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Don't Be Your Kids' ATM

In the 1996 landmark book The Millionaire Next Door, Thomas Stanley and William Danko shared the results of their years of research linking the common threads among America's millionaires. Millionaire came to some conclusions that challenged the assumptions of many of us: Those people who live in giant houses, drive fast cars, and belong to country clubs and those whose true net worth exceeds one million dollars are actually not the same people. Millionaires aren't even necessarily the people with the highest paying jobs. While millionaires do tend to be successful, they're also -- my favorite term from the book -- "prodigious accumulators of wealth" (PAWs).

One of Millionaire's more important lessons was the need to resist providing financial life support for fiscally irresponsible relatives -- kids, siblings, even parents. But one area in the book that could have used some fleshing out was what it would take to instill good financial values in children before they leave the nest. Parents need to understand that the amount of marketing done to children growing up in America today is substantially higher and more sophisticated than ever. The stakes are high: America's children spend more than $150 billion -- and influence the spending of up to a trillion dollars -- every year.

Unlike those now in their twilight years, today's kids are the product of a time in which neither they nor their parents have ever seen widespread financial hardship. Most financial messages today's children receive teach that immediate gratification is a good thing, something we all have a right to. And kids heed those messages, to staggering results: In 2001, more than 150,000 Americans under the age of 25 declared bankruptcy, up 150% from only a decade earlier. More than half the high school seniors who took a financial literacy test last year (given by the Jumpstart Coalition for Financial Literacy) failed.

Many parents are exasperated at their kids' gotta-have-it-now attitudes toward spending, but at the same time feel powerless to combat the substantial self-esteem issues built into kids' need to go with the crowd. Remember Hannah Gets a Visa Card? That's not a fairy tale -- it's both reality and a nightmare.

Financial advisor Nathan Dungan has filled in the blanks with his commonsense book Prodigal Sons and Material Girls: How Not to Be Your Child's ATM. It's a must-read for parents, as it shows in bright line fashion how some of the little decisions we make in supporting our children's poor financial choices can lead to serious problems later on.

Everything I never had...
Let's face it, we parents want to provide for our children, to make sure they have all the advantages that we did not. (I mean, not necessarily me... I had every advantage in the world. Thanks, Mom and Dad.) We don't want our kids to be unhappy, and the pressures to conform that existed when we were growing up are stronger today than ever. Kids have to be seen wearing Abercrombie & Fitch (NYSE: ANF  ) , Nike (NYSE: NKE  ) and other brands, and parents resisting can actually leave kids open to ridicule and rejection.

But what many of us parents may not realize is that rather than assisting our children, granting spending requests too easily conveys negative messages about money and wealth. If a child is brought up to believe that each itch to buy must be scratched without reservation, he or she is apt to overspend well into adulthood. Dungan is unequivocal about this, calling consumer culture a "legalized corruption of children," and likening materialism to many other out-of-control addictions.

Stop me before I charge!
The problem, of course, is that everyone -- from our government and elected officials on down -- has a vested interest in seeing consumers spend. Think about it -- what's the point of cheap credit? To get people to borrow more, that's what. Our vaunted economic recovery is built upon the backs of consumers continuing to buy. It doesn't even matter that the average American is deeper in debt than ever before, and that hundreds of billions of dollars once stored as home equity has suddenly disappeared through cheap home refinancing. A nation of PAWs we are not.

And yet, to parents, it's their kids' rampant spending that is of deepest concern. What Dungan does in Prodigal Sons is teach effective ways to talk to your kids about money. And what's more, he gives some hope -- more than 81% of all adults name their parents as primary influences in their habits toward saving.

Dungan's six-step process stems from workshops he provides for his company, Share Save Spend LLC. Most important among these steps (as we look at the crushing consumer debt the average American family faces) is the need to look at our own values, and elements in our own financial pasts. How did your parents talk to you about money? Or did they? Were they too controlling, making you want to rebel, or too loose, keeping the gravy train running fast? Some parents make a point to hide the cost of things from their children, and each time they miss the chance to share a lesson about value and choice.

Dungan also discusses how to set boundaries for children, how to teach them about money and the choice to save, spend, or share, and how to eliminate the "nag factor." Dungan explains that children are creatures of habit, and that establishing good habits from the outset is critical to success. But what if you've already got an eight-year-old whose requests for you to buy something come almost hourly, like clockwork? Dungan suggests giving more financial responsibility by letting the child make her own choices with a limited amount of money. Where we each get in trouble with kids is when we establish a pattern of saying yes.

What Dungan is not is a financial puritan. That was the most common complaint I heard about The Millionaire Next Door -- that those people held up as models in the book had acquired wealth by denying themselves any enjoyment whatsoever. I, too, thought some of the stories lacked balance. That's what I enjoyed about Dungan's book; he doesn't treat spending as some sort of illicit pleasure. Rather, he encourages people to teach their children about healthy spending habits, about turning their wants into goals to be attained, not demands to be met -- right now -- by harried parents.

My eldest child will be four in a month. I have yet to have to endure any wheedling from her to buy the latest and greatest. But in the past few months, I've noticed that her playing habits have become more brand- and image-conscious. The other night, she asked me specifically to tell her a Disney (NYSE: DIS  ) Princess bedtime story, and when I left three of the princesses out of the first story (full disclosure: Jasmine, Cinderella, and Belle), she demanded that I tell her another story including these three characters, with whom she deeply identifies. What am I going to do when her love for the princesses becomes the inevitable demand for more Princess gear? Prodigal Sons & Material Girls is helping me put together a battle plan.

Fool on!

Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann's own spending habits are greatly impacted by his inability to avoid buying scotch. He owns shares of Disney. The Motley Fool is investors writing for other investors.


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