FINANCIAL SKILLS TO TEACH THE YOUNG PEOPLE IN YOUR LIFE: PART 1
A FINANCIAL HEAD START
Whether we mean for it to happen or not, much of our financial behavior was developed when we were very young. How our parents and grandparents saved and spent money, how tense bill-paying times became, and whether or not we buy into status symbols all profoundly influenced the way we view our own finances today.
If money is understood, it becomes a tool instead of an antagonist or something to be taken for granted. And the younger an individual who learns this, the greater a chance they have of building strong habits and mindsets that can very literally pay off in the future. Setting an example for the youths in your life can help balance their relationship with money and give them the confidence to handle it prudently. With real-world skills at their disposal, young people can better control and manage their finances and have along with it a greater sense of freedom and confidence.
Here we outline a few skills and insights, in no particular order, from which the children and adolescents in your life may benefit in getting their own financial head start.
GRASP THE DIFFERENCE BETWEEN WANT AND NEED.
Whether we have kids of our own or not, we’re all familiar with the grasping toddler. Everything for him is a need. Both for our own sanity and for his maturity, emphasizing the difference between a want and a need is important, and it’s never too early to have a running discussion with children about it. Help them to differentiate when they’re young so that they can better discern—and discipline themselves—when they’re older. There is a reason 40% of Americans are living paycheck to paycheck, and it’s not just because they aren’t making enough money to subsist. As children mature, you can introduce them to concepts such as utility, lifestyle choice, and opportunity cost, and how Jonesing is just trying to shoot at a moving target.
UNDERSTAND THE IMPORTANCE OF SAVING.
A new game. A car. College. In today’s world, there is little that offers greater opportunity and flexibility than the dollar. Not being able to afford something wanted or needed is a sometimes painful but necessary lesson to learn. Help a young person understand how important setting a goal and saving for it is. Kids will also learn discipline and critical thinking when they stave off whim purchases. Now is a great time to drive home, maybe even by personal example, the eventual importance of keeping an emergency fund, especially as young people grow older. Living rich, surrounded by luxuries and the latest-and-greatest gadgets, does not always mean living wealthy or financially secure.
KNOW HOW TO BALANCE A CHECKBOOK.
Okay, checks are slowly going the way of the pager, and transaction registers have been digitized in your online bank account, made available directly on your phone. But fraud is still prevalent, and there is something to be said for the lifetime habit of verifying every exchange happening inside an account. Balancing a checkbook or transaction register is a great exercise in math, too. For very young kids, helping them keep track of allowances, money gifts, and any chore wages is a simple and easy way to reinforce basic math skills and financial diligence. For older, working learners, keeping a written record of all paychecks and how their income is subdivided for expenses like car insurance, college savings, and fun money can underline the costs of growing up. With balanced, hard numbers, they’ll be able to see exactly what comes in and what goes out, which may make the “game” real and cultivate healthy spending and saving habits.
CONSIDER A ROTH IRA.
There are lots of other priorities for which to save—college, a car, car insurance, and an emergency fund just to name a few—but one option if your child or grandchild has earned income is to put some of that money into a Roth IRA. Not only does, say, a sixteen-year-old get the advantages of a Roth—tax-free distributions and withdrawals of contributions without penalty—but time is on his or her side. The contributions will have time to grow, and since Roth contributions are after-tax, they will be made at what is likely to be some of the lowest tax rates your child or grandchild will ever see based on earnings—more bang for the buck. While the maximum 2021 contribution for the year is $6,000 (as long as the individual earns that much in the year), putting away even a fraction of that can give your young saver a head-start and pay big dividends in the future.
CULTIVATE AN ATTITUDE OF CHARITY.
Half a lifetime ago, I read a magazine article about how one family had been teaching their young daughter how to prioritize finances, long before she ever received a paycheck. She would gather her allowance, bolstered by chore wages and gifts, and use an envelope system to split the total between savings, spending, and charity. Now, if you can believe the article, her favorite was gifting 10% of her money to a cause she really cared about. Whether or not she was telling the truth, I think we all are familiar with the feeling of well-being when we help someone out. Some studies even suggest that giving—whether in time, services, items, or money—can lower blood pressure, depression, and stress levels and increase self-esteem. One study even suggests that people may live longer when they give of themselves. Even if this isn’t true for everyone, giving to those who are less fortunate is a real and concrete way to shift the perspective from “I need the latest XYZ” to “I’m grateful for what I have.” Helping your young person find a cause they can support, whether financially or with time, can bring years if not a lifetime of fulfillment, appreciation, and possibly even career and social opportunities. That’s a gift worth giving.
UNDERSTAND WHAT TAXES ARE AND HOW THEY WORK.
There is a depressingly hilarious viral video of a young teen opening his first paycheck. His family has gathered around him to celebrate his big achievement, and he squirms with giddiness as he tears open the envelope. Slowly, his grin fades to reflect his horror—taxes have diminished what he anticipated receiving. Teaching your child or grandchild early on what taxes are and their impact can go a long way to entrenching their prudence and save them the trouble of a major upset when they do open that first paycheck. One example of teaching this hard lesson is the “Dad tax”—Dad gets a bite of every dessert from his kids! Another way would be to charge an “income” tax on allowances and chore wages. Maybe in the store, when your kid or grandkid reaches for a toy or game, start a game with them to calculate the final cost including sales tax (bonus points if no calculator is used!). For older learners, consider inviting them to walk through your bills and tax payments when you pay them, explaining how the money is used and why.
KNOW THE DIFFERENCE BETWEEN INVESTING AND SPENDING.
Why are we willing (perhaps begrudgingly) to spend $30,000 on college and not on that super-cool sportscar that will blow away the other students at school? One has a high likelihood of paying huge dividends in the future, while the other is guaranteed to depreciate in value. Investing prudently with finances reflects an ability to invest prudently in oneself and knowing how to judge a risk based on its potential future value—be it monetary, social, or self-caring in nature. One way to share the financial side of this lesson is by playing good, old-fashioned Monopoly. Highlight how investing in properties by purchasing and building on them eventually accrues greater cash flow, while paying rent, fines, or utilities decreases cash flow. Obviously, bills are a reality of life, but recognizing the importance of investing money rather than simply spending it on something with limited or no return can help your young person make informed decisions in the future.
NEVER TOO LATE
While so many facets of life require a basic understanding of finances and how money works, lots of young people are thrown into the adult world with little to no education about finances. In 2015, a study by the American Psychological Association indicated that money is the top source of very or somewhat significant stress in adults (with a whopping 67% of respondents saying so!). What better way to help someone than by giving them the tools needed for financial literacy and management? Making kids into money experts isn’t necessary, but it’s never too early—or too late—to start introducing concepts around spending and saving behavior and mindsets. Teaching this information doesn’t have to be dry and boring, either. On the contrary, there are lots of creative ways to gamify learning.
If you know a parent, grandparent, or guardian who could benefit from these tips, please feel free to forward this article to them. Part 2 will soon follow, but in the meantime, please reach out to Day Hagan if you have any questions.
Best,
Natalie Brown, CFP®
Director of Client Services
Day Hagan Private Wealth
—Written 6.18.2021.
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