Hey, all you parents out there. If you are like I am, you worry how you’ll teach your kid financial literacy when you’ve barely mastered it yourself. It is on you because kids aren’t learning these skills in school. Chad Willardson has also been concerned about this and as a financial advisor, was equipped to do something about it; write a book, Smart, Not Spoiled: The Seven Money Skills Kids Must Master Before Leaving The Nest.

On Author Hour today, Chad discusses why it’s so important for kids to understand how money works. How to talk to them at different ages about skills such as investing, budgeting, and earning and get them to actually do it, and why he and his wife don’t give their kids an allowance.

Hi Author Hour listeners. I’m here today with Chad Willardson, author of Smart, Not Spoiled: The Seven Money Skills Kids Must Master Before Leaving The Nest. Chad, thank you so much for being with us today.

Chad Willardson: My pleasure, thank you for having me.

Jane Borden: First of all, tell us about this title. What does Smart, Not Spoiled mean?

Chad Willardson: Smart, Not Spoiled represents one of the concerns that most parents have today. There’s this recent study that says, two-thirds of American families and parents believe that their children are spoiled. When I think about that, I wonder whose fault it is. Is it really the kid’s fault that they’re not smart about money? That they’re a little bit entitled and spoiled?

They have so much more than we had growing up and maybe that’s where that concern comes from. The idea that we can really train our kids up to be smart with money rather than having that entitled mentality is something that I really wanted to help empower parents and grandparents and teachers and mentors. Really, that’s what this is all about, training the next generation to be thoughtfully and financially prepared for their future.

Jane Borden: Finance is your area of expertise. Tell us a little about what you do and then how you came to kind of write a book about doing that for kids?

Chad Willardson: Sure. I’m the founder of an outsourced family office called Pacific Capital, in Southern California. I’m responsible for managing nearly a billion dollars of other people’s money. So, helping people be smart with money, that’s my professional career. That’s what I do every day. But I’m also a father of five children. 

My wife and I have kids ranging from age six all the way up to almost 17. Thinking about how to teach our children to be smart with money is something that’s on not only on my mind as an advisor and mentor to clients and families, but also to my own children. This is a topic that’s very important to me.

Jane Borden: Why is it so important for kids to learn this? I mean, you write in the book that they’re not getting this information in school and often not in the home either.

Chad Willardson: It seems like kids grow up with the same money blueprints that their parents grew up with. If parents were raised in a home where money was a controversial topic and there were arguments and fights about it— about debt, maybe there was other stress about money it seems like they’re going to carry that same attitude and approach to their family that they’re raising. And that just continues down generation to generation. 

I’ve seen that. I’ve seen people carry those mindsets about money and they’re in a totally different situation than their parents were, yet, they still have the same money mindsets that they had as a kid. In the schools, I’m not sure why it’s not taught as much. I mentioned in the book how kids graduate high school and they are fully versed in the membranes of a cell and they could dissect a frog but they have no clue about personal investing or getting a loan or paying their taxes or insurance. 

There’s so many personal financial topics that these kids just aren’t taught, in the home or at school. And yet, they’re thrust into adulthood with student loan solicitations and credit card solicitations at age 18. They’re really unprepared for their future and often prone to make very big financial mistakes. What I’m trying to do with this book, Smart Not Spoiled is give people the resources, some ideas, some great stories, and activities that they can use to help raise the next generation to be more financially prepared for their future.

Instant Gratification vs. Delayed Gratification

Jane Borden: Great. Let’s get into it on that note. As you mentioned, the information in here is specifically geared toward how to get kids interested in it and ways that they’ll understand it. You’ve broken it into the seven different skills, so let’s start with investing. How do you suggest parents approach this topic with their kids?

Chad Willardson: One of the most famous experiments that’s been known for many decades is the marshmallow experiment, and maybe you’ve heard of it. They put the children in the observation room and they put a marshmallow on the table and they say, “You can have this one marshmallow, right now and you can eat it or you can wait a certain amount of time and not eat this marshmallow. If you wait that certain amount of time, we’re going to give you two marshmallows.”

