Guest post by ConsumersAdvocate.org
As parents, one of the most important lessons to pass along to your children (other than saying please and thank you and to always eat your vegetables) is how to stay out of debt and plan for the future.
This doesn’t require mastery of financial instruments – like currency futures and exotic derivatives. But knowing how to make a budget and stick to it, or how to choose the best IRAs and other retirement plans are essential to their future well-being and development.
Setting the Right Example
Unfortunately, children often learn the wrong lessons from the examples their parents set. For instance, how many four-letter words have your kids picked up from hearing you accidentally stepping on their Legos in the middle of the night on the way to the bathroom!
Bad fiscal habits are also surprisingly inheritable. In short, if you’re bad with money, it is more likely that your kids will be, too. If you’re in debt by the end of your life, it could become hereditary debt. If you leave debt to your children, it will be far more difficult for them to achieve a debt-free life, themselves.
3 Financial Identity Types
According to the decade-long Life Success research project, children fall into three categories when it comes to learned fiscal habits.
- Followers: follow their parents’ example
- Pathfinders: are interested in financial topics and find their own way
- Drifters: don’t follow their parent’s example, but also don’t have any other strategy.
Parental Influence
Even though each child tends toward their own way of processing things, the researchers discovered that each identity style was strongly associated with a different level of parental guidance.
- Children who had received some financial education, primarily modeled after their parents own financial habits identified as followers.
- Children whose parents talked to them openly and frequently about finances and involved them in financial decisions identified as pathfinders.
- Children who lacked these experiences identified as drifters.
Preventing Hereditary Debt with Life Insurance
One of the most important financial habits to pass on for preventing hereditary debt is to discuss and purchase term life insurance with your children. They learn that you can still be financially responsible to those who depend on you even after you die. Making sure your loved ones are cared for, the mortgage is paid off, and college expenses are covered ensures that heirs don’t inherit debt and thus breaks the chain of hereditary debt.
