A dear friend recently suggested I should teach kids about investing. As flattered as I was by the idea at the time, the thought has stayed with me.
Do children need to know about money and investing?
What are the most important things for kids to know about money and investing?
Where to begin!
A lot of parents don’t want to “burden” their children with financial information. It is considered to be “robbing them of their childhood” by many families.
My Kids Don't Need To Know About Money. Do They?
But is this sending the right message?
Should children be kept oblivious as to the financial workings of our society?
Certainly, young children should not be overly exposed to these concepts. However, by the time a child starts asking for spending money, or an allowance, it is time to slowly start passing on important knowledge.
What is the best way to start teaching children about money?
5 Things Kids Need To Know About Money
The best place to start is to answer any questions openly and honestly. It is important to do so in a way that is appropriate for their level of understanding at the time. They shouldn’t ever feel overwhelmed by detailed financial information. Broad concepts are best. Your child doesn’t need to know how much you or your spouse earn from working, what the monthly household expenses are, what you pay in taxes or how much you have in your retirement funds. Most certainly, don’t stress them out by telling them that you have started a college fund!
The Allowance
When they begin asking about money, it would be a good idea that they understand that many people trade time for money. That is a good discussion to have once the allowance request is made of a parent.
It is a perfect opportunity to teach them that for most people, money is not received without some effort. Doing chores around the house in exchange for spending money or extra privileges is a great way to demonstrate this concept and is usually enough of an education for most young people.
Saving
If your child has reached the point where they want to strive for greater goals – such as a new bike or other planned purchase, this would be a great time to introduce the concept of saving.
When I was about ten years old, my parents took me to the bank to open a savings account. Not because I had any lofty goals, I am sorry to admit. It was their way of teaching me about money. It was described as a safe place for me to keep my money where my siblings couldn’t pilfer my piggy bank. Not that they ever would!
My parents taught me that if I wanted to make a big purchase that I would need to put some of my allowance into the bank on a regular basis to save up for that purchase. I had a bank book that counted my savings right down to the last penny and I needed to take this book with me to the bank every time I wanted to move money in or out.
This was a great first step to my learning financial planning and the value of money. Back then, there was no thought of buying on credit. My parents probably didn’t even have credit cards. I remember a neighbor showing off their new Chargex card (That should really date me LOL) and how skeptical my parents were about buying merchandise without money. The instant gratification that has become so commonplace in our current society was unimaginable at that time.
Saving was a long and patient process. I discovered that if I spent less on treats and going to the movies and instead put more money into the bank, my projected time to amass this fortune for my great planned purchase was sooner and sooner.
Once your child has started to save and is ready to learn the next step, explain that banks and other institutions use money to lend to borrowers, such as people who want to buy a car or house. I thought it was the greatest deal ever that a bank would give me money - just for storing my money! Of course, those days were very different than today. Interest rates were almost double digits and banking fees were minimal – if they existed at all.
Will That Be Cash Or…?
No financial education would be complete without addressing the advantages and disadvantages of credit. Most people know that credit can be a severe master when the borrower is left with monthly interest payments on top of the unpaid balance. It is important to understand that used responsibly, credit is a great way to pay for a sudden emergency, monitor spending and (when there is no previous balance) to leverage someone else’s money for a period of 20-30 days, interest-free.
It is vital for young consumers to understand that responsible use of credit includes paying down any balance fully and quickly to avoid paying the usual high-interest charges. Maintaining a healthy debt to credit ratio is another valuable lesson because it establishes responsible credit habits. Good credit habits offer many advantages later in life, such as advantageous interest rates for a home purchase, or access to other or greater credit lines.
Investing
By the time I had full-time summer jobs, I learned that I could get even more money by buying government bonds and other investment products. By parking my money for a set agreed time, I could make a great return on my money. Making money just for having money! What a deal that was!
The biggest lesson I learned from my initial investment was that I shouldn’t put all my money in a single certificate. When my car broke down, I had to cash my bond and I lost all the interest. If I had purchased several bonds in smaller amounts, I could have just cashed enough to pay the repairs and leave the rest undisturbed and continuing to earn interest.
By the time I had full-time summer jobs, I learned that I could get even more money by buying government bonds and other investment products. By parking my money for a set agreed time, I could make a great return on my money. Making money just for having money! What a deal that was!
What is it they say about eggs and baskets?
The Most Important Education
Perhaps the greatest epiphany I ever had was seeing a colleague’s son at an investing course I was taking. It was an advanced course on mortgage notes and we all had our heads spinning with fantastic new strategies for creating the best payouts on partial notes.
I marveled at this young man quietly sitting there, next to his father, listening and taking down the information. I realized that even if he didn’t understand everything, that he was probably still 40 years ahead of me in learning about investing in mortgage notes!
It turned out that he understood quite a lot. This reminded me of an old joke that a kid now can program a spaceship launch in less time than it takes me to fix the blinking 12:00 on my PVR. How wonderful that by the time he finishes high school that he would be able to invest his money into a proven model with great returns!
I thought his dad was just so wonderful for giving his son this gift of knowledge.
This, of course, was a very advanced session and surely not the first this young man had attended. I would recommend something more general as an introduction. In addition, I would suggest the exploration of a variety of investing models. Not all models appeal to an individual and it is important to have the right fit.
One book that is actually fairly easy reading narrative I feel every young person should read before graduating high school is the original The Wealthy Barber.
The Wealthy Barber is a financial planning book franchise by Canadian author David Chilton. The first book in the series was in the business fable genre, using the story of fictional characters to convey financial advice.
- Wikipedia
So, what is the most important thing for your child to know about money and investing?
I would say absolutely everything – as soon as it is age and awareness appropriate.
1 Give Them An Allowance – Explain trading time and effort for money.
2 Have Them Set A Savings Goal – For a planned purchase or special event.
3 Teach Them Responsible Credit Use – How to leverage credit and avoid amassing debt.
4 Introduce Them To Investing – There are many models. Help them find a good fit.
5 Encourage Financial Education – Introduce them to books and seminars.
2 Have Them Set A Savings Goal – For a planned purchase or special event.
3 Teach Them Responsible Credit Use – How to leverage credit and avoid amassing debt.
4 Introduce Them To Investing – There are many models. Help them find a good fit.
5 Encourage Financial Education – Introduce them to books and seminars.
We all know that today’s schools don’t teach this important area of knowledge. Not only can most kids not balance a checkbook, some probably don’t even know what one looks like! Until educational priorities change, it is up to every parent (or a knowledgeable friend or family member) to teach important financial skills to the next generation.
Get them interested in reading and attending local seminars to open their minds to new investing possibilities. Engage them in thoughtful discussions about what you are all learning.
Your children and their children’s children will thank you.
If you feel you are not well educated enough to teach your children. Take the time to learn the basics.
Knowledge is power and updated knowledge is the most powerful of all.
It takes discipline, but living within one’s means is key to accumulating wealth. Being financially responsible in the present is a good way to ensure a comfortable future.
These steps are good places to start a more conscious and directed route to achieving your financial freedom. Read, reflect and take what will work for you.
It takes discipline, but living within one’s means is key to accumulating wealth. Being financially responsible in the present is a good way to ensure a comfortable future.
These steps are good places to start a more conscious and directed route to achieving your financial freedom. Read, reflect and take what will work for you.
Bottom line is that there is no blanket strategy. Each person must evaluate their own circumstances, needs, and desires. Get the help you need to achieve financial freedom.
If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much.
-Jim Rohn
Above all, believe in yourself and believe that you will achieve your goal!
_________________________________________
Sources:
Lynda at Sonoran Sun | Private Equity Investments
Further Reading:
