Your Kids Will Inherit Your Financial Habits

Don't let your terrible saving and spending habits be your financial legacy to your family.

The folks at T. Rowe Price recently concluded a survey that found that significant credit card debt affects kids. Of those surveyed, 53% have credit card debt and 48% of those in debt have $5,000 in credit card debt or more. Among their children, 58% spend money as soon as they get it -- compared to just 44% of children whose parents have not debt. When parents rack up credit card debt, 65% of their kids expect them to buy them whatever they want (compared to 57% of debt-free parents' kids).

That makes parents far less likely to talk to their kids about finances and help them learn from their mistakes. Compared with less-indebted or debt-free parents, parents with $5,000 or more in credit card debt are more reluctant (35% to 21%) to discuss finances with kids. Additionally, their kids are more likely to be confused when their parents talk about money (67% vs. 51%) or hear something different from their parents than what they hear at school (65% vs. 53%).

"We know that kids' money habits are formed before they get to high school and that their parents are often their most influential teachers," says Roger Young, a senior financial planner at T. Rowe Price and father of three. "It's unsurprising, but still saddening, that parents with troubling money habits seem to be passing them on to their kids. These parents are hit with the double consequences of their own financial mistakes and the prospect that their kids may be set up to relive them."

Bankruptcy has an effect on kids as well. 19% of survey respondents have declared personal bankruptcy at some point in their lives. Compared with parents who have not declared bankruptcy, those who have are more likely to have kids who do not save any money they receive (16% vs. 6%), spend money immediately (71% vs. 42%) or demand money or gifts (72% vs. 56%).

"To prevent this, parents may want to consider openly discussing their finances with their kids—the good, the bad, and the ugly," Young says. "Kids who are aware of their parents' bankruptcy are more than twice as likely to say that they are very or extremely smart about money compared with those who weren't aware of it (68% vs. 30%). So I don't think they are destined to follow in their parents' footsteps."

However, parents often leave them little choice. Roughly 44% of parents have pulled money from retirement savings during the past two years, but parents who have declared bankruptcy at some point in their lives are twice as likely to do so (74% vs. 37%). Similarly, parents with $5,000 or more in credit card debt are significantly more likely to have pulled money from retirement (62% vs. 37%).

Worse, they're more likely to have pulled from their kids' college savings in the past two years as well. Those who've declared bankruptcy are more than twice as likely to raid a college fund as their more frugal peers (69% vs. 25%), while those who have more than $5,000 in credit card debt are are nearly twice as likely to do so (50% vs. 26%). All of these bad decisions just tend to breed more debt. Parents who have declared personal bankruptcy at some point in their life are significantly more likely to currently have over $5,000 in credit card debt (68% vs. 42%). They are also more than twice as likely to take out payday loans (22% vs. 10%).

So how do you avoid that worst-case scenario? Talk to your kids about money. T. Rowe Price suggest having a weekly conversation about money, noting that 64% of kids who have those conversations say they're smart about money, compared to 41% of those who don't. Talk about budgeting for back-to-school shopping, the amount saved by shopping a sale, a trip to an actual bank, the cost of college or even why your family went to the beach instead of Walt Disney World last summer.

Also, set yourself up. When 39% of parents have at least three kinds of savings (college fund, emergency fund, retirement, etc.), 83% of their kids talk to them about money, compared to just 66% of those whose parents lack those savings. It also makes them less likely to simply spend money when they get it (40% vs. 52%) or lie about what they spend (34% vs. 43%). Also, when 44% of parents allow kids to decide how to save and spend money on their own, they're less likely to spend frivolously (40% vs. 53%), lie about spending (29% vs. 49%), ask their parents to buy them stuff (52% vs. 65%) or feel ashamed because they have less than other kids (30% vs. 50%).

"Kids who have the freedom to manage their own money seem to have better money behaviors and are more truthful with their parents about how their money was spent," says Roger Young, a senior financial planner at T. Rowe Price and father of three. "I know firsthand the temptation of helicopter parenting, but there is evidence of a downside to this approach when it comes to money. Giving them real life money experiences brings finances out of the conceptual and puts it into practice."

