How to Teach Adult Children About Financial Literacy

Many adult children moved back in with their parents during the pandemic. Some haven’t moved back out. Others are still on their parents’ phone plans and streaming media plans. Some parents are the “emergency fund” or “bank” when their adult kids overspend. Many of my clients ask me, When do I make them “adult”? A lot has to do with teaching financial literacy.

True story: I am a wealth manager, and I sent my oldest daughter off to college with a debit card. We had agreed to a monthly “allowance” for things that were above and beyond tuition, room and board — mainly for her to go out with friends, order in pizza, things like that.

The second week of school she called from the bank to tell me the ATM card was not “working," meaning she wasn’t able to withdraw funds. It turned out she was trying to take out more than was in the account! She had spent 90 percent of the monthly funds in two weeks. I explained that the cash doesn’t regenerate automatically at night in the machine.

Inquiring further I was told about a very cute jacket she saw and "had” to have. I realized that while I may have taught her about finances, I had failed to teach about budgeting.

Teach your adult kids how to budget.

Most people know what they make but don’t know what they spend or what they spend it on. There are many great apps on phones that can track spending. Teach your children to regularly look at their bank account and track their balances so that they don’t end up trying to take out more than they have and then tell you their ATM card isn’t “working."

Their budget should include all mortgage/rent, car and credit card payments, anticipated taxes, home maintenance, and personal and household spending such as groceries, clothing, laundry, health care, insurance and entertainment. Also important to track are Lyft rides, DoorDash, Uber Eats and transferring funds to friends on Venmo and Zelle.

If your young adult is in the workplace, her budget should include everything that is deducted from her paycheck so that she is budgeting on an after-tax and after-deduction basis. The budget will show whether she can sustain her current lifestyle or will need to increase income or decrease spending. Awareness is key and will show where to make improvements.

Credit card interest adds up.

Teach your child not to pay only the “minimum amount due” on credit cards. An adult child of a client of mine came to a meeting very proud that she was paying the minimum due on her credit card to have a great credit rating. I explained that by just paying the minimum due, she was giving 20 percent in interest to the credit card company every month.

Reexamine the budget regularly.

At the end of the year, after increasing their vigilance and awareness on spending, your children can refine their budgets by looking at year-end credit card and bank statements.

If they find they have money left over each month, encourage them to put that money to work. If they do not have money left over, they need to retool their budget and see where they can cut back. Can they eat out less? Can they buy fewer clothes? Are they going to too many costly events? Can they have potluck dinners at home rather than spending money at restaurants?

Start saving and investing.

If they do find they have money left over each month, have them put a line item in the budget for savings and have that amount automatically deposited into their savings or investment account each month. Forced savings that are not seen are less likely to be spent!

It's never too early to communicate the importance of savings. First make sure they are maximizing retirement contributions to a 401(k) or IRA. Many employers will match contributions up to a certain percentage of compensation.

If they are starting to earn a good amount of money, have them work with a wealth manager and create a financial plan. This plan will be the road map of where they are today, what their needs, wants and wishes are, and how to get there.

The plan will include how to invest their assets to last and grow throughout their lifetimes. It will consider what cash they need day-to-day, month-to-month and year-to-year. It will consider what future expenses (such as health care and long-term care) are likely to be. It will include the fact that people are now living much longer lives.

If the adult children are in their 30s and 40s, they still have a longevity horizon of 50 to 60 years. They may be advised to invest aggressively, especially in their retirement accounts. If they contribute regularly (monthly or with every paycheck), even with dips in the markets their accounts will do well over the long term.

It is never too late to teach financial literacy, lessons that last a lifetime. You just have to start the conversation with your children and make sure you explain why it is important they gain control of their financial futures. Oh, and keeping them on the family phone plan — but charging them for their portions — can be an incentive for them to learn!

How did your kids learn about budgeting and finances? Let us know in the comments below.