Introduction
“The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth in what seems to be an instant. – Robert Kiyosaki
Initially, I was going to include a quote that would touch upon how money either does or does not buy happiness. But this quote is much more profound. It speaks volumes as to how our minds are the necessary tools in order to build riches. It is especially relevant in this context because if parents properly teach their children about money, their growing minds will have an enormous effect on their financial future. In addition, this notion of teaching children about personal finances can trickle down into the next generation…and then the next. So, as a parent, you really have an obligation and a fantastic opportunity to not only begin a generational legacy, you have the opportunity to ensure your children will learn and grow with a money mindset. Lastly, this will do nothing but benefit you as a parent in the long run. If done correctly, the knowledge you instill in your children will come back 10x and they may be kind enough to front your bills when the time comes and you grow old. After all, It is a shame and incredibly burdensome to constantly care for your kids financially. Ultimately, if the money mindset is instilled at different stages throughout the child’s life, they will have obtained some of the most powerful knowledge in the world…the knowledge of money and personal finance.
First and foremost, as a parent, it is crucial for you to understand the basics of personal finance yourself. In addition, it is important for you to have healthy finances and to have the ability to track your personal finances. I strongly urge you to install Personal Capital which is a free software program that combines all of your financial accounts and provides an overview of your financial standing. Click here to install Personal Capital for free! Please also see my main page for an overview of the software.
The Current Education Model
Currently, there is a tremendous flaw within the education system. The education system does not teach kids, teenagers, or young adults about how to personally care for and manage their money. The irony is that the education system is very expensive over the course of a lifetime. Yet, personal finance is never a topic of discussion within the basic curriculum. Why is this so? There is a push for personal finance to be taught at the high school level. Reasons for its absence include:
- Lack of qualified teachers
- Personal finance concepts are not part of standardized tests so the subject matter is not taught
- Education is run at the state level. Therefore, there is no federal authority for the implementation.
- Little academic agreement regarding the personal finance instruction.
Acquired the above information from an article I read within business.time.com entitled “Why We Want – But Can’t Have – Personal Finance in Schools.”
The bottom line is that this is truly a harrowing tragedy. However, the more important question is what are you going to do about it as a parent?
Respect the Money, Earn the Money , Save the Money
A young mind should learn the notions of respecting the money, earning the money, and saving the money. At an early age, it is important for youngsters to understand the value of money and the power it possesses. Money is the current medium for exchange in which to buy valuables and support a life and the lives of those in connection. They should be reinforced with notions that money does not grow on trees and it is hard work to accumulate an abundance of it, which is indeed necessary for a fruitful life. Once they understand this, they will learn to respect it. Earning the money reinforces the notion that money is earned and not given. An individual must exchange time or effort to accumulate money. To reinforce this, I believe it is important to enable the children to work at a young age so they understand the trade of work for compensation. Save the money is an important concept that should be instilled at a child’s young age. However, it should be reinforced as the child grows and understands that by saving money, additional money can be accumulated to purchase belongings or experiences. It is crucial to instill the understanding that when money is saved, it can work for the child to return an increased amount of money…sometimes on a massive scale. This will also help to instill frugality.
Budgeting, Saving, Borrowing
It is important to understand that money affects all stages of one’s life. It is more important in some stages and less important in others. However, the bottom line is that if money is understood and respected at an early age, the child can learn tremendous savings habits to ensure that money is not a struggle in his/her various stages of life. As we are all aware, money can either be a tremendous slave or a horrible master. Money is freedom. The choice is up to the individual as to whether they will get ahead or fall behind.
At the most basic level, a child must learn lessons and values that encompass three notions (at minimum): Budgeting, Saving, and Borrowing. It is important for a child to learn to budget their money. This can start very early in life by implementing a rewards program associated with putting money into a jar. Once the jar is accumulating money, the child can be given several options to choose from as to what to buy. Concurrently, the child will begin to understand that all material items cost money and if money is budgeted and saved properly, they can afford to purchase more items that they desire. They will learn not to overspend on items that are less desirable. Borrowing is a little bit more tricky. However, there are lessons that can be demonstrated here. A parent could in fact lend the money to a child and then give them a certain amount of time to pay the money back. If it isn’t paid back, some type of repercussion should be implemented.
Different Stages
Ages 3-5 / Preschool
Patience
At this age, it is important to implement patience. Although, teaching your child about money at this point is probably the last thing on your mind. However, implementing patience is probably incorporated into your guidance as a parent regardless.
- Basic math will become a part of the education curriculum…this is obviously a good thing and absolutely necessary.
- Acquire a savings jar so the child can learn how to save and actually visualize the savings grow
- Chores around the house for an allowance is a good system to illustrate that labor equates to money earned
- Play money related games so they start to understand the transaction process regarding money
Ages 6-10 / Elementary School
Choices
At this age, it is important to implement the fact that the child has choices as to what to spend money on. As a result, the child will learn to respect, value, and budget their money because they will begin to understand that they cannot purchase everything they want…they have to earn it.
- Let the child spend their own money when shopping for toys or other things. In addition, once the child runs out of money or has depleted their savings account…do not buy the toys for them. This will illustrate that money must be earned before it is spent.
