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5 Tips for Raising Financially Sophisticated Kids

Picture a conference room with 30 analysts and portfolio managers talking about aluminum prices and supplies in New York City at Alcoa’s headquarters. There is intense pressure. The stakes are high. The air is full of testosterone and posturing.

I was the only woman in the room — and I dominated the meeting.

My dream job when I graduated from college was to be an investment banker, but then I switched to the buy-side following an old boyfriend’s tracks. As I became immersed in the business of managing money, I learned to compete and thrive in the male-dominated field and became a portfolio manager at a pressure cooker hedge fund called Plural Investments.

I’m now a wealth adviser with my own firm, Wealth Engagement. I still manage money and I’m also a proud mother of two amazing daughters, ages 12 and 14, and my 8-year old son. I often talk to my kids about money, the economy and investing to help them understand the challenges and triumphs I experienced in my life as an investor.

We all know the old formula of going to college and getting a good job, but that doesn’t mean you will be financially successful in today’s competitive world. The new formula of success requires you to be an investor in yourself and to put more money in the stock market. That means the new formula of success is based on understanding risk and reward, leverage, learning from your mistakes and planning for a rainy day.

So here are 5 tips that form my own personal framework for how to raise financially sophisticated kids so that you as parents can successfully get your kids off your balance sheet and not worry about whether your kids will be successful as adults.

1. Talk about risk with your kids

To gain confidence, kids need to try big, scary things. They need to see that even if they fail, they can try again. Eventually, they will master a new skill. And that feels really good.

They need to learn that mastery is more meaningful if the stakes are higher — if there is a bigger risk of failure (or even injury). If you are not failing, you are not learning. If you play it safe and stay off the green runs, you will never advance to the blue runs. How do you get better at skiing? Go faster. If you can’t turn and go too fast, you fall. If you are not falling, you are not getting better at skiing.

Then offer an example in your life that shows you took a chance and talk about the outcome. As a kid, I spent a lot of money collecting stickers, then I decided I didn’t like stickers anymore and decided to sell my collection at school. I was so excited that night that I couldn’t sleep. I thought about the prices I would charge for my stickers and all of the money I would make. While I was the only one selling my stickers at school, I only sold a few and I was disappointed. It was a little scary selling my stickers on the playground. But at least I did it and made a little money.

Taking risk is also about making a decision, and having confidence in your convictions. My daughter made the tennis team in 7th and 8th grade, but then realized she had an interest in joining the robotics team at school and that she probably couldn’t do both and do them well. So she decided to solely focus on robotics, which disappointed me, because I know colleges often like kids who are athletic. She didn’t know at the time that COVID was going to cancel the robotics match at the end of the year but COVID didn’t cancel tennis matches. However, Alexandra gained a leadership position on the robotics team because of her focus and dedication. That made me proud and gave her confidence in her decision to switch and explore a new club that captured her interest and it was a great lesson for her.

2. Talk about how the economy and business work in a basic way.

Talk to your kids about how prices are set by supply and demand for goods and services. If something goes on sale, do you buy it because the price is low or do not buy it because you don’t need it? Why do you think the company lowered the price of something? Because others don’t want to buy it, so they discount something to get people to buy their excess inventory? Are they using it as a loss leader to get people to buy more of other things?

Teach your kids how interest rates impact the supply and demand for money. Low interest rates reduce the cost of money, which can in turn help folks be able to afford a more expensive house. And the opposite is also true, that when interest rates are higher, the cost of money also goes up and that can help lower the prices of houses. Use real-life examples to explain these things so kids can wrap their heads around the concepts.

3. Talk about the price of things relative to a budget or an allowance.

During the pandemic, my 7th-grade daughter Caroline, who goes to a pretty affluent private school in Atlanta, mentioned to me that her friend’s mom bought her daughter a $300 sweater. Sweating bullets I think to myself: gosh I hope she doesn’t ask me to buy her a $300 sweater, especially during a pandemic.

Before I could even finish my thought, Caroline said to me, “Thank goodness you taught me it’s not a smart purchase for a kid to have a $300 sweater.”

As parents, we know that it’s important to lead by example. Start discussing financial awareness by having them look at the prices of clothing items. Show them how to comparison shop and guide them on how to make good decisions. For my daughters, pointing out the price tags at the designer stores versus the budget retailers was eye-opening.

4. Talk about taxes.

Back when I was a teenager, my dad showed me how to fill out my 1040 EZ tax return after I had earned some money at a job. After a few years, I started to do my own taxes.

While doing your own taxes sounds scary, I know I'm lucky that I have a thoughtful and caring father who wanted to set his daughter up for success by showing her how to fill out her own tax form. That early knowledge and ability to take control of my own finances set me up for success in a fundamental way that has served me well my entire life.

5. Talk to kids about leverage.

This is the most important concept everyone should learn and really understand — not just financial leverage, but also operating leverage.

Leverage is the use of debt (borrowed capital) in order to undertake an investment or project. The concept of leverage is used by both investors and companies, and we as individuals when we take out a mortgage to buy a house or an auto loan to buy a car.

Operating leverage can be best described by a business owner. Let’s say someone owns an ice cream shop, and you decide to take a job as an ice cream scooper. You get paid $15 per hour, but the ice cream shop is able to generate $100 an hour in sales based on you serving 20 customers and charging $5 a scoop. Ignoring the cost of rent and the ice cream for this example, the shop owner generated $85 per hour and will have a profit after she pays for rent and the cost of ice cream. You the employee created operating leverage for the owner.

Taking this concept one step further, if you take an hourly job, try to leverage your knowledge of being the worker, and leverage this learning to maybe start your own shop someday so you are the one who is generating operating leverage!!

These are not very easy concepts for most kids to learn. I repeat them often to my kids with stories about things we notice and experience in our everyday lives. I show them the math behind these concepts and relate it to things they can understand with their allowance money or things they want to buy on Amazon. Even when they get bored or tune out, I know that some of it is sinking in at a very important time in their lives as they go through their teenage years and prepare for adulthood.

Instead of giving them fish after fish, let’s spend more time teaching our kids how to fish so they can become self-sufficient and empowered for the rest of their lives. They will grow up to become more financially independent and confident, and that will spill over into other areas of their lives like their romantic relationships, friendships, jobs and parenting.

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