A generation of kids are being raised to finance everything. Debt has become the norm. It's ok to have $200,000 in student loan debt. It's ok to finance cars. Credit cards are handed out like candy.
And my heart goes out to them because it isn't their fault. They are doing what they see their parents do, what their friends are doing, and ignoring all else.
Unfortunately, money isn't taught in schools anymore. Ask any young adult if they know how to balance a checkbook? They will say no. More than likely they don't even know what a checkbook is…let alone how to balance it.
As a result of this lack of education or should I say lack of financial literacy…this same generation of kids is on the fast track to being a generation of broke 65 year olds. Currently about 15% of all retirees file bankruptcy – and these are the adults who know better!
So, how do we, as responsible adults, teach them money? How do we show them the correct way? Well…I got 8 tips for teaching kids about money…here you go!
An allowance is a good place to start. Teaching them the value of money when they are little goes a long way in their education. Whether or not an allowance is tied to chores is up to you (I address this in the blog post ‘Should You Give Your Kids An Allowance?') When kids have their own money to spend they quickly learn that it is not a never ending building that spits out money. When their wallets are empty it's a clear message that they spent too much. And will learn next time they spend it all in one place.
Introduce savings when they receive their allowance. I recommend that 20% off ALL money received (except gifts) goes into a savings account.
This practice sets them up with a savings mindset that will serve them well when they are working. Because our retirement lifestyles don't fund themselves – we have to take the initiative and save the money for ourselves.
Open up an investment custodian account on their behalf. Show them the power of compounding interest. You may need help from an advisor with this. But, in the meantime, research stocks to buy together, invest and see what happens. You can check out ‘Investing for Freedom‘. This educational course explains the stock market in easy to understand terms…and teaches you how to invest in Index Funds (the easiest way to begin).
And, before they head out to college (where they will be tempted to cash out of their investment accounts) plug their numbers into this Retirement Calculator. Use the money they have already invested. If the haven't already…here is an example: At the age of 18…for 47 years (age 65)…If they invest $35 a week – they will have close to $1.8mm
A budget is just a tool that you use to manage your money. If your child gets paid $10 a week in allowance their budget might look like this: $4 into savings/investments. $1 tithe to God. $5 to spend. Keep in mind…this is real world thinking. We pay taxes. We save. We tithe. And they should learn how to do that too – especially when they are younger.
As they get older you can introduce ‘real world' paychecks and how taxes and retirement plans work. Which leads me to…
Not only does a summer job provide income, it teaches your child how ‘real world' paychecks really work. They will see their gross income and their net – and be shocked at first.
I bet they say ‘That isn't fair!' 🙂 But better to be shocked when they are young…so they can understand it when they are older.
A summer job has many other benefits besides income. It teaches them the responsibility as it pertains to work schedules. Arriving on time. Working hard. Being a team player. These are all skills that they need when then actually leave home and are living on their own.
Once your kids are earning money they can start contributing to an individual retirement account (IRA). A Roth IRA is funded with after-tax dollars. And withdrawals in retirement are entirely tax-free. When funding these accounts early, and their income and their tax rate is still very low, your kids could benefit from decades of potential compound growth and tax-free income in retirement. Check out this Retirement Calculator – which shows you the value of compound growth. Compound growth is the 8th wonder of the world IMHO!
Now, this is a tough one. As you know, you need credit for most things. You need credit to sign a lease or get gas/electricity. Most financial advisors would recommend that your older/adult kids take out a credit card of their own. Personally I don't agree with this. I saw how much trouble my son got into with just a debit card!
I recommend that you open a credit card with your kids as an authorized user. Explain what the card is for and lay out the consequences if they abuse that privilege. Our kids could only use the card in case of emergencies – flat tire or an Uber if they were stranded. Going to the movies was not an emergency.
This option can be fraught with consequences. You know your child – if they have a history of responsibility than go for it. If not…only you can decide. A great post for you to read is ‘Parent College Student Contracts‘. The power of the written (and signed) word is amazing.
One last thing in #7 – make sure you show them what interest is…the kind you pay vs the kind you earn. How carrying a credit card balance is NOT in their best interest. How a car loan is not a good idea (why finance something that depreciates the minute you drive it off the lot). How paying cash is king (or queen).
As parents, if we are fortunate, we have 18 years with our kids at home. But statistically our sphere of influence is until they are about 7. And then they look to their friends. The earlier you are involved in their finances the better.
We want them to mess up when they are at home and we can help them out….not when they are out in the world and have NO idea what to do.
We need to educate our kids. We need to teach them financial literacy. We need to teach them about the power of debt (it's a soul sucker), how saving now is important for when they get old (because getting old is what will happen), and so much more! And, hopefully your kids will be one of the few that retires with millions and millions in their investment portfolio. No idea how to do that?
Go on and grab the FREE ‘How to Create Wealth' workbook below!