As a parent and a financial advisor, it has always been important to instill the value of financial knowledge and to encourage other parents to teach their children to understand the fundamentals of good financial decision making. This is the cornerstone of establishing financial literacy at a young age.
Unfortunately, lessons in money management can fall by the wayside, and by the time kids are starting to make their own money choices, they do not have the tools to avoid costly mistakes.
One of the most impactful ways to encourage informed financial decisions is to lead by example. Children absorb everything they see so if you conduct yourself in a way that demonstrates self-control and prudence in the way you make, save, invest and spend money, your children or grandchildren will certainly have a strong foundation to start with.
Teaching Good Habits
The idea that people work for money may be novel to most children. So lessons about money often start with chores. Kids can learn that by doing work they can earn money, then they can use that money in different ways. It’s important to establish this connection between work and money and sow the seeds for a strong work ethic early in life.
Children should also learn the value of saving the money they earn. It’s no surprise that many children are impulsive with money and want to spend the cash as soon as it’s in their hands. They should see that impulsive spending is not the point of earning money. In this modern day of technology, it should come as no surprise that “there’s an app for that.” Indeed there are a whole bunch of them. A few that have received positive reviews from parents and educators are iRewardChart, Chorepad, iAllowance.
Kids get more expensive as they get older — all parents who have survived the teenage years can testify to that. Clothes and toys come with bigger price tags. Sports and other extracurricular activities require more money. And when teenagers begin to drive, the cost of car insurance premiums can put a dent in many household budgets.
Plus, many teenagers are also making preparations for college and other paths to careers beyond high school. Those plans come with costs as well, including tuition, transportation and a host of other living expenses that add up quickly.
So teenagers have their fair share of reasons to save. Hopefully the lessons they learned as younger children have been well established, and they are able to put them into practice.
Adolescents also have more opportunities to work and earn money. Their increased earnings potential can make the incentive to save more powerful. Moreover, for teenagers working their first real jobs, those initial pay stubs show them how taxes affect their income — another chance for parents to teach children an important lesson that can carry on into their careers.
Finally, many college students also get their first lessons in borrowing at this age. Applying for education loans is common for students these days. Parents can help their children navigate the complexities of the loan application process, understand the burden of debt and the impact of interest rates and ultimately set up a plan to start paying off those loans as quickly as possible after graduation.
A fantastic tool to familiarize this age group with creating and sticking to a budget is Budget Challenge. Students can learn how to pay bills, handle financial mistakes and setbacks and save for retirement by actually using a 401(k).
Avoiding Debt as a Young Adult
Children eventually grow up and (hopefully!) move out of the family home, eager to embark on their own lives. That does not mean their financial education comes to an end. Parents should continue to share lessons on finance and money management to help adult children learn advanced skills and turn the knowledge they have already accumulated into lifelong habits.
A household budget is an essential tool for young adults living on their own for the first time. A budget should be used as a financial guide to help prevent overspending and living beyond their means. But many may not know how to create one or even where to start. Parents can share their own household budgets to help their adult children see all of the costs that should be considered. They can also find sample budgets and templates online that make it easier to plan for monthly expenses and manage household expenses.
Financial Literacy Is a Long-Term Investment
Like any long-term investment, the ultimate reward from teaching your children financial literacy will come down the road. By showing children, and grandchildren, the value of money and instilling the basics of a financial education in the earliest ages, parents can help their children be skilled enough to make smart financial decisions as adults and be able to plan for their own future financial security.
Contributing author AES Virtual Consulting
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