When I graduated High School, I didn’t wait long to start making my own way in the world. I’d always been driven and independent, so rather than making the most of my parents’ free room and board, I immediately joined the military, moved across the country and began earning paychecks. My parents raised me with a solid foundation in nearly everything, but if they fell short anywhere it was in preparing me for financial success. We’d struggled to make ends meet for much of my life, and I had no idea what I was doing, or how to implement good financial habits, until years later when I began working for Greater Nevada, where I now teach financial literacy to youth and adults.
Like many topics parents face, financial responsibility may seem too complicated and overwhelming, but like many topics, it’s never too early to start instilling good values. No matter how old your children are, little things you teach them now can help them avoid the situation I found myself in upon entering adulthood. Plus, good financial habits are easy to tie into other values most of us want our children to learn. For instance:
Needs vs. Wants: Many of us have attempted to navigate adulthood without a firm understanding of the difference here. Do your children a favor and get them acquainted with the concept early. Even if you’re not talking about finances directly, your child's approach to spending and saving is often tied to other aspects of his or her life. For instance, we need to eat, but what we want to eat may not be best for us in the long run. That’s easy to translate into finances. You need to be able to get hold of me, but you don’t necessarily need to get hold of me via the latest model smart phone. It can be a shock (and cause some tension) for children to realize that they don’t actually need to have everything their friends have, but it pays off in the long run.
Sacrifice now, enjoy later: I personally can’t think of a more important concept to impart to children in terms of financial success later. To understand that what you want later will cost you something now, and be willing to pay that cost, will pave the way for success in many, many areas of life. Stanford once did a study on the power of delayed gratification, using children and marshmallows. Check out this delightful video to watch these precious little guys weigh the pros and cons of a very important marshmallow-related decision (and learn some awesome lessons in the meantime).
Hard work and sacrifice: This one ties in closely with the last one, but it involves your children having to do something to get what they want. Many parents give their children an allowance, or a set amount of money per week, to spend on fun, food, or needs. Some parents make the allowance contingent on chores or household tasks, grades, or other criteria. The benefit to this model is that the child learns the value of hard work. Another benefit is that children tend to value items they had to save up to buy themselves, more than those that were given to them for free. The important thing is that you talk to your children and help them understand why the allowance system works the way it does.
Pay yourself first: In every financial literacy class I teach, regardless of topic, I talk about this concept. Many, many people feel that they make too little money to save, and promise themselves they’ll start saving when they make more. This is a very dangerous mistake, as most of us learn when it turns out that no amount of income is enough to meet what we feel our “needs” are. The key to the “pay yourself first” concept is to train your brain to consider your savings account a bill that needs to be paid, and the most important one at that. So instead of putting whatever you have leftover at the end of the pay period (which is often nothing) into savings, you put a set amount in savings before you spend anything else. You’ll find you actually can live on what’s left, and are less likely to go into debt in an emergency (I’m talking to you adults, too!)
Short, Medium and Long-term Goals: A great way to get your kids in the habit of saving regularly is to help them set some short, medium and long-term goals. In financial literacy classes, we always encourage people to set goals using the acronym S.M.A.R.T. as a guideline. SMART stands for Specific, Measurable, Attainable, Relevant, and Time-Bound. So rather than just vaguely “saving” for something, you and your child decide what he or she wants, what a reasonable timeline would be to attain it, and determine how much needs to be saved per week/month, etc. in order to meet that goal. Setting short-term goals as well as long-term makes it easier for the child to experience the rewards of saving.
So, for example, you and your child could set aside three mason jars: label one “new dress ($20)”, one “Snowboard ($300) and one “Car downpayment fund ($3,000)”. Then determine a timeline for each, and every allowance check, your child could put $2 in jars 1 and 2, and $7 in jar 3. Before long, setting aside money to make goals will be as natural as brushing their teeth.
The Power of Compounding Interest: An extremely powerful motivator for young people (especially teenagers) to save is to teach them the power of compounding interest. If you don’t understand compounding interest yourself, that’s okay! There are so many helpful tools online to help you get there, such as:
Without going into too much detail, the basic concept of compounding (as opposed to simple) interest, is that money invested in interest-bearing accounts grows exponentially over time.
I find that illustrations such as the following are extremely helpful in motivating children to save.
Illustration 1: the $0.01 job:
If you could choose between a job that pays $1,000 per day for 35 days, or a job that pays 1 penny the first day and doubles the amount every day for 35 days, which would you choose?
A: Job 1: By day 35, you’d have $35,000
B: Job 2: By day 35, you’d have $169,728,000. That's the power of compounding interest.
Illustration 2: The early and late saver
In this illustration you contrast two people with different savings habits: One who starts saving at 18, saves $2,000 per year, and stops at age 28 (earning an interest rate of 7%). The second, a person who starts saving at age 31, and saves $2,000 per year for 35 years (earning a 7% interest rate).
A: By the time person A is 65, compounding interest has been working for him for 47 years. That person invested $20,000 and has earned $368,718.
B: By the time person B is 65, he has invested $70,000 and earned $295,827.
The point of these illustrations is to break down the mindset that if you don’t have much to save, you should wait until you can save more later. A little now works harder for you than a lot later.
Lead by Example: This is probably the toughest one, but in the long run it will benefit you, your children and your grandchildren. You can help your children build good habits by teaching, but whether you realize it or not, you are also instilling behaviors in them by what they see you do, and the environment they grow up in as a result. If they see you splurge on items you want now, use debt to pay off debt, and live paycheck to paycheck with no savings or emergency fund, they may recognize that there are better ways to live but often they will follow the same patterns. By the same token if they see you deny yourself some things for the sake of meeting more important goals, they’ll learn to do the same.
If you’ve got some bad financial habits you need to break (either for your own sake or your children’s) don’t worry! It’s never too late to start building a better financial foundation. We offer some great financial education resources to our members free of charge, and there are many other resources out there. There are even online video games like Fraud Scene Investigator, h.i.p. pocket change, and many more that your kids can play to help them learn solid saving and spending habits. You might even enjoy them too! One of my favorite resources is Biz Kids, a show designed to teach kids about money in a “Bill Nye the Science Guy” format. The Biz Kids website includes episodes of the show, games, a blog, a newsletter and more.
There are many other resources out there, most of them free. Check them out... and have fun!