Key concepts about money to teach your kids

When it comes to money, it is never too early to start educating your kids and teaching them good habits.  Here are a few concepts that some of us at P&A have implemented with our own kids.  If you are a parent, or even a grandparent, hopefully these concepts are provocative and aid you in formulating your own ideas and money teaching methods:

 

  1. Create an incentive-based reward system vs. an entitled allowance system.

Consider implementing a system where your kids are earning their allowance, as opposed to being given their allowance.  By creating a system that is measurable and incentivizes a job well done, you teach them important life lessons.

One method is to cycle through a list of 2-5 different chores (each week, some change, some don’t) and have a tracking sheet for accountability.  Have your kids ‘check the box’ when they complete their chore, which gives them a sense of satisfaction and gives you a way to create a reward system that is tied to their actions.

 

  1. 212 vs. 211

At 211 degrees, water is hot.  At 212 degrees, water boils.  With boiling water comes steam, and with steam, you can power a train.  That ONE degree makes all the difference.

When it comes to life in general and EARNING money, one of the most valuable lessons to teach your kids is to go the extra step, to make the extra effort.  A good way to introduce this concept is within the scope of their incentive-based reward system.  Here is what this might look like:

  • Cubby doors need to shut all the way. If they can’t close, they aren’t organized well enough.
  • Every – single – piece – of – clothing is off the floor in their room before they go to school and/or before they go to bed.
  • The last step of taking the garbage out is placing a new trash bag for future trash.

 

  1. Teach about the uses of money

It is never too early to teach kids about the uses of money.  In our view, there are five (should sound familiar to some of you who have gone through our Finding the Balance process).

Live, Give, Debt, Tax, and Save.

Continuing with the incentive-based reward system, consider tallying up their reward/payment at the end of each week.  If their reward is $10, give them 10 $1 bills.  Then, put three mason jars on the table.  Take back $1 for taxes and put it in the Tax jar.  Ask them for $1 to put in the Give jar.  Ask them for $1 to put in the Save jar.  Then, they can do what they want with the remaining $7.

 

  1. Introduce them to the most important financial concept of all – compound interest

“Compound interest is the 8th wonder of the world.  He who understands it, earns it; he who doesn’t, pays it.” – Albert Einstein

You can open a UGMA brokerage account for your kids (we are happy to help).  The sooner their savings dollars can be invested in the equity markets, the better.  In college, they can put away their own money and start to really see it grow.  At age of majority (which differs in each state but is 21 in Nebraska), the account will be in their name alone.

By investing $100 per month, starting at age 20, at an annualized growth rate of 8%, they would have $530,970 at age 65.

By investing $100 per month, but waiting until age 35 to start, at an annualized growth rate of 8%, they would have $150,030 at age 65.

By starting early in life (age 20), they would be putting in an extra $18,000 of their own money during that 15-year time frame, but the compounding growth could earn them an additional $362,940.

 

  1. Set a good example

Studies have shown that money habits in children are formed by the time they are 7 years old.

As a parent, know that little eyes are watching.  When parents argue about money, kids notice.  When parents are consistently worried about money, kids notice.  Conversely, when parents have harmony in their financial lives and make confident, well-thought-out decisions, kids notice this, too.

Click here to download the PDF version of this article.

 

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Since 1995, we have existed for one purpose...to help our clients live the life they’ve always imagined. We are a fee-only registered investment advisor (RIA) and a full-time fiduciary, meaning we fight for your best interests day in and day out. Our approach results in shared success.

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