TEACHING CHILDREN THE WORLD OF FINANCE

One of the biggest complaints parents have about their children’s education is the lack of financial training. From household budgeting to investing – and everything in between – children need to have a solid grasp on what it takes to live within their means and be financially secure.

That’s why, it’s our job as parents to teach our children about the world of finance and give them the guidance and tools they need to succeed. Here are three ways you can set your children up for financial success and build a solid foundation for their future.

1. TEACH THEM TO HAVE A DEBT-FREE MINDSET

Although much of my career was in lending, I was always an anti-debt guy when it came to personal debt (except for a home mortgage). From my experience, it’s been a great way to live. In turn, I have raised my children with a debt-free mindset. They are now in their thirties, and they’ve never had credit card debt. It’s not that I haven’t taught them the value of using a credit card wisely – I have! But I’ve taught them how to use credit cards, to get all the mileage they can get, while also paying off their balance every single month.

You might find this hard to believe, but two of my three kids have never had car payments or debt on a car. When they were in high school, we had a family vehicle which they shared. Fortunately, there were never more than two of them using the vehicle at the same time! When they went to college, we gave them a budget for a used car. We sent them off with the idea that they could start saving so that by the time they needed a new vehicle, they would have enough cash saved to upgrade. That was our goal. Because of this, two of my children have not had car payments and one has chosen to lease.

By teaching our children to have a debt-free mindset, they’ve been able to buy cars, and navigate emergencies without going into debt. And so far, they’ve managed it extremely well.

Teaching your children to have a debt-free mindset will be one of the best things you can do. This will set them up for a financially stable future and help them avoid the burden of acquiring debt.

2. TEACH THEM TO LIVE ON 80% OF THEIR INCOME

While there is no magic formula regarding spending vs. saving, I recommend teaching your children to live on 80% of their income while also having a solid savings, investment and giving plan for the remaining 20%. Keep in mind, this can be 90/10 or 70/30, depending on the realities of their life and budget, etc.

The key is to teach your children to live a life of minimal debt and to live well within their means. It isn’t always easy, but in my opinion, it’s a great way to teach self-discipline, generosity, and wise investing.

Here are a few simple ways to instil an 80/20 mindset:

• Help them create a budget from an early age.
• Teach them to tithe right off the top.
• Show them how to save and watch the interest grow.
• Get them excited about investing. (See our investing posts for more guidance.)

I can’t emphasize enough the importance of generosity when teaching your children the world of finance. As they learn to live on 80% (or less) of their income, show them the immense value in giving. For more guidance on the benefits of giving, here’s a post called. Generosity – Who, What, and Why.

There’s a Bible verse in Proverbs 21:20 which says, “Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.” This passage is a good one to share with your children as you explain the importance of living within their means and having a generous mindset.

Again, there’s no magic formula for living within your means, but the 80/20 rule is a great place to start. Once your children see the benefits of giving, saving, and investing, they’ll work even harder to make money and watch it work for them.

3. TEACH THEM TO INVEST WISELY

When our children were young teenagers, I began to introduce them to the concept of investing. I would bring home a one-page summary of our investments. We would go through them together, they would ask questions, and ultimately, they’d decide which ones they wanted to invest their own money in. For more help in this area, check out my post titled, Investing and Relationships where you will see a section on Teaching Children About Investing.

Initially, they would start by investing between $100 and $500. Twice a year, we would review their investments and talk about new opportunities. As teens, they each made over twenty investments. I would keep track of each investment in a ledger and whatever return I received from the investment they received the same return. They learned a lot through this process – making, and even losing money along the way.

One of the best things about teaching my children to invest was the rewarding experience of connecting with them as a dad. When they each graduated from college, my wife and I gifted them a larger amount to add to their investment portfolio. Over the next few years, they began to make meaningful investments and their portfolios grew sizably. We did this to increase the stakes and keep them focused on growing their investment portfolios.

Because there were many things about investing, I had to learn the hard way, teaching our children about the investment world – with smaller investments- allowed for lessons to be learned that weren’t too expensive. Through this experience, each of them has made at least one investment that went bad, and they lost their entire investment. However, these are lessons they will never forget and details they will pay attention to as they make their own investments in the future. So, start early teaching your children these important strategies. It will pay off big time in the end.

When it comes to homeownership, encourage your children to save for their down payment starting as early as they can.

To incentivize our own children to save, we provided them a 2-to-1 matching gift. That meant, for every dollar they saved towards a home, we added $2 (up to a predetermined amount). Through this process, our children were able to accomplish homeownership in about 10 years.

Of course, homeownership is a positive thing for many reasons. To emphasize this, I put together an excel model to show my children the financial benefits of homeownership, amortization of the mortgage, appreciation of the value of the home, and the tax income benefits of deducting interest and real estate tax. This comprehensive model showed them the amazing benefits of homeownership and got them excited about the idea Fortunately, there are apps on the market today that will help you accomplish the same type of modelling for your own children.

Ultimately, it’s our job as parents to teach our children the world of finance. We can’t rely on the education system to prepare our children for the ups and downs of the economy and teach them how to live within their means. Invest in your children now, and pass on solid financial tips and tools to help them succeed.

ACTION STEP:

Get your children excited about the world of finance by helping them start a personal budget that includes giving, saving, and investing.