plan to win with money. Few people give large amounts of money on impulse. Few people save every month in their Roth IRA on impulse. These are acts of maturity. Adults devise plans and follow them; children do what feels good. As a parent, I tried to raise my children to be adults, not children in oversized bodies. So as they aged, Sharon and I progressively entrusted them with more and more adult-like responsibilities, ones that demanded maturity.

  RACHEL: Once your teen has written down all her expenses, it’s time to do the math. Subtract all the expenses from the income. If the expenses are more than the income, then she’s spending more money on paper than she has coming in. Help her go back and adjust the categories by trimming the budget a bit. If there’s money left over, then she needs to go back and add to a category or double-check The Five Foundations. She can put the money toward whichever step she’s on. If her emergency fund isn’t up to $500, then she can build that up. Or if she is ready to save for a car, the money could go in her car fund. The goal is to get that number at the bottom of the page to zero. That means every dollar is accounted for on paper, on purpose.

  DAVE: Keep in mind that you are trying to get a fourteen- or fifteen-year-old to engage in an adult activity. Some days getting them to dress themselves is a challenge. As you push through this, remember that you are applying continuous pressure on them to do a budget monthly. This is not a one-time meeting and then they’ve got it. The
y are teenagers, which means you may sometimes seriously consider murder versus coaching. Drama, drama, drama. You cannot discuss abstinence one time and expect them to stay out of the backseat of some car. This is ongoing, and you may not know if you got through until they are twenty-five years old and they wake up and realize you were not as mean or crazy as they thought. I was twenty-four before my parents became intelligent again. Persevere. Keep pushing. Sometimes you’ll feel like you are talking to a thirty-four-year-old and sometimes you’ll think you are talking to a four-year-old. But don’t quit.

  Budgeting for Upcoming Expenses

  RACHEL: The monthly zero-based budget is one part of your teen’s financial plan, but we’re not quite done yet. Now we need to see how to plan for big expenses that are coming up a few months down the road. Say it’s March and your teen is already thinking about Christmas presents for her friends. Or maybe it’s January and she’s already dreaming about that perfect prom dress. We call those things “upcoming expenses,” and they have a place on the monthly budget too. Check the back of this book for our Upcoming Expenses form to help plan for those events.

  Here’s how it works: Have her write down the item (prom dress, spring break trip, etc.) and how much it will cost. Then she’ll write down how many months she has to save up for it. Divide how much she needs by how many months she has, and that shows your teen how much she’ll need to save every month toward that goal. That monthly chunk should go into her monthly budget so she’ll have the money on hand when the time comes. If it will take more than a couple of months to reach the goal, then I suggest putting that money in a separate savings account. You want it safely away from the regular monthly spending money so she doesn’t accidentally spend her spring break money in January. I’m not saying she needs a separate account for every savings goal, though. A single savings account for all of the individual upcoming expenses will work fine.