As adults, it is our responsibility to raise our children to be both good citizens and also financially astute so that they can live independently and contribute to society. It is well known that primary education does not address financial basics, such as balancing a checkbook, saving for retirement and the pitfalls of debt. Many young adults get to college and the temptations grow somewhat exponentially — there’s no one looking over their shoulder, credit card offers are endless, student loans feel like lottery winnings and so on.
If we don’t begin with healthy financial habits at a young age, it can be very difficult to break bad habits later in life. Overspending $1,000 on a credit card can easily morph into a life of overwhelming debt and a vicious cycle of high interest payments, poor credit scores and limited financial prosperity.
How can we teach our children about smart financial decisions while making it fun along the way? The trick, in my opinion, is incorporating technology and simulating the growth of money over time.
The Baker’s Dozen steps to helping your children achieve financial literacy:
» 1. Lead by example: This is arguably the hardest tip to stick to! But if you are telling your children to spend within their means, and you are not, your children will notice. At the risk of sounding cliché, it’s true: Actions speak louder than words.
» 2. Set a goal for them so they learn to save, whether it’s $5 to save for that shiny new toy, or $5,000 for a down payment on their first car. Your child will not only learn the lesson of saving and spending within their means, but they will also experience the value of prioritizing what they want and then working hard for it.
» 3. Compounding: Talk about power of compounding, and conversely, discounts. Using coupons at the market can make for a fun shopping experience, whether you’re at Vons or Macy’s. Show them how if they start saving for retirement early they can earn interest on their interest, and thus through compounding they can have more than someone who saved more but started later.
» 4. Show them how they can “own” a company by purchasing a stock. If Apple is their favorite store, show them the different ways they can participate. I don’t mean by simply consuming the product (although that could arguably help their stock position), but by investing. They don’t have to have a trust fund to do so. There are great simulated websites where they can build their own stock portfolio, such as WeSeed.com. This is a fun way to learn about investments with “play money.” This also shifts the teaching to a neutral third party.
» 5. Chores and allowances: Being rewarded for your work goes a long way. I distinctly remember earning $20 for washing and vacuuming both cars. It was great — any time I needed a “little extra” for that must-have outfit or ski trip, I would use the income from my chores to complement the income I had from my part-time job.
» 6. The art of saving and budgeting: This tip certainly doesn’t discriminate based on age. The sooner you learn to set up a budget and track your expenses, the better off you will be. For young adults, budgeting for college can be a great tool. Outlining what they can expect to spend and how they will pay for these costs is a valuable exercise. I suggest showing various income sources, such as support from parents or grandparents, 529 College Savings plans, student loans and/or part-time employment. Set them up for success!
Help them track current spending as well. Mint.com is an excellent online tool. It will send them updates each week, providing a status summary and any areas where they may be overspending. They will be surprised to see where their money goes.
» 7. Taxes: Show them on their pay stubs how much is taken out for federal and state income taxes, along with the Medicare tax. Additionally, show them where that money goes and why. I remember my friend being penalized because she didn’t file a state income tax return, simply because she didn’t know that she had to. Explaining the larger picture will help them understand what is happening on a macro-economic scale.
» 8. Credit card interest rates: It is one thing to hear a number, but to see how a minimum payment does not pay off the balance can be very impactful. I recall a college friend experiencing frustration that her credit card balance remained the same. Once I did the math for her, illustrating that she was simply servicing the debt fee, it clicked. She worked more hours and made larger payments to pay it off.
» 9. Helpful website: MyMoney.gov has podcasts and videos to “teach” your kids.
» 10. Helpful book: The Millionaire Next Door by Thomas Stanley and William Danko is one of my all-time favorites. The book uses stories and illustrates how successful savers reached their goals, therefore eliminating financial hazards later in life. You can find it used for less than $5 on Amazon.com.
» 11. Asset protection: Have a conversation with your son or daughter when they begin to make plans for marriage. This is a very blissful time, yet there are a few items that are best ironed out before the “I do’s.” This applies to their personal money, family money (trusts you may have set up for them) and also when discussing prenuptial agreements. It is best for you to discuss this as a family and meet with an attorney to review your options so that you make an informed, proactive decision.
» 12. Continue educating: Whatever method you find works, keep it up. Education is knowledge, and knowledge is power.
» 13. Talk, don’t preach: Finally, having money discussions in the form of discussions is most advisable. Let’s be honest, no one enjoys being lectured to.
— Kimberly Horn, MBA, CFP, is a client advisor for Mission Wealth Management.