August 08, 2019
I hope you and your family have had a fantastic summer full of fun, adventure and most of all, relaxation.
With the academic school year starting soon, it’s an important time for parents –and grandparents – to think about one of the ways they must supplement the school curriculum.
Personal finance is not typically taught in middle or high school. That is depressing to me because it is so dangerous. A child who is not taught the basics of money management will be a risk of making costly mistakes as a young adult.
These are the kids who borrow way too much for college, rather than choosing an affordable college. And these are kids who end up with high-rate credit card debt, because they didn’t realize who the system worked. Or they are the kids who are thrown off when an unexpected expense –new tires for the car, a health insurance co-pay –strikes and they don’t have emergency fund savings to cover the bill.
If you still have kids living at home, please step up and be the financial educator in chief. Make money part of your parenting/grandparenting.
Some key lessons to teach:
Compound interest: Make it your friend, not your enemy. If you can teach the pros and cons of compound interest you will have done so much for your child or grandchild.
Lesson 1 is that the younger you are the more you can take advantage of having oodles of time to let your savings grow. There are free online calculators that will help you show the magic of compound interest over time.
Then use those same calculators to show the downside of compound interest: when you have a credit card balance and are paying compound interest of 18% or more on average.
Save, Spend, Share. Whether it’s a gift of money at a birthdate, or your child is already working, encourage them to think about their money in three buckets: Something should always be saved. (If they are working, a Roth 401(k) or Roth IRA is a fantastic way to save). Spending on some wants is okay too. Just not too much. And I am a big believer that we should all want to share some of what we have with others. A very young child doesn’t have living expenses, so it is easy to make charity part of their financial education.
Needs vs. Wants. This is a huge lesson. And I know some of you may struggle with it yourself. Please, please, please try to break the cycle and teach your kids to focus on needs. If that means owning up to “do as I say, not as I have done” that’s a great sign of strong parenting. Admitting a mistake to stop a loved one from repeating it is such a powerful act of generosity.
For those of you with young adult children, the purchase of a car is a huge need vs. want challenge. If they need a car, that’s fine. But if they want a new car, or a high-end used car, that is no not okay.
The average car payment is more than $500 a month and it runs for nearly 70 months. Both are signals of extreme overspending. The less your kid spends on a car, and the less time he or she needs to pay off the loan, the more money there will be for other financial goals.
Self-sufficiency. Surveys of parents with older children show that many are continuing to provide financial support. If you’re helping with basic living costs, that’s one thing. But parents of adult kids cop to continuing to pay for the cell plan, or bankroll a vacation. Or help with a car payment (or cosign). I have two problems with this.
First, if your “help” is keeping you from tackling your pre-retirement goals –saving more in your 401(k) or IRA, paying off the mortgage if you plan to stay put -- that’s a failure on your part.
And when you continue to help them out I want you to carefully consider if you are really helping them to become financially independent, and able to make wise money decisions. I think you may find instances where you are enabling them to just keep behaving as a child, and depending on you. I know you do that out of love, but I think helping them gain independence is truly the biggest gift you can ever give.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.