It was very interesting. I believe they tracked in that study, the financial success and careers of the kids who waited patiently to get the extra marshmallow versus those who ate it right away. The studies were significant. The results were significant that those who showed patience and to receive a greater outcome, also practice the same principles in their financial life. I include a few activities and a lot of stories of how you can help kids understand the value of investing. I believe kids learn by doing and in my own experience, my children don’t learn much from me just talking at them, they learn by doing.

I’ve got some great ideas in there, even to the point of opening up a small investment account and letting your child make some mistakes. Or maybe find some interesting investments to put some money into, to get that experience and get their feet wet. I think that kind of experience as they learn by doing and can evaluate their experience, that stuff is very valuable at a young age.

Jane Borden: Yeah, I love that you wrote in there that you let your kids play around on Zillow.

Chad Willardson: Yes. I think that it’s important for them to understand the value of different things. Many times, parents keep money a hush, hush topic and so we don’t talk about it. And I understand a lot of us don’t want to share how much we earn with our kids, that may not be necessary at all. My kids don’t know my income but I definitely talked to them about the cost of things that we do and the cost of things that we buy.

If they say, “Wow, that’s a beautiful house”— we like to go to the beach a lot in Newport Beach and they say that’s a beautiful house. I’ll show them on Zillow, I’ll say, “What do you think that house cost to buy?” and we’ll look it up and we’ll compare and we’ll talk about it, “How much money do you need to earn to pay for a house like that?”

It doesn’t become real if everything is just – they see mom and dad swipe a card or type in a number on Amazon and it’s not really real. They don’t understand the value of money and what things cost. We went to Disney World last year over the Thanksgiving break and I was not quiet about the cost, I let them know. “I just want you to understand the cost of taking a family to Disney World and having lunch there,” all the different things that go into it. 

You’ve got to give them a little bit of a dose of reality, of course, based on their age and what’s appropriate. Talking about the cost, letting them understand investing, showing them things like Zillow or the stock market; all these types of conversations can lead to a much more financially ready adult when the time comes to leave the house.

Jane Borden: The second tip is around borrowing wisely. How do you prepare a kid for a credit card? And maybe the answer is making mistakes, which is certainly how I learned.

Chad Willardson: I believe it’s a topic that we need to address more seriously because so many families are in debt. The average family has over $10,000 of credit card debt. A lot of families have more debt on their credit card than they do in their retirement savings. I think we just haven’t done a good job of teaching about the borrowing costs, who to borrow from, when to borrow… so, that chapter we talk about good debt versus bad debt. We talk about things that you should borrow for, things that you probably should not borrow for.

I think it’s important for them to understand interest rates. If you get a mortgage today, you might get a 3.5% annual rate. If you get a credit card, you might get a 25% annual rate. What does that mean? What does that do to your payments if you owe $10,000 on a credit card with a 25% interest rate? What does that actually compute to if you’re only paying the minimum payments over the next 10 years? If you don’t make the numbers real, we can’t expect the kids to really understand what we’re showing them.

Frankly, I think a lot of adults themselves will benefit from reading this because it’s just a refresher on these basic principles and we really can’t teach it unless we’re understanding it and accepting it ourselves. 

Borrowing Money is Not Free

Jane Borden: You with your kids— or at least you advise, that parents lend their kids money at interest.

Chad Willardson: Yeah, I think if you’re going to lend your children money, then it’s okay to charge it an interest rate. My dad did that. He lent me money one time, probably over 20 years ago, and he discussed with me what’s a fair interest rate. Frankly, because I was a little bit higher risk than a mortgage, the interest rate I paid was a little bit higher than what a mortgage would have paid.

Even if your kids are little, it’s a good exercise to understand that if they borrow $10 and they take months to pay it back, then they owe you a little bit more than $10. Obviously, if your kids are older and they’re borrowing for, maybe they’re borrowing money for a car, for a used car purchase or something like that.

I do think it’s important to put things in writing, teach them negotiation, teach them writing a contract, teach them that there is interest cost. Borrowing money is not free. I think the worst thing you can do is teach them that the bank of mommy and daddy has infinite resources and will lend to them at 0%. That does not prepare them for the real world.

