It’s Father’s Day – a time when children share what they like best about their Dads. Ask a few kids, and they’ll probably say that he is wise, strong, patient, hard-working, and good at solving problems. From a child’s perspective, Dad do just about anything to keep everyone safe and happy.
But there is one area where some Dads (and Moms) need to make sure their teaching sound habits by example, money.
Kids aren’t being taught financial literacy in school. Most young adults graduating from high school are ill equipped to make sound decisions regarding personal financial matters, including whether to take on student debt or not, how to use credit responsibly, the power of compounding interest, and the importance of health and disability insurance during their working years.
Teaching kids about sound financial habits is largely up to parents.
So how can parents pass on lesson about financial literacy? First, they have to become literate themselves, if necessary, taking a class or online course on financial basics. But once they’ve mastered the fundamentals, it’s time to communicate and demonstrate these principles to their kids.
Here are a few ideas for helping your kids become more financially savvy.
Lesson One: Money is a tool that can be used to accomplish goals as well as pay for food, clothing and shelter. Kids first see money as having one function only, as the means to get stuff they want. Teach kids that money can have a purpose beyond buying stuff. That it can provide for future consumption through savings and investing, that it can provide freedom from having to work in a job that is unfulfilling, that it can be used to make someone else’s situation better through giving.
Lesson Two: Credit can be good and bad.
Don’t wait till your child gets her first credit card to teach her the prudent use of credit, by then it will be too late. Try to get the message across that cards are for convenience only and aren’t a source to pay for things now that they can’t afford to pay for with cash. Emphasize that when you pay with a card, you must have money available elsewhere to pay for the purchase. Teach them the value of using credit to pay for investments that will grow their wealth in the future, an education or a place to live once they are settled into a career.
Lesson Three: The power of compounding.
As your child gets older, you might introduce the idea that the money in the savings jar can be used to make more money by putting it into an interest-bearing account or investing in mutual fund. Explain the difference between saving in a bank where the money is guaranteed not to lose value and investing in the stock market where your money may lose value. Show them how leaving money invested longer and continuing to earn interest on the interest will lead to larger accumulations than if the interest was withdrawn.
Lesson Four: The different life phases of money.
During our 20’s up until our early 30’s we are in the accumulation phase. We have started careers and are beginning to earn money and acquire assets. In our mid 30’s to mid 60’s we are in the capital appreciation phase of our lives where we can focus on growing our wealth through increased savings and investing. Then we enter our distribution phase of life at retirement where we use our accumulated assets to generate income to support us.
Be the Dad (and Mom) your child looks to for safety and happiness and provide them with a lifetime of financial literacy and good habits.