Your parents may have taught you how to ride a bike or drive a car but did they teach you how to properly manage your finances? Many parents are guilty of loading up their kids with "financial baggage" that weighs them down. We'll help you unpack it in this post.

Hopefully they were not like most Americans who have no idea how to manage their own money let alone teach their children proper financial management habits. Although you love your parents, as we age we recognize that they aren’t perfect, and many parents fall short when it comes to their personal finances.

If you don’t want to make the financial mistakes your parents did, here are the best ways to avoid them.
 

Track Where the Money Goes

A good question to ask yourself is: Where is all the money going? By understanding where your money is going day to day you can begin to master it. Start by creating a budget using these 8 tips and watch all your purchases closely.
 

Looking "Rich" On Credit

Many people feel pressure to establish a certain lifestyle to fit in with societal norms or appear successful. They may buy a bigger house or nicer cars than their budget allows, just to “keep up with the Joneses”. However, these poor budgetary decisions will lead to a life of revolving credit card debt, the risk of foreclosure, and living off crumbs in retirement. 

Figuring out how much is enough and being happy and secure with that decision instead of always wanting more more more is a key to financial independence.

One strategy to avoid overextending yourself is the 50/30/20 rule which breaks down your budget into needs / wants / saving. The guideline being that 50% of your funds will go toward your needs such as housing, insurance, and food, 30% of your funds will go toward you wants such as shopping or dining out and 20% will go toward savings and investing for the future.  The exact ratios are not important, but thinking in terms of these three buckets is.
 

Being Overly Frugal or Cheap

On the flip side, being raised by a parent who pinches pennies or over emphasizes manual labor to save money can be just as much of a burden. An overbearing annoyingly cheap parent can alienate their kids and drive them to be spend thrifts.

Some things are worth paying a lot for. From concrete to subjective some ideas are: a good education with a solid ROI, a good sized home in a safe neighborhood, good tires, good shoes, a comfortable bed, a fancy blender, the sports TV package... It comes down to personal preferences. We wrote a post on how smart spenders recognize quality and gladly pay for it.

Some things are worth outsourcing. Your time has value and you need to put a price on it. Life can be full of drudgery and knowing when to spend money to avoid said drudgery is important.  Assembling Ikea furniture is a pet peeve of mine. My wife buys it thinking she saved money but I end up spending 1-2 hours assembling it!!!  When it comes to time vs money, if you can hire a kid to mow the lawn and pay them a fraction of what you make per hour that is a good deal.  On the flip side if a painting company wants $150/hour and you can do it yourself and would enjoy the physical exercise then there is significant savings to be had on that project. But always opting to do the drudgery "just because" isn't a recipe for happiness.
 

Not Saving Enough for the Future or Starting Too Late

According to a recent Wells Fargo Retirement Study, more than half of participants feel as though they aren’t saving enough for retirement. It is easy to let other financial responsibilities take precedence over saving for retirement. However, not saving enough will create future financial struggles.

One of the best ways to increase your retirement savings is to invest early and automate your contributions. The earlier you start, the more time you have for your portfolio to grow and enjoy the benefit of compound interest.

By automating your contributions, that all important line item “pay yourself first” is built into your budget. Automating your contributions will assure consistent investment contributions. You will barely notice it is happening.
 

Not Prioritizing Financial Education and Literacy

Adults have many responsibilities and commitments which makes it hard to prioritize their financial education. Often, people perceive it to be easier to live in the dark instead of spending the time doing research and reading up on the latest financial news.

Taking the responsibility of your financial education into your own hands is imperative for a successful financial future. Talk to your peers and financial experts to adopt some of their expertise. Read financial books to brush up on your personal financial habits and skills. There are many ways to continue your financial education, it’s just about taking the time to do it.

Not only will this education pay off for your own financial needs but it will help you set an example for your children, hopefully influencing them to establish a prosperous financial future.
 

Ignoring Insurance Needs

With only 59% of Americans carrying life insurance policies, one has to wonder, what would happen if uninsured individuals were to pass away unexpectedly? Most families get lucky and everybody stays alive until the kids are grown up, but for the families where a parent passes away early it is devastating.

If you want to protect your family from the financial burden of your untimely death, you need to evaluate your life insurance needs. Compare multiple policies and determine the best plan for you and your family.

Many people assume their group insurance plan through work is enough to cover their life insurance needs if something happens to them. However, most of the time a group insurance plan only covers a small percentage of the actual debt and costs incurred from an unexpected passing.
 

Lead by Example

Have you ever heard the saying, “monkey see, monkey do”? 

Children imitate the actions of their parents. From spending too much time watching TV to the way they communicate with their spouse, children will often adopt the same habits. A parent’s financial habits have a significant impact on the financial success of their children. If children see their parents living paycheck to paycheck, racking up credit card debt, shopping for entertainment, or arguing about money spent, it can result in the next generation doing much the same.

If you have kids, regardless of your own financial track record, you can begin to talk about the basics of money at a young age so they are aware of how it works and are not intimidated by the subject of money.
 

Supporting Children vs Spoiling Them

Parents love to spoil their kids. They want to give them everything they desire. However, this is problematic for two reasons:

1. It harms the family budget (overspending), and encourages the Monkey See Monkey Do behavior mentioned above.
    
2. It doesn’t teach their children the concepts of building wealth:
   1. Delayed gratification
   2. Utility - understanding what you get for your money
   3. Investing in yourself first (education, health, savings, etc)
   4. The character building experience that comes from putting in the hard work it takes to achieve their goals.

It’s okay to want to give your kids everything but imagine instead giving them the tools to understand what they want and how to get there on their own.

Here’s an example - consider clothing. It seems like kids are always growing and needing new clothing. Rather than buying them whatever they want whenever they want it, setup a budget and a plan to get the best stuff within that budget. Include them in the decisions. Point out the idea of shopping around, waiting for sales, looking for coupons, and looking at quality vs price. For bonus points get in the habit of sorting old clothes to donate or sell prior to purchasing new ones.

It is extremely important to teach children the value of a dollar by involving them in the process. This will benefit them more as they venture into adulthood.
 

In Summary:

There isn’t a handbook for raising your children to become financially secure. That’s why it’s important to take your finances into your own hands and adopt values and lessons that you can impart onto your offspring.  Here are some tips we wrote for talking to teenagers about money.

The earlier you begin to adopt positive financial habits and create a plan of action for a successful financial future, the easier it will be to execute and stick to the plan at hand. Ask yourself what you can do now to improve your financial well-being for years to come. Then make a plan to do it!