I remember my dad telling me when I got my first job that if I saved 10% of everything I made going forward, I could be a millionaire when I turned 55. I was 15 and a newly employed paperboy.
Not convinced, I failed to take his advice. He never really pressed the issue. Now, at 36, every finance and investing book I read indicates my dad was right. It’s depressing thinking about how much money I’ve wasted in my nearly 22 years of working and earning money.
However, as a dad, I’ve tried to make it a point to teach my kids about finances. I can share what I’ve done; I think my wife and I have come up with some very clever methods. I can also share some ideas I hatched after reading some finance books recently.
It’s never too early to start teaching your kids about money. Trust me, these are the lessons they won’t learn in school. They’re counting on us as parents to set them up to succeed. Try following these simple rules and strategies.
1) Start as early as possible.
Think about this. Can we all agree most kids are gifted money starting as early as birth? Let’s assume on average, the average kid nets $100 annually between birthdays, holidays, etc. So by the age of 10, if they’ve saved (or you’ve saved for them) all $1000 they’ve been gifted, you can take that $1000 and use it to start talking about saving and investing. When they’re 10, you still have some control over them. Let’s say you opened a savings account for them. Explain to them that if they left that money in the savings account until after college, it would grow to $1056.40, which means they got $56.40 for doing absolutely nothing. That’s not a very good ROI, but to a 10-year-old, it’s still free money and he or she might find it interesting. The main thing is you’re talking to them about it. Perhaps make them a deal at that point. Act like an employer, and offer to match half of their future contributions up to 6% like a 401k. It might be too early to talk 401k, but if they take you up on the offer, they might appreciate the concept when the savings account is worth say $2500 when they graduate high school. That might be a good time to start the investment conversation.
2) Compound interest is free money; make them understand that.
Explain how compound interest works (and if you don’t know, Google it together). If more kids participated in saving money, and had these conversations with their parents, the amount of silly financial mistakes most young adults make could be largely avoided for those with the interest and discipline. Let’s use the same example from before, and assume an 18-year-old has saved $2500 in a savings account with 0.5% interest. You can find a compound interest calculator online to show how that $2500 invested in the stock market would grow to $30,559.05 by the time he or she turned 55. Explain that saving $100 a month and investing it on top of that initial $2500 investment would result in $236,432.27 when he or she turned 55. You could literally turn birthday money into $236,432.27…why didn’t our parents tell us this? That leads to the third thing…
3) Kids don’t typically take this advice and put it to use.
Our parents probably DID tell us this. We weren’t listening, and they weren’t being aggressive enough. Don’t just bore them to death with numbers; they can’t even get through a math class, how are they going to absorb your financial jibber jabber?
4) Get creative, and make it fun.
Several summers ago, my son asked me to buy him a pack of Pokémon cards. I thought about it a second, and said, “No, but you can do some chores and I’ll give you money that you can use to buy some Pokémon cards.” This achieved two things. First, I tried to address the need for immediate gratification. If my son still wanted those cards a day or two later, he would have at least spent some time thinking about it while he put some blood, sweat, and tears into the process acquiring the means to buy them. Secondly, he would associate the cards, the purchase, the money involved with the work, and the delayed gratification with the time spent earning the money. These are things kids have a hard time understanding, and it’s mostly our fault because we are so quick to just give them what they want and ask for. After my son’s experience, our chore chart was born. I had all my kids fighting over the available jobs in order to earn more money.
5.) Make them pay taxes.
After our chore chart was born, the following Friday it was payday. My daughter was the first in line to collect the cash. She did enough chores to earn $13.80. Imagine her disbelief when I handed her $12.42. Oh yeah…nothing like the lesson of Uncle Sam getting his! Any allowance or “pay” I’ve given my kids has always been taxed at 10%. Yeah, I know, they fell into a great rate – but when you’re counting out paychecks, it’s nice to have easier math to do. I would track their “taxes” and once it added up to $5 or more, I’d transfer it to their savings accounts. It was pretty easy, and I know this was educational. We had some fun conversations about taxes!
I hope this got the creative juices flowing, and motivated you to start thinking about your options and your capacity to help. Think of if this way, your ROI is not having a kid you have to support long into his or her adulthood. These methods could yield more college financing opportunities, or a least an avenue to pay back any pesky loans. There are tons of ways to get a free education though. That could be its own blog though…
So make a date…gather all your loose change and old savings bonds and get you youngster on track early. I’m sure there are other great ideas out there to be shared.
It’s funny how things happen sometimes. About 6 weeks ago I went to the public library here in Eau Claire, Wisconsin to see if I could check out the same book my son had left at school so that he could finish his assigned work. Oddly enough, the library only had a copy at a sister location. However, there was a fund raiser downstairs at which the library was selling some old books. I bought some at a huge discount for my youngest children, and before I knew it I was inside checking out audio books.