How much should your kids know about the family’s overall financial health?

Perhaps more than you think. If you argue at all about money (and most people do — at least sometimes), then there’s a good chance your children or grandchildren have already experienced some discussion of family finances. So, that’s all the more reason to make sure that they hear more than just arguing — that they have the experience of listening to calm and reasoned discussions of the family budget.

It’s not necessary for younger children to know every detail of your financial life, although they should gradually be included more and more, as they get older. But, they should know, in general, how things are going — whether times are good or not. I feel that these areas ought not to be a secret — they have a right to know, and sometimes they have a responsibility to know the ups and downs of the family they are part of.

By the time the kids are 11 or 12 years old (you decide if that is appropriate), they should be ready for the “Bill-Paying Game,” a deep-dive into your real household budget. As a parent, I know you may be cringing at the suggested age, but don’t put this off until they are teenagers. It really is true that teens, if they are not disabused of this notion early, can start thinking that money does grow on trees. It is hard to get a teen to ever listen to a parent. A responsible 11-year-old, who still considers you worth listening to and who thinks it is a privilege to be given family responsibility, is the perfect candidate for this project.

Bill-Paying Game

The family bill-paying project is exactly what it sounds like: the family sits down and pays its bills together. It is a great project for the kids to setup a spreadsheet to track the bills.

Step 1: Enter your total income on your spreadsheet and call the section “Money In.” (If you want to, you can actually show your offspring your paystub. This is a great way for them to learn about taxes — read my Forbes article on that topic — and Social Security and Medicaid reductions. Or, you can just show them your bank statement, with the credits applied.)

Step 2: Create a column for “Money Out” and list all of your monthly bills, such as mortgage or rent, utilities, credit cards, student loans, cable, Internet, cell phones, car payments, etc. along with the payment or minimum payment due for each.

Step 3: Calculate or estimate regular monthly expenses such as food, gas, commuting, and entertainment.

Step 4: Add your “Money In” and “Money Out.” Hopefully, the “Money In” exceeds “Money Out.”

From there, you can decide how much you place into the following categories:

  • Medium-Term Savings: Include items like emergency fund, gifts, and vacations.
  • Long-Term Savings: This is for college tuition and retirement.
  • Charity: Choose a favorite cause or organization each month.

If there is a shortfall, involve the kids in coming up with strategies for which bills to pay in full and which to pay in part. This is the time to discuss how the “miracle of compounding” can work for and against you. This is also a great time to discuss how the whole family can come up with ideas to economize.

Sometimes parents of wealth tend to be afraid that their children know that they’re doing well; they worry that it will make the kids greedy, snobbish or spoiled. They worry that if the children know the family is well off, they won’t be able to hold out against arguments along the lines of, “the Joneses next door have a large built-in pool; why shouldn’t we have one too?”

First of all, in this day of the Internet, most of us can find out a lot about each other, including what we are worth, or close to it. Kids are not stupid, if they can’t find out, their friends will. It’s really better to have this conversation yourself.

I feel that there is a good two-pronged answer to this issue.  First, “our house, our rules, and our values.”  Second, you’re not telling your children only that you are doing well; you’re sharing with them the whole picture of your family’s budgeting, goal setting and priorities. Your kids must know that there will always be families with more than you have, and there will always be people with less — and that it is important to try to help those who have less, not envy those who have more.

(Note: When you explain this to your children, I recommend using these words, not euphemisms like “less fortunate” and “more fortunate.”  It’s true that good fortune, or good luck, came to be associated in our language with having a fortune or having lots of money. But, you don’t want to reinforce, for our young ones, the idea that having a lot of money is what makes you fortunate or not.)

On the other hand, if things are tight and you need to cut back, your children need to know that, too.  You don’t want to scare them. Kids don’t have a sense of proportion, especially when it comes to numbers that are outside their everyday experience, and they need to be reassured that “we’ll be okay; you will always have food and clothes and a roof over your head, and most important, you will always be loved, but right now we have to stay on a tight budget.” Do not apologize for things being tight and don’t feel guilty… this is part of life.

In the long run, being honest about things is a way of empowering your kids and giving them the strength to deal with change.  Don’t you wish your parents had come clean with you?