Parents, financial literacy is a way of life, and while teachers integrate some key money concepts into the various math and humanities curriculums (bravo, by the way, for this effort in the education system) it’s not up to them to make your kids financially savvy. It’s a team effort.
I get it. You’re stretched for time. You might not feel like you’re a shining example of good financial choices. And the pandemic has shifted your priorities. But having regular, positive and simple conversations about money can go a long way toward empowering your kids and teens to make smart financial choices when the time comes. It will also give them a head start in the classroom when their teachers teach this subject in the fall.
Here are three simple principles you can share with your kids and teens. And obviously, you’ll want to integrate age-appropriate examples.
Saving early has major advantages
Who doesn’t want the freedom to do what they want, right? Well, having savings allows for that flexibility.
Young people have the most important ingredient in saving success: time.
The earlier your kid or teen starts saving, the greater the time their money has to benefit from the power of compounding. It works like this. Money earns interest and returns, which are reinvested into the original amount. Then that larger sum earns interest and returns. Repeat.
It’s like a snowball rolling down a hill of fresh snow. It picks up more snow as it rolls and, by the time it hits the bottom, that once tiny snowball is much larger than the original size. The longer the hill, or time, the greater that snowball will grow.
All your child has to do to benefit from the time value of money is start saving.
Thus, the best thing you can do with this money principle is instill the habit of saving small regular amounts early on; even a small amount like $ 1 per day or $ 5 per week. And, if you really want their eyes to light up, plug their savings into a compound interest calculator online so they can see just how huge their money will grow.
The savings habit is what’s most important. How the money gets invested is bonus material for when your child is a teen and is ready to go with you to meet your financial adviser.
It’s OK to spend within your means
Kids and teens need to know that it’s OK, and normal, to spend money on what matters to them. This helps to form positive money psychology, rather than approaching spending from a place of scarcity and fear.
The money principle underpinning this is to spend what you have and nothing more.
It can be extremely effective to focus on the benefits of planning out spending — a.k.a. budgeting — and how good it feels to be able to afford their purchases. The most basic of a budget for a young person has three parts:
Saving — 20 per cent
Spending — 70 per cent
Giving — 10 per cent
The older your kid, the further they can break their budget down. For example, if they are heading off to college they will need to incorporate spending categories for meals and books. This level of basic budgeting is reinforced in most provincial curriculums.
Certain debts are good; choose these
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By the time your child is a teen they will have a basic understanding of debt. For obvious reasons you will want to steer them away from ever carrying a credit card balance, which is bad debt; but this is your opportunity to make clear to them that not all debt is bad. Specifically, they need to know that it’s OK to take on student loans to fund formal education so that they can have better future income opportunities. In fact, it’s one of the best investments they can make: education. Certainly, paying it back will feel a bit burdensome, but statistics continue to show that the payoff far outweighs the cost of the student loans.
This money principle can be extended further; good debt (mortgages, for example) helps build up assets. Bad debt (credit card balances and car loans, for example) has a near-zero payoff. So use good debt when you need it and avoid bad debt.
For your kids to really be great with their money, these three money principles need to be a way of life and not just a one-and-done conversation. My advice is to talk about them often, demonstrate them, learn more about them, help your kids with their financial homework (when school resumes) and have some fun in the process.