Jane Borden: All right. Skill number three: know your cash flow. You advise not giving kids an allowance. Tell us about that? 

Chad Willardson: That’s true, and I have never given my kids an allowance. I think I’ll talk more about that in the Learn To Earn section but know your cash flow, I would say. The B-word that no one likes is budget. Everyone thinks that’s a restrictive, painful word. It is tedious. We don’t want to talk about our budget. That tells me what I can’t spend money on. But we can talk about knowing your cash flow. We should know what our earnings are for the month and we should know what our expenses are. 

The earnings need to be higher than the expenses, that’s the basic principle that kids need to understand. Spend less money than you make and you’re going to keep yourself out of trouble but knowing your cash flow is critical. Even if you could have almost like a fake budget for the kids and say, “Let’s make a cash flow table” and say, “If you were to earn $100 this month, let’s go over the expenses that you might have.” 

It might be going to the movies with a friend, it might be buying a present for the birthday party of their neighbor. It might be going out for pizza or hamburger after the baseball game, so let’s talk about earnings versus spending and have some conversations about what that really looks like. I’ve done the exercise where we did a fake, almost like a fake budget for a family and the kids got to pick out where they would live in the United States. 

We looked up average housing cost, we look up utilities costs, we factored in having a car, we factored in all kinds of grocery expenses and insurance and things like this and they basically said, “Okay, now what careers could pay for that type of lifestyle?” We looked at the different potential earnings of different careers. Almost like we’re playing house and we’re creating this cash flow situation and that conversation where they can thoughtfully think about “what would really cost to live that lifestyle that I’m thinking of” and “what kind of career or business opportunity would I need to materialized to be able to afford that.” 

I think those are healthy conversations and the more healthy conversations about money we can have in our family, then the more smart and not spoiled our kids will be. 

Why We Don’t Give Out An Allowance

Jane Borden: On the topic – I know I’m skipping around a little bit with the skills here but— on the topic of earning, let’s talk about that. How do you teach your kids what earning money is like and how to do it?

Chad Willardson: My personal philosophy is that an allowance would do them more harm than good. I know that is probably a unique stance but I just didn’t want to pay them for breathing. I didn’t want to give them money because another Saturday rolled around and they were still alive. I just felt like that kind of entitlement and dependency was not something I want in their attitudes and so we basically flipped the script and my wife and I created a menu of opportunities. 

We wrote down close to maybe 40 tasks and left some blank columns and rows on the task sheet of opportunities that said, “Here are all kinds of things that you can do and earn money with but it’s up to you and there is no maximum potential. There’s no ceiling. If you want to do nothing for the week and earn nothing, that’s your choice. And if you go to the movies or you’re invited somewhere where you need to spend money, you’re going to be empty pockets and you won’t be able to go.” 

We do make our kids pay for a lot of things in their own activities, so they’re a lot more decisive about do they want to participate or not based on how much money they’re earning. My second child, Pierce— he’s 14 years old now— pretty much maximizes the menu of opportunities every week. He likes to save money, he likes to have money available when his friends are doing activities. If they are going to go to an amusement park here in California, he wants to have money available. 

They get to keep track every single day and go through the spreadsheet and pick different activities on that list to earn points, which they can then redeem for money every Saturday morning. I included a big sample spreadsheet of our menu of opportunities. I just feel that this teaches them the principle that your effort and your hard work is needed for you to be valuable to earn money. It is not just because you deserve it and you made it through another week. 

Jane Borden: Yeah. And so in addition, do they have chores? 

Chad Willardson: They do have basic chores that they’ve got to do that aren’t included in that. These are more of the above and beyonds. These are beyond just brushing your teeth and making your bed and the basic things that we expect them to do as responsible kids. Those basics, they don’t get paid for. This is like if you want to earn money, you’ve got to do a lot more than just put your clothes on and go to school and make your bed kind of thing. 

Jane Borden: A lot of this stuff is really specific and kind of in the weeds. What do you teach at what ages? 

