According to the USDA Expenditures on Children by Families report released in August 2014, it will cost a moderate-income, two-parent family about $245,340 to raise a child born in 2013 through age 17, not including college expenses.* But if current trends continue, very little time or money will be spent—by parents or the education system—teaching the child about managing money and paying taxes before the harsh financial realities of life confront them.
It’s been likened to pushing a person out of an airplane without teaching them to use the parachute.
They might be able to figure out what to do while hurtling to the earth. Better, though, to have learned the basic principles of using the device before jumping! By the time they reach their mid-twenties many young adults have racked up a large amount of unnecessary debt before they even know what happened.
The best time for a young person to learn about money and taxes is while living with their parents. If you’re a parent, teach your child the basics. If you’re a young person, ask your parents what’s involved in maintaining a household. The details about how much the different utilities costs each month and how much it costs to run a car, buy food, and pay for the rent or mortgage may sound like it would be boring. But when you leave home, you’ll have to pay for such things. Parents, explain the bills and actually show them to your children, reminding them that they helped to incur them. Children, listen closely as your parents explain how they develop a budget and stick to it. Teaching the basics also involves the value of comparing prices when shopping before you buy. Help your children to learn that if you waste money, you also waste the time it took to earn it.
Part and parcel to teaching the basics is being able to say “no” when your child asks you to buy them something that your budget won’t allow. Explaining this to your child will teach them self-control, which is vital to good money management. Interestingly, sometimes your budget will allow it, and yet you may still say “no” to your child. What are you teaching them, then? The important lesson that being happy and content is not dependent on getting everything you want. This can be illustrated by two different families I met within a 1 week period. The first family was better off materially and quick to give their child everything asked for. The child was surrounded by every toy imaginable, but was extremely bored and whiny as he spent several minutes with one toy, and then another, never really finding any contentment. The second family had less materially, yet their child would play for hours with an empty cardboard appliance box.
It’s also important that you explain to your children that every year when the income tax deadline comes around we all have the responsibility to file and pay on time. I can’t tell you how many people I see coming into our tax practice each year, both young and old, who either haven’t filed their taxes for years or who owe tens of thousands of dollars in income taxes, penalties and interest because of not fully understanding their obligations to the tax system. Teaching them the basics early on can help them to stay compliant with the IRS for life. That’s a good thing.
Learning the basics while still living with your parents will help prepare you for when you move out on your own. But there are still challenges that you’ll need to recognize. First, if you receive money from an allowance or earn money from a job, a large percentage of your money will be available to you to spend at will since you’re still living at home and your parents are paying most of the bills. Spending at will can be a thrill. But this will drastically change when you’re living on your own. How much better it is to put limits on your spending habits even while living with your parents, instead of waiting until you leave home and learn the hard way after running up unnecessary debt.
Second, your friends may pressure you to spend more money, especially if they know you have money saved. Financial advisor Suze Orman warns: “If you feel the need to impress people with what you have rather than with who you are, you are at high risk for credit card abuse.” So be sure to budget your spending ahead of time and stick to it. Pay your debts. Stay in control. If available, having your payroll direct-deposited into your bank account will help. What will help, too, is shopping with friends who are careful with their money and who will encourage you to be frugal.
Bottom line: Teach your children the basics of managing money and paying taxes while they are living with you at home. Children, learn the basics, while at the same time recognizing the challenges you will face when you leave home.
* The Expenditures on Children By Families, 2013 report can be found at http://1.usa.gov/1PASUfC