Schools offer no courses in money management, so the majority of your children’s financial education will come directly from you. Either you will actively teach them the concepts or they will pick them up by observing your behaviors. Here are the top five things to teach your kids about money before they are out on their own.
1. You have to earn it.
Many kids have no concept of where money actually comes from and how you earn it. They just assume you go to the bank or ATM and grab some when you need it. You need to inform them that money (literally) does not grow on trees and that it is earned through working.
2. It’s not how much you make, it’s how much you keep!
Kids and teens often get the impression that if they are “rich” or have a job that pays a large salary when they are older, then they will be able to buy all the things they want. The truth is, people at all income levels can have issues with cash flow management because cash needs vary from month to month. It doesn’t matter whether you make $30,000 per year or $1 million per year, if you spend every dime, your future is in trouble. Sure, you have all the “things” or experiences those dollars have purchased, but if you don’t save any for the future, there won’t be any money available to pay for emergencies or to use when you are no longer working. Just because a person drives a fancy car or lives in a large house does not indicate wealth. They may be living paycheck to paycheck and spending all their money as it comes in.
3. It is never too early (or too late) to start saving.
Even if a savings goal is months or years away, the sooner you start, the faster you will accomplish the goal. For example, if a child wants to purchase a $100 bike and has an allowance of $10 per week, the bike could be purchased in less than three months! Putting away $10 a week may not sound like much, but it all adds up. Teach kids the “pay yourself first” saying. Help them determine a longer-term financial goal (e.g, saving up for a bike, laptop for college, car or emergency fund) and have them allocate a certain percentage of their “income” to fund those goals BEFORE they can make any other purchases with the money. This will help instill the mantra of paying yourself first and investing in your future before spending today.
4. The time value of money is very powerful.
By investing your money, you can make it work for you. In theory, dollars invested in a growth allocated portfolio could double every six to 10 years. This is called the “Rule of 72” and is the power of compound interest at work. To use the Rule of 72, divide the number 72 by an investment’s expected annual return. The result is the number of years it will take (roughly) for the money to double. For example, if an expected return is 9 percent, it will take eight years to double that initial investment. The trick is to stay invested and not take funds in and out of the market as it ebbs and flows. If you are just stashing money under your mattress, you are essentially losing money because of inflation. A loaf of bread may cost $3.00 today and $3.50 next year, so by not investing or earning interest on your money, you are losing the purchasing power of those dollars.
5. Debt can be dangerous.
We live in a society that tells us we can buy whatever we want, even if we can’t afford it. Just think of all the advertisements for buying a car with no money down, quick money lending and no credit approval required. These are all sticky situations to get into and do not benefit the consumer in the end. Our kids need to learn that delaying gratification is healthy, as is not spending money as soon as they get it (or before they get it). Have them make a wish list and a spending plan for their money. You want them to be in a position where they are telling their money what to do, not having all of their dollars going toward debt payoff. Your kids will be bombarded with credit card offers before their 18th birthday, so teach them lessons now before they get into trouble. Teach them to make plans for their money, not to buy on credit and figure out how to pay it off later. There are “wants” and there are “needs,” and sometimes kids and teens cannot tell the difference.
The more kids know about money, the better they will be able to manage it on their own. Set them up for success by teaching them these five principles early. A great website for ideas on age-appropriate ways to teach your kids about money is MoneyAsYouGrow.org.
Jamie Bosse, CFP®, RFC, is a mother of two and a financial planner at KHC Wealth Management. Jamie loves to write, travel, barbecue, watch the Kansas State Wildcats win football games and spend time with her husband, sons and pet corgi.