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Four principles for teaching kids about money

Friday, June 03, 2011

I think all of us would agree that money (making it and spending it) is a very big part of our lives, even if it isn’t money that is our primary motivator in life. Most of the fun stuff (golf, vacations, and children’s activites, sporting fun to name a few), however, requires it. That’s a reality we can’t ignore. Money plays a central role in our lives, yet there are very few institutions teaching young people about money management. Young people all make money, and they certainly know how to spend it. But managing it is a different story.

What usually happens is that everybody learns the hard way. By making mistakes, getting in credit card trouble, having to go to the folks for a “Mommy/Daddy loan,” or going back home for a year or two while we get our affairs in order. That’s the hard way to learn financial discipline.

As parents, we can help our children avoid some of the hard knocks of the financial world. Here’s how.

1. Start early. Give a small allowance and make them earn it. This can start at about age 7 or 8 and continue until they leave home. They can clean their room, make their lunch for school, and help with lawn work to name a few simple chores. Later they can help with meal preparation and cleanup. All skills they will need when they move out.

2. Start a savings plan. When your kids are about 15 to 17, they will need to start some real savings plan, because a car and post-secondary education all cost money too. Parents can “help” with cars or school, but young adults need to contribute too so they have some “skin in the game.” A 50/50 split is a good idea.

3. Start investing. When you children are over 18 and working, and perhaps have more money than they need to live and study, it’s time to learn about investments. Introduce them to your financial advisor so he or she can help teach them slowly. Some of my clients give their kids $1,000 to start the plan; others will cover a loss if necessary. Start with $50 a month while learning.

The point of the exercise is to teach your kids early about various investments (GICs, money market funds, bonds, equities, mutual funds, and stocks), so they learn some basic advantages and disadvantages of each. Then, when they start to make and invest some real money, they are starting with some knowledge base, which gives them a better chance of success.

4. Don’t spend more than you make. This is the most important principle you can teach your kids. Too many people are burdened with debt because they want a lifestyle they can’t afford. There are only two times you should spend more than you make: First, when you are starting out and buying big ticket (and appreciating) assets like a home. The other is when you retire and start depleting some of your nest egg. (A third might be when you are temporarily between jobs or moving from one career to another.)

Invest well and teach your children about money basics. Once learned, it’s a skill that will help them all their lives.



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The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.