As a parent and financial advisor, I believe that one of the most valuable lessons we can impart to our children is financial literacy. Teaching kids about money from a young age sets the foundation for a lifetime of smart financial decisions and habits. It's never too early to start, and the lessons can be simple, yet powerful.
When my twins were just 7 years old, Preston found a Pokemon card that he wanted to buy with his birthday money for ~$70. I quickly realized that I was not teaching them enough about money! I introduced them to the concept of the "Rule of 72." This simple rule is a way to estimate how long it will take for an investment to double, based on a fixed annual rate of return. We all know the market does not move at a fixed annual rate – which Gianna quickly learned! The first time she saw her account balance dip, she asked, “Who took my money?!” By dividing 72 by the annual rate of return, you can get a rough estimate of the number of years it will take for your money to double. I used this rule to demonstrate the power of compound interest to my kids. By showing them how investing small amounts consistently over time can lead to significant growth, they began to grasp the importance of saving and investing for the long-term.
Fast forward to today, and my twins are now 14 years old. They're putting a portion of their allowance and earnings into investment accounts each month. While they may not fully understand all the nuances of investing just yet, engaging them in these conversations and practices at an early age helps to plant the seed for strong financial habits.
Here are a few key lessons I've focused on teaching my kids about money:
- Saving: Encourage your children to save a portion of their allowance or any money they receive. Help them set savings goals and show them how their money can grow over time.
- Budgeting: Teach your kids the importance of budgeting and living within their means. By prioritizing the investment from each allowance, they can learn to set aside money as opposed to waiting until the end of the month to see what is left over.
- Investing: Introduce the concept of investing and how it can help their money grow. Discuss different types of investments, such as stocks and bonds, and the importance of diversification.
- Delayed Gratification: Teach your children the value of delayed gratification and saving up for larger purchases. This helps them develop self-control and long-term planning skills.
- Giving Back: Encourage your kids to allocate a portion of their money to charitable causes they care about. This helps foster a sense of empathy and social responsibility.
In addition to these lessons, it's important to make financial education engaging and fun for kids. Here are some interactive games and activities you can try:
- The Allowance Game: Give your children a weekly or monthly allowance and help them create a budget, allocating their money into categories like saving, spending, and giving.
- The Stock Market Game: Introduce your kids to investing with a mock stock market game using online platforms that allow you to create virtual portfolios and track real-time market data. Or, open an account (i.e. Uniform Transfers to Minors Account, or UTMA) where they can actually invest.
- The Lemonade Stand: Encourage your kids to start a small business, like a lemonade stand or pet-sitting service, to teach them about entrepreneurship, pricing, marketing, and customer service.
- The Grocery Store Challenge: Give your kids a budget to work with at the grocery store and challenge them to find the best deals and make smart purchasing decisions.
- The Goal-Setting Jar: Help your children set financial goals and create a visual reminder by decorating a jar labeled with their specific goal, like saving for a new toy or family vacation.
Remember to tailor these activities to your children's ages and interests, and offer plenty of praise and encouragement along the way. And when they are upperclassmen, I would be happy to chat through some of these concepts with them, as well.
By starting early and consistently reinforcing these lessons, we can help our children develop a strong foundation for financial success. The habits they form now will serve them well throughout their lives, whether they're saving for a car, buying their first home, or planning for retirement.
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This content is provided for educational purposes only, represents only a summary of topics discussed, does not constitute any personalized investment advice or recommendation, and represents only the views and opinions of the speakers which are subject to change without notice. Investing involves risk including the potential loss of all amounts invested.
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