I have a little girl. Sometimes I joke with her about her financial affairs.
"Where is your money, honey?"
"When can you take baba out for ice cream?"
She is 2 and a half. 🥰
You may think I'm being a little harsh on her. But I'm of the belief that you can never start too early with teaching young people about their finances. After all, I teach a lot of college kids about finance and I've seen first hand what neglect in this area can do!
I've thought about what I'd like to instill in my daughter. These are the five main areas of personal finance that I think kids need to learn about. Feel free to comment below if you feel you have anything constructive to add! The means for teaching kids these five aspects probably depends on the type of children you have.
1. Earning
I strongly believe in kids working part-time jobs when they are young. At first, parents may have to seek these opportunities out for them, but eventually, children will figure out the most suitable activities for themselves. Flyering. Lawn mowing. Babysitting. Tutoring. Washing cars. Modeling. Newspaper route. Online entrepreneurialism. Grocery bagger. After-school bus boy. Part-time waitress.
Whatever it takes! To learn the value of a dollar one has to first work hard for that dollar. When Warren Buffett was a kid he used to purchase 6-packs of Coca-Cola from his grandfather's store and resell the individual bottles for a nickel a piece, netting a whopping 20% margin (5 cents)!
2. Saving
For saving, I will probably incentivize my daughter by matching their savings 401-k style. Something like "I will give you 50% more of what you save, but the money that goes in that account does not come out unless we as a family agree that the purchase is worth your savings."
In other words, that money is not coming out of that account for yet another stuffed animal. I don't care if it is a limited edition Paw Patrol whatever thingamadoodle! Especially in a country like the United States, where the savings rate currently hovers around 6% but has in the recent past been as low as 1.5%, teaching every child the fundamentals of saving is really important. After all, "no job is too big, no pup is too small!"
3. Budgeting
I really like the idea of not bailing out your kids for sales taxes and the like. Let them learn about the tradeoffs that are associated with purchases of consumer goods. If they really want some kind of fancy new toy, don't just buy it for them in a moment of weakness. No matter how much they cry. Let them make a plan for affording that must-have item. No one needs everything. Who knows? By the time they save up what they need to make the purchase, they might have even gotten over their baby FOMO.
4. Investing
When they are old enough, I would establish a Uniform Gift to Minors Account (UGMA). When they were born, you should have opened a Coverdell Education Savings Account for them. When they reach the age of 10, maybe 12, it really depends on their interests, you should let them start to pick investments with a small part of those accounts. That's their stock! When I was a kid, I was lucky enough to pick 100 shares of Marvel Comics and 100 shares of Topps Baseball Cards. One did spectacularly well, the other... not so much. By the time Marvel had split three times and gone up a couple hundred percent, I was addicted to checking the ticker page in the business section of the newspaper everyday.
For the majority of the account, however, stick the money into something safe, like an index fund, balanced mutual fund, or municipal bond, but show them the statements every month and say, "You see, son, we didn't do anything at all and look at how our money is increasing every single month. That's called compounding! Einstein used to say it was the 8th wonder of the world. Do you start to see how it works?"
5. Charitable Giving
Lastly, it's probably a good idea to instill in your child that they must learn to share a bit every month. If you go to church regularly, you can let them physically put $5 or $10 in the donation plate. If you're more of an online kind of family, make sure they see you donate to some websites rather than just always buying stuff on Amazon. Or shoot, just make sure to note how you always use Smile.Amazon.com when you shop. (My Amazon purchases go to support the American Lung Association). Giving or donating to churches, humane societies, political campaigns that you believe in, whatever is an essential part of developing good personal finance habits. Warren Buffett himself has committed to giving away the lion's share of his wealth to the Gates Foundation.
With these five tips, hopefully I'm well on my way to raising a daughter who knows her way around the piggy bank. If you have any other suggestions, please let me know in the comments below 👇👇👇.
Have a great weekend and
PEACE ✌🏼