It’s never too early to teach your children about money. Starting them off on the right financial foot may be one of the best things you can do for them.
As a Certified Financial Planner (CFP), I help clients every day with their financial planning needs. Many client situations are complex – there’s no “one-size-fits-all” solution. However, I can tell you that no matter how complicated the financial services industry may be, most of what I do each day has been built on a foundation of lessons on the basics of money management and common sense that my parents taught me.
If you want to help teach a young person solid financial basics, I will share with you some of the lessons I learned that may help you start that conversation.
Pay Yourself First
At age 12, I was a paperboy. My parents opened a custodial investment account for me, and I’m glad they did. In fact, I think a large part of that early investing experience led me to my career today.
While an IRA may not be right for your child, teaching them to save definitely is. Maybe they get some money for doing chores around the house, shoveling a neighbor’s driveway or running a lemonade stand. Teaching them that the first thing they should do with that money is put some away for themselves for later is a critical lesson.
Save Early, Save Often
Worry about yourself first. This may come across at first glance as a lesson on how to be a selfish person. But it’s not. It also may come across as the same thing as “pay yourself first.” But again, it’s not.
What it means is to make sure that your financial responsibilities are taken care of before you follow what your friends are doing. For example, if your teen has a car payment coming up, it’s important that he or she has enough money to cover that before buying that concert ticket, even if “everyone I know is going.” What teens often don’t understand is that their friends may have put that ticket on a credit card, which won’t be paid off until much later.
Pay Off Your Credit Card Every Month
Credit cards are a great way to pay for things conveniently or to earn points from rewards programs. What they are not, however, is a free line of credit that allows you to borrow however much you want, for the time period you want, with zero interest. A good rule of thumb is if you don’t have the money in the bank to cover your next statement, then don’t put it on the card and don’t buy it at all. Online accounts also allow easy ways to monitor purchases so there are no surprises.
Delay Gratification
In the now famous “marshmallow test,” Dr. Walter Mischel and researchers from Stanford conducted an experiment that tested what children would decide to do if given the choice between getting one marshmallow now, or two marshmallows about 15 minutes later. (Keep in mind how long 15 minutes is for a child.) The researchers found that after studying these children for years after the test, the ones that could hold off on the one marshmallow for the reward of a second had better SAT scores, a lower BMI, and better educational outcomes.
All of that said, it’s not a bad way to teach a child about delayed gratification and how interest works. If children can avoid the instant gratification of having something now, they will have a better chance of having more later.
Buy Whatever Kind of Car You Want, But Buy a Good Used One
We all know that cars lose value the moment you drive off the lot. If you purchase a new car, the value is going to be reduced drastically more than if you bought a good, used one. I’ve found over the years that I’m much more apt to buy a nicer luxury car that is used than to spend a fortune on a brand-new one.
And with how much information on cars there is online today, your homework can be done well in advance of ever stepping foot in a dealership. Knowing your numbers ahead of time puts you, not the salesperson, in the driver’s seat.
Invest in Yourself
Unlike the purchase of a flat-screen TV or expensive new shoes, investing in education appreciates over time. You can even say that knowledge is a “worldwide currency.” I’ve tried to take every opportunity to better myself and continue to learn.
Instead of looking at this as “this book or course is going to cost me X amount,” think of it this way, “this book or course is going to allow me to earn X times the cost of what I invested in it.” Consider the return on investing in yourself.
The Bottom Line
There are several ways to begin the conversation with kids about money and get them started on their way to better financial habits. And while getting them to eat their greens might be a struggle, hopefully, the ideas above will make discussions about money a little easier.
Contact Scarborough Capital Management to see how we can help.
The opinions voiced on this blog are for general informational purposes only and are not intended to provide or be a substitute for specific professional financial, tax or legal advice or recommendations for any individuals.
