My daughter Grace (13) recently read my book, Flourish Financially. She said the lesson that stood out most to her was a part that explained the cost of delaying your retirement savings. She found it fascinating and a little scary to think that her financial decisions today (at age 13) could actually have an impact on her 65-year-old self. I showed her a tool in the financial planning software that I use for my clients to demonstrate the cost of delaying saving for retirement. We put in her age and an annual savings amount of $1,000 and a desired retirement age of 65. The calculator showed that if she began today she would have $806,563 saved by the age of 65. If she waited until she was 23 to begin saving the same amount, she would only have $350,170. The fact that $1,000 a year and ten years could mean almost half a million dollars blew her mind! While Grace happens to have a financial planner as a mom, the reality is that there are daily opportunities for each of us to teach good financial decision making, and you don’t have to write a book to do it.
There are opportunities all around us to teach our children lessons about money every day. It could be a trip to the grocery store, attending a birthday party, finding a new pair of sneakers, receiving a monetary gift from a friend or relative, and so many more examples that provide an opportunity to discuss and put into practice financial decision making and the impact one decision can have on your life for either the short-term, the long-term or both.
Setting Goals and Saving
From as early as the age of two, we teach our children that they sometimes have to wait to get what they want. They are at the park and want to go on the swing, but they are all occupied. We teach them that they must be patient. They have identified the goal–to go on the swing–and now they must wait for the right time for them to accomplish that goal. The same lessons can be put into practice for similarly aged children about money. If you are at the store and your child sees a toy that they really like, you can teach them about setting a goal and saving for that toy.
Try to help her choose something that is not so expensive that it will take months to save for it or it will just become too frustrating for a child that young. Give her age appropriate chores (organizing her shoes, picking up toys from her floor, putting away her blocks) for which she can earn fifty cents or a dollar. Each time she saves toward that item, count up what she has saved and show her how much she has to go until she reaches the goal. Providing children the opportunity to earn, save, spend and share money, even from a young age, will teach them the value of work as well as help them develop prudent financial habits.
Making Choices about How You Spend Your Money
Children as young as six can begin to understand that “money does not grow on trees” and that the choices you make about what you spend your money on, or how much you spend on a particular item, can have a big impact on what is left over. When you go to the grocery store, for example, you have a list of items to purchase. Many of those items come in a variety of prices or there are discounts available for members or cardholders for specific items and others may be on sale. Talking out loud about the items you need, why you need them and what items cost can give your child perspective on prioritizing purchases as well as opportunities to lower expenses. You might consider giving your child part of the list and a budget of $5 or $10 and challenging them to find those items for the lowest cost. Helping a child understand the difference between needs and wants in an environment like the supermarket where everything is there to tempt you is a healthy way to hone their decision-making skills and will power.
Savings, Compounding & Opportunity Costs
By early adolescence and even a bit before, children can grasp the concept of compounding interest. Helping a child understand that the sooner they begin to save the sooner their money will grow is critical for a foundation in good money habits as they move into adulthood. This was the part Grace found so interesting, which is fitting since the exercise is age appropriate. Explaining the theory with actual numbers, rather than in the abstract, will help your child grasp the concept more easily. Investor.gov has a great calculator where you can play with length of time, amounts saved and interest rate to help your child understand savings and compounding.
Another important concept to grasp at this age is opportunity cost. Putting aside the little toys that she may have been saving for before, have her set a longer-term goal for something more expensive like concert tickets, a particular electronic gadget, a really nice bracelet, or something else of interest to your child. Your child will likely have to give up some things in order to achieve the savings goal for that particular item or experience. Teaching these sorts of tradeoffs is a useful tool to learn as kids grow and things get more expensive.
College, Affordability, Financial Aid and Loans
By the time your child enters high school, it is fair game to begin discussing the costs of college with your child. Being open and honest about what your family can afford will help your child be realistic about where she applies or, at least, what she can expect from you in terms of contribution.
If she has her heart set on a specific school that is out of your family’s price range it doesn’t mean that she has to strike it from the list. In fact, it is a wonderful opportunity to teach her the variety of ways in which college may be funded. Helping her to understand what funding sources are available that are “free” like scholarships and grants plus loan programs that may be subsidized can give her a firm grasp on the exact amount that she has available to pay for college.
Return on Investment
Beyond knowing how much they have available to them for college tuition, it is important for your child to know what they can expect from a job right out of college. With the majority of students graduating with some amount of student loans to pay back, they need to know how they are going to afford the repayment of those loans as well as their cost of living out of college. There is a great College Scorecard that compares the cost of college, employment prospects for recent grads and how much student loans could affect your child’s lifestyle after graduation.
Encouraging your child to get a part-time job on campus can help offset some costs and give them spending money while in college. As long as they aren’t working too many hours it can also help them engage more in student life and campus activities.
Credit
By the time your child turns eighteen she is probably receiving credit card offers in the mail and the temptation to use it as free money can establish quite the slippery slope. Teaching your child about the benefits of good credit and using credit to improve their score is important to their ability to buy a car, purchase a home and stay financially solvent as they grow into adulthood. Warning them of the dangers of overextending themselves is paramount. Bottom line–they need to understand that they cannot use a credit card unless they can pay the balance off in full every month.
Your child should understand that poor credit can even affect her job prospects. Many employers check your credit score and will not hire someone whose score falls below a certain number. Teach your child about co-signing and that, if they miss a payment on a cosigned loan or credit card, that can affect the co-signer’s credit as well.
Money Cannot Buy Happiness
The relationship that we have with our children is priceless and the lessons we share with them will have the greatest impact on who they are as people. We teach them love and patience and the Golden Rule. It is our greatest hope that our children grow up to be healthy and happy. While money can’t buy happiness, having a good relationship with money and a strong foundation of skills to use money to foster confidence and stability is paramount to a healthy and happy life.
