Even for the most seasoned professional, financial planning is not an easy task. For something as important and complex as your financial security, you must contemplate the many different contingencies that could occur, consider the thousands of available financial products and investments, and strive to align these decisions with your goals and ambitions for your wealth creation. Some people believe that because of these intricacies, children cannot hope to fully grasp an investment philosophy. However, there are many ways to teach your kids about finances, and this financial planning education early in life could mean the difference between their success and failure in wealth creation. In fact, while there will always be some challenges, the single most important trait for creating wealth with certainty is establishing good habits.
Lesson One: The Allowance
One simple yet effective way to teach children about money management is by setting a weekly allowance. In order to instill that life is subject to a law which states that when work is done well there are rewards and when it is not or poorly done there are consequences, this allowance should be given only in return for some quality labor, like cleaning or chores. Teaching children the benefits of hard work and discipline has many benefits of course; on the flip side, giving children an allowance without work teaches the negative lesson that they can receive benefits in life without working for them, which, sadly, is not the way the real world works. Rewards are not always financial when raising kids, but when it is appropriate, giving your child an allowance is the first step to teaching them about responsible money management. The lesson doesn’t stop at the point in time they receive their allowance; to prevent your child from spending all their money immediately, the allowance offers an excellent time to teach your child about banking, savings and the benefits of compound interest.
Lesson Two: Compound Interest
Teaching compound interest to your child, are you kidding? No, you can sit down with your child and explain that their allowance could be used to buy things immediately, and they will certainly enjoy the item they purchase. However, you can then teach your child about having a bank account, and talk about the benefits of an institution protecting their money and even giving them more in interest simply by depositing money into an account. This is where creativity comes in. There are many illustrations or examples that can be provided to demonstrate the utility of banking and this basic lesson may require different approaches depending on the child. For a historically-minded child, some background on the development of banks may be interesting; for an athletic child, an analogy to sports may be appropriate. Whatever your approach, be sure to impress upon your child the need for saving money. Who among us would argue that one of the biggest problems facing families today is debt, and to learn from childhood to buy only when one can afford it is the best way to defeat this problem before it even arises.
Lesson Three: Bonds and CDs
Once your child has grasped the basic idea of banking, you can move on to the next step in developing their investment philosophy: Bonds and CDs. Saving money is only the first step, and fiscal planning requires that the saved money be invested in a way that increases wealth. Ideally, an investment doesn’t just return to you what you put in, but more. Teach your child about the differences between bonds and CDs, and, if they are interested, take them to the bank and help them put money into a CD or buy a bond. This teaches the child a valuable lesson: patience. Often, a youth may want to see the yields of their investment philosophy immediately; however, these assets require time to grow and teach a proper understanding of the way that financial markets operate.
Lesson Four: Family Finances
Another good way to teach a child about a wise investment strategy is to share with them some information about your family's plans. While many parents may wish to keep the details of their finances private, much can still be taught by explaining the concepts behind mutual funds, stocks and bonds. Sharing information about your family budgeting gives your child a connection to financial cycle—earning, budgeting, and saving—that they began to understand by saving and investing the money from their allowance. Have your child help with budgeting by planning the weekly meals, helping with grocery shopping, or keeping track of how much your family spends on entertainment. Most importantly of all, answer your child's questions about fiscal planning. If you think that you cannot answer a question properly, you can find very reputable websites for great explanations that your child can understand. Some sites may even have a financial sandbox that your child can set up accounts to practice in. Not only will your child benefit from an answer to their questions, but you too will find your own understanding of your financial situation improved by the act of teaching.
Creativity is King
Limited only by your imagination, there are many other ways that you can help your child understand the importance of financial planning. If banking does not interest your child, try one of the many free sandbox games ‘from reputable online sources’ that allow them to track the stock market and use play money to learn about the exciting world of trading. Take a creative approach and give your child the chance to succeed in an area where many modern American families and unfortunately schools do not excel. With these lessons about savings, investments and wealth creation, your child will have the knowledge to succeed for a lifetime.
Paul’s 21 years of experience as a
Financial Advisor gives him a unique perspective and expertise in leading
Wealth Management practices. As an IRA Advisor (part of Ed Slott’s national IRA advisor network) and with access to world-class training and experience, Paul regularly collaborates with some of the best financial minds including forecaster Harry S. Dent and Asset Preser
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Creativity Rules when Teaching Kids about Finances