Even a little assistance isn't necessarily the worst thing for a child's financial development. According to a survey by UBS, nearly three quarters (74%) of Millennials receive some form of financial assistance from their parents. However, Baby Boomer parents have been more than happy to provide that help. Roughly 80% feel good about providing financial support, while only 10% withhold it to teach a lesson about financial responsibility.

That lesson is hitting home regardless of whether a parent provides support or not. Boomer parents are helping out with health insurance (29%), home buying/renting (28%), auto insurance (26%) and utilities (23%). They're also doling out for Millennials' vacations (19%) and spending money (21%). In an effort to save money, Millennials have been twice as likely to move home after college as their parents were -- with 24% preferring the option and 22% being asked by their parents to stay. However, 52% of Millennials feel shame, frustration or guilt about accepting assistance from their parents.

"Boomers and Millennials are as much friends as they are parents and children," says Paula Polito, client strategy officer of UBS Wealth Management Americas. "Their unique relationship deepens their bond, and they maintain both close emotional and financial ties."

According to UBS, a majority of Millennials see their parents as peers, mentors and friends, where Boomers saw their parents as authorities. Nearly three quarters (73%) of Millennials say they spoke, texted or video chatted with their parents more than once a week during college, compared to 34% of Boomers who called or wrote their parents. However, Millennials are putting off marriage and children later than Boomers did, with 28% saying they have traveled the world for six months or more, compared to 12% of Baby Boomers.

Though a survey by The Principal Financial Group last year found that, 84% of Millennials believe that they should be independent by age 25, they acknowledge that expenses such as their phone bill (12%), car insurance (8%), health insurance (7%) and rent (7%) are still being covered by parents. While student loan data site Cappex puts the average 2016 college graduate's student loan debt at $38,000, watching their parents get slammed by the economic downturn and housing crisis yielded a few lessons of its own.

As credit agency Equifax discovered, about 70% of college students have one or more credit cards, but a slightly higher percentage pay their balances in full each month -- without help. In a survey of more than 600 college students ages 18 to 24, this happens despite 16% of respondents using credit cards for emergencies only. Nope, 72% pay off their credit card balances each month on their own, and 18% said their parents helped pay off their balances every month.

Even if they haven't paid their balances of within the month, more than half with outstanding balance (59%) plan to pay it off within a year.

"We're talking about a generation that has subtle, but meaningful differences from its Millennial predecessors," says Melanie Wing, vice president of customer insights at Equifax. "We wanted to peer inside this consumer group, understand their relationship with credit, and attempt to prevent what we're seeing with Millennials - many of whom are plagued with record levels of student loan debt and an inability to successfully achieve their financial goals."

As Bankrate.com notes, just 52% of Americans have more emergency savings than credit card debt. However, Millennials are more likely than any other age group to have a nest egg that exceeds their bills.

"Contrary to society's perception of Millennials and their financial characteristics, Millennials have learned from their parents' mistakes and are more cautious when it comes to saving for that rainy day," said Greg McBride, Bankrate.com's chief financial analyst. "Their aversion to credit cards may have also played a part in helping them grow their savings accounts."

Also, though CreditCards.com found that more than one in five Americans with debt (21%) believe they will never pay them all off, only 11% of Millennials give the same response. Why? Because they know how credit and debt work and how to balance them. The percentage of U.S. households with credit cards carrying revolving debt has decreased from 44% in 2009 to just 34% today, according to the National Foundation For Credit Counseling, and Millennials are a big reason why.

Yes, 67% of Millennials hold a credit card, according to Experian, but 68% have pre-existing debt and 64% say finances are holding them back from their life goals. There are 49% who want to travel the world. Another 49% want to buy a home. There are 30% who want to start a business, 28% want to go back to school and 22% would like to change careers. It's why 71% have never maxed out a credit card, 77% have never had their credit card interest rate increased and 58% pay the full balance instead of the minimum each month.

"This survey provided us with the feedback we had hoped: that this generation, despite being bombarded by information from a variety of sources, is developing credit-smart behavior early on," Wing added. "However, we firmly believe ongoing education; appropriate tools and resources; and a thorough understanding of the implications that today's financial decisions can have on tomorrow's milestones are keys to a positive experience with credit."