This is a guest post from Pauline of InvestmentZen.com
I know it’s weird, I don’t have kids, and here I am talking about things kids should learn from their parents about money. Yet I was a kid once, and if it weren’t for my financial education, I’d probably be deep in debt right now, struggling to pay off my student loans in my mid 30s. My parents were always pretty direct about where money came from, how hard it was to earn it, and how important it was to save and invest it for the future.
I read a post about a dad who brought his whole salary home in cash (it was a big one at that, around £8,000), to show his kids where the money went every month. The kids had always assumed their dad was making a lot of money, so there was more than enough for all they could wish for. Seeing their dad’s pay in cash on the kitchen table was a real eye opener. The dad proceeded to take away the sums needed for the family’s mortgage, bills, the kids’ tuition and extra curricular activities, etc. until only a small part of the cash remained. It was easier for the kids to realize that if they took a bunch of money away to buy their last whim, there wouldn’t be much left for groceries or gas to take them around.
Now how you decide to approach money matters with your children is very personal, but one thing is sure, money should not be taboo at home. Not between you and your spouse, not around the children either. And it is never too early to start talking about money. Of course, you don’t want to discuss the math behind early retirement with your five year old. You probably want your kids to be mature enough to start discussing your salary as well, so the whole school doesn’t find out how much you make.
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An easy way to get started with smaller children is with a physical piggy bank. Some even have different slots, for money to save, money to spend, and money to give away, so children can learn how to set aside money for investing. Around 10 or 12 years old, kids are generally old enough to understand the basics of investing. Some of my friends had their parents open a brokerage account for them in their early teens, and part of their Christmas and birthday money had to go into index funds, or carefully picked company stocks.
Teen years are also a great time to get a first job, like baby-sitting or dog walking. Your kid will learn the value of money when he starts having to sweat to earn it, believe me! In any case, if you think they are too busy with class and activities to even work a few hours a week, you should discuss how to handle money with them. Protecting your kids in that area is doing them a disservice. Help them draw their first budget with their allowance, what they need to pay for, and how much money is left for fun. Introduce savings when they want something that is expensive. How much do they need to save every week if they want to buy that bike by the summer?
By introducing delayed gratification, you are teaching your kids one of the most valuable life lessons. You can even get them a credit card with a small limit, so they learn how to pay it in full each month, and start building a credit history.
Once time comes for college, you should sit down and discuss who is going to pay for what. Are they applying for scholarship? Is there any way to avoid student loans? Is living on campus worth the expense? Kids have to understand that everything comes at a price. A prestigious college can result in six figure debt to start their adult lives. Can they go to community college for the first couple of years and cut that in half?
School sadly doesn’t provide much financial education, yet it is such an important life skill. So don’t be afraid to talk to your kids about money, they’ll thank you later.