- Start introducing the money system. Take them to the bank with you when you go. Discuss banks & bank cards, checking & savings accounts, and ATMs with them. Let them handle some cash so they begin to understand how to handle money.
- Start explaining expenses to them including monthly bills. They need to start to understand that goods and services, that we constantly interact with, cost money.
- Implement the notion that once the money is earned, they have a choice as to what to do with it. Be sure to hone in on the fact that saving their money is crucial.
Ages 11-13 / Middle School
Savings
At this age, it is important to convey the power of compound interest. Although this may be a challenge as to how powerful the concept can actually be, it is time to start with the beginning stages.
- Explain how smart money choices such as savings and investing can be very beneficial.
- It may be a tad early, but towards the end of middle school and the beginning of high school, it is time for them to seek a job. Not only will this change their point of view towards work and compensation, you do not have to pay an allowance anymore. They will begin to understand independence.
- Explain the importance of making smart moves with money and review money mistakes with them. Let them know that they are solely in control of their finances.
- Open a bank account for them. It is time for them to have a bank account to understand transactions and balances. In addition, it may be smart to implement a match program with them. Perhaps when they have a certain amount, you will reward them as a parent. This will guide them towards making savings a habit. This is huge. You will be setting them up to realize how powerful compound interest can be.
Ages 14-18 / High School
Investing & Borrowing
Hopefully, by this time, you are raising a heck of a bean counter. This stage is important because the young teenager will be introduced to the spending habits of others. It is important to keep a close eye to make sure the practices you implemented remain and they do not listen to their new friends who do not have the same discipline.
- Show the teenager how to invest. Explain to them the basics and let them understand that investing their money is extremely beneficial. Explain stocks, bonds, and mutual funds. Personally, I would stick with low-cost index funds. Do not make things very complicated. Besides, over the long term, these are the best vehicles. Let’s just leave it at that.
- Force them to start saving for big items such as phones, automobiles, education, and other major expenses.
- Although, some may say it is time to introduce a credit card at this stage, I think this can wait. Just begin to explain what a credit card is. Start explaining how it is important to build credit…and not to build credit card debt. DO NOT LET THEM BUILD CREDIT CARD DEBT!
- Introduce savings vehicles for retirement such as 401ks & IRAs. Also begin to explain student loans and the costs of borrowing.
Ages 18 & Up / College
Credit Cards & Debt
Compound Interest and the Time Value of Money
Before I comment on anything for this stage…the number one thing is to open an IRA (Individual Retirement Account) for them if you have not already done so. I REPEAT. If you have not already done so. I say this because 18 is the age as to when the individual can open an IRA on their own and contribute up to the maximum (currently $5,500 a year). It is critical to look into opening a custodial IRA for the child at an even earlier age. This way, as a parent, you can contribute in the child’s name and then the account will be converted into a regular account once the child reaches the age of 18. IT IS CRUCIAL TO LOOK INTO THIS! Get the IRAs open and contribute as much as possible as a parent and practically force the teenager to max out the account or contribute as much as possible. The key is to get as much money into the account as soon as possible…AS SOON AS POSSIBLE.
I could get carried away here and illustrate how powerful compound interest can be…but trust me. We are talking millions…millions. The best retirement calculator I have come across is the Ultimate Retirement Calculator on the Financial Mentor site. Give it a shot and run the scenarios. The numbers are incredible. I will provide one example…
Let’s say the teenager starts saving $5,500 a year at age 18 and continues this until age 30. At age 30…the contributions can cease completely. Given a 3% rate of inflation and a 9.7% annual return…the individual could have a portfolio with a value of $4,688,747.00 at age 70. Let’s let that sink in for a minute. Not only is this mind blowing…the individual could also max out their 401ks and work retirement accounts which max out at $18,500 a year. In addition, the individual could continue contributions later in life in order to fortify their returns. The power of compound interest. This could be your LEGACY.
- Now may be the time to introduce a credit card but keep tabs on this and make sure that the card is paid off in full every month or the card is used for emergency situations only.
- Assist in creating a more complex budget to include assets and liabilities. Expand on this into different time frames…weekly, monthly, yearly.
- Make sure that the teenager continues to invest as much money as possible. In doing so and experiencing the power of compound interest, life will be much more flexible down the road. And you will end up with a very wealthy young adult….and you may become a very rich parent!! Build the legacy.
- Teach the notion of delayed gratification. This describes the process of resisting temptation of an immediate reward in order to receive a 10x reward in the future. Force them to understand that it is important to live cheap at an early age so that they can live rich at a later age.
Building A Legacy & Conclusion
The above will assist in developing a child that will be hardworking, smart, and independent. You do not want to be a parent of an individual that is constantly relying on you for money and help with things later in life. Raise a well-oiled machine…not a machine that will constantly need maintenance. If nothing else, you will be the one to change the financial future of your children and your families future generations forever. Simple mental implementations at an early age will create remarkable returns over multiple decades to ensure that your family will be financially sound for ages.
How does that sound? Sounds pretty good to me…
Redefine.
-James