We want our children to be money savvy and this is, unfortunately, one of the things they will never learn in school. We started working and found out about taxes, loans, interest and all the financial terms that we had to know. Systematically, we started figuring out what was going on around us. Then one evening in your 30’s while paying bills, you think to yourself, “Fuck man, I’m adulting hard”. Then you begin to think about how different life would have been if you had your finances sorted out years ago. You would have been half-way to retirement by now.
I think that parents have a huge responsibility here. However, in a lot of households, we never talk about money. We don’t want that additional stress on our children. However, we are responsible for raising educated young adults that will contribute to the economy. We also plan on having so much money our children would never need to work. You don’t want them to blow it on alcohol and drugs, because then you’d have to haunt them from beyond the grave and that sounds like effort. So, I made a list of all the things that I wish I knew as a kid.
1) Where does money come from?
My mom had an employee that asked her for a raise. At that stage, my mom really could not afford to give her a raise and had to tell her that. The employee was confused since she could not understand why my mom could not simply go to the bank and just get more money. She thought that when people went to a bank teller, you could literally ask for any amount and the bank would simply give it to you. She didn’t understand that you are accessing your own money. The reality is, that this is how kids understand money as well. All they see is that you go to the ATM and leave with money.
We need to teach them, that we do not put on suits in the morning and go to work for the whole day because we are bored at home. We go to work, to do something for a company, that ends up paying us for our effort. The ATM is simply a way for us to access this money. One effective way to imprint this message is to give them tasks to do for their pocket money. This will ensure that they know money does not fall into your lap.
2) Things cost money
They then need to learn that things cost money. After you worked for your money, you spend it on something or you save it. Children need to know that something like a bar of chocolate is cheap and Play Stations are expensive. Well actually everything is expensive, but that you can leave for them to find out on their own.
Children should understand where the money goes. When they are teenagers you can have them sit in on discussions regarding the family finances. How much is spent on the home and car payments? What is food costing the family? What are you spending on school fees and sporting equipment? It does not need to be every line item, but if they know what things cost, it will help them appreciate and understand why you make certain purchases.
3) Wants and needs
They now have money that they worked for. They should know that to buy something, they will need to part with some of it. This is where the next lesson comes in, “what is the difference between wants and needs?” I’m not suggesting that you have them memorize Maslow’s hierarchy of needs. They just need to know the difference between spending money on toy cars and bread. Only after buying everything that is compulsory for you to survive, should you even consider buying luxuries.
The next spending habit they need to learn is that you don’t have to spend everything. If you have money left at the end of the month it does not need to go to luxuries. Costs will vary, and it is important to understand that if your costs during this month are contained to a minimum, it allows you to tank some of the big unforeseen expenses during the next month. It might be a good idea to pay them a bit extra to allow them to save for that paw patrol figure themselves, rather than buying it outright.
Most importantly, they should see that you save. If they are aware of how much you are spending on everyday purchases and payments, they should see that the rest is saved. They should also know why the money is saved. Will it be used to supplement the emergency fund, be saved for retirement or will it go towards the family vacation? Obviously, some lessons will only be understood when they are older. Some of the concepts they will only grasp (or be interested in learning) later in life. You can read more about savings rate in my article how savings rate influences your retirement.
5) Spend is more important than income
Not every profession will earn millions. There is an argument to be made for living a low-income stress-free life. Whatever you are earning, your child needs to understand that if you limit your monthly costs, you will have enough. We often think that we will save more and enjoy life once our salary increases. This, in turn, leads us to purchase more expensive cars and larger homes, reducing our savings margins.
Our children need to learn from our mistakes before they make them. Teach them that when you earn a salary, you can only spend 80% of that. For all practical purposes, the other 20% does not exist. Then keep your costs the same (including inflation) as far as possible. Your salary will probably increase faster than inflation. If your living costs remain the same, your savings rate will only increase.
They will pay tax. It is a hard pill to swallow but it is a reality. Teach them what taxes are used for (or should be used for). You can leave the irregular government spending as a nice surprise for when they are out of the house. Teach them how it works and that it is dependent on your income. For more information on taxes read my article why you should always submit your tax return.
7) Open a bank account for them
You can pay their pocket money into the account and have them spend from that account. If a family member gives them a bit of pocket money, take them to the bank to pay the money into the account.
8) How to use debt
No, you should not make debt in their name. They should only be familiar with the concept. Teach them that there are only two acceptable reasons to borrow money. The first is if you are buying something that will appreciate (an asset). The second reason is if it will influence your ability to earn an income. If you need to travel to your job and decent public transport is not available, it makes sense to buy a reasonably priced car with debt. However, pay it off as soon as possible and buy your second car cash.
9) What is compound interest
The eighth wonder of the world. Compound interest allows everyone to become millionaires. Compound interest doesn’t care whether you put away massive amounts of money. All it needs is the time to grow. Start when you are in your twenties and never stop until you retire. Compound interest can work in your favour if you invest or it can work against you if you have debt. It is important to know the difference.
10) What investments do you make
After you have shown them how to save, they need to know what an investment is. Do you put your money in stocks, property or invest in cash products? Not all investment products are created equal and some only work in certain circumstances. They don’t need to know everything about investments. Simply that your savings should be invested in order for it to compound to a significant amount.
We all wish that we had this information when we started working. It would have saved us from those spiralling credit card debts. It would have motivated us to save much earlier in life. Give your child the opportunity to start correctly.
Be safe out there,
Quote of the week“Economists report that a college education adds many thousands of dollars to a man’s lifetime income – which he then spends sending his son to college.” – Bill Vaughn Click To Tweet
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