Chad Willardson: It’s a good question. At the end of each chapter, we have activity ideas to teach our kids. In each chapter, I try to include some that are for younger kids and some that are for older kids. I think people would be very surprised at how young kids can actually pick up on money lessons. Even our six-year-old, he’s just starting kindergarten, we will talk to him about the cost of things. We will talk to him about if you save money, it could grow to be more money later, versus if you spend it all today. 

He gets to pick off the menu of opportunities and earn money. A lot of times, he redeems his points for playtime, you know, arcade time, things like that or watching a Disney movie. It is not always just about money. He can redeem his points for extra screen time or activities but kids can really pick up on a lot of this stuff at a young age. I think that the older age over 12 years old, over 13, junior high, high school, you can really talk more about the cash flow. 

You can get into the specifics of investing. You can talk about stocks and real estate with much more detail. I think my older three kids are a lot more interested in watching the stock market or looking at Zillow or visiting my rental properties and learning about what it’s like to actually own a home and have someone else living in it. The high school and middle school-aged kids can really – they can really get deep into the more adult financial conversations for sure.

Jane Borden: Thank you. I love the way you approach insurance as protecting who and what you care about. 

Chad Willardson: I think that’s critical. We had a personal tragedy. A friend of mine with four young kids suddenly passed away at the age of 40, unexpectedly last year on October 2020, and really was not prepared. Though we’d had many conversations about getting prepared, he just never took those steps and his wife and widow and their four young children are in a house with a mortgage and had nothing in place to really protect the family. 

There are so many situations; whether it’s driving a car and having an accident, or it’s something at your home, or even worst, someone passing away. I believe it’s very important to teach children that you can protect your family and what you care about and it doesn’t need to be significantly expensive. You can really put things in place to help you feel more secure, give you that peace of mind and prepare yourself for the unexpected emergencies that inevitably will happen. 

Jane Borden: Talk to us about how you teach your kids about giving and philanthropy? 

Chad Willardson: One of the things that we do— our family does like to travel and we set aside typically one day during the trip as a family [during vacation] for service. We’ve done service projects. We just recently did a beach cleanup with a big service group. We’ve done it where we’ve gone to an orphanage. We were traveling outside the United States, took a long taxi ride to an orphanage, and spent time reading with the kids and playing games with these kids. 

The local taxi driver was very confused, but I think impressed, that we would take a full day out of our vacation and do something like that but to us, it’s not a big sacrifice. And often it’s the kid’s favorite day of the trip, engaging with the locals and doing something service-related. The beach cleanup thing that we did was at 6 AM and it was not easy to get the kids up and wake them up and leave the hotel, but I think these types of things teach our children to be generous and to be charitable, and to be giving. 

It is not all about just gathering material things or having more money. We can’t take that with us so let’s do as much good as we can with the resources we’ve been given. I gave a bunch of examples of clients and friends in the book, stories, and things that they’ve done to teach their kids to be generous. From a young age, we’ve definitely asked our kids to be giving a portion of the money that they earn and not keeping it all from themselves. 

Jane Borden: It seems like the takeaway here is as you said, to do. Kids learn by doing. 

Chad Willardson: One hundred percent. They are not going to learn by listening. I think what we say is a very small portion of the teaching and then what we do and what we teach them to do themselves is going to be where the learning comes in. 

Jane Borden: On that note listeners, as Chad had said, the book is full of suggested activities and stories of things he and his clients and friends have done as well. So many great ideas in here and it is such an important thing to remember to be doing as a parent. Chad, it has been a pleasure speaking with you. Again, listeners, the book is Smart Not Spoiled: The Seven Money Skills Kids Must Master Before Leaving The Nest. Chad, in addition to reading the book, where can people go to learn more about you and your work?

Chad Willardson: Pacificcapital.com. You can sign up for our free weekly newsletter there and you can also find me on LinkedIn, Chad Willardson. I’m very active on LinkedIn and I will definitely engage and share insights daily there. 

Jane Borden: Great, thank you. 

Chad Willardson: Thank you very much.