I was lucky. My parents taught me the importance of finances from a young age. Starting with the basic understanding of expenses to run a lemonade stand and the time it took to realize a return on investment. Although unprofitable until I cornered the market on the after-school sugar rush, it was a great learning experience along the way.
When raising financially prudent children, there are several simple yet effective strategies they can use. A few topics parents should be discussing with their children from an early age are saving vs. spending, budgeting, building credit, and investing for the future. Shaping habits from a young age can have a profound effect on the financial futures of children and parents alike, determining how to assist children with things such as college tuition, cars, and housing. Further, this may have an impact on when parents can retire, their lifestyle in retirement, and if they are adequately equipped from a risk standpoint should there be health decline leading to ongoing medical expenses.
Teaching children to save is important. But that doesn’t mean it should be boring. Consider the following when creating a saving crash course:
- Set savings goals with your child.
- Create a rewards system for hitting certain savings milestones.
- Offer them a savings match (similar to a 401(k) plan).
This will not only teach them to save, but allow them to have fun along the way. It also shows them that parents are along for the ride.
Understanding expenses and building credit are essential concepts as kids get older. The goal of most parents is to ensure that their children can become financially independent. Being able to recognize fixed vs variable expenses is the first step in making sure children budget correctly and live within their means.
Consider the following exercise: keep a list when on a bulletin board or something similar when your child asks to buy something; then categorize the expense into a “Need” or “Want”. When done properly, this can help them to frame their financial choices.
Once there is a clearly outlined budget with expenses understood, it makes it much easier for children to then build credit and avoid accumulating credit card debt. If they are not of age for a credit card, it is a great idea for parents to make children an authorized signer on their credit card as long as rules for use are outlined. The power of building a strong credit score early on can not be understated. It is how lenders evaluate individuals as borrowers and is crucial in purchasing items such as a car or home.
The importance of investing at a young age is shown in the graphic above and plays a role in every aspect of a child’s financial future. To educate children, consider the following idea:
Dedicate a portion of a child’s birthday money to purchasing stock in a company that your child will recognize and monitor it once a year.
This is a great way to help them understand risk/reward and appreciation (or depreciation) of assets.
With the emergence of investment platforms making it easier for retail investors to invest in the market, these principles around investing have never been more important. Starting to understand these principles at a young age is a big reason why I decided to pursue a career in Wealth Management. Although Wealth Management isn’t the right career path for everyone, the value of raising children who can appreciate and adopt some of these principles cannot be understated.