There are a few people who are naturally gifted when it comes to managing money. The rest of us, myself included, need to be taught proper money management habits.
The first class I taught at Texas Lutheran University was a personal finance class. Although it was very practical, I wasn’t getting the students until they were 18 or 19 years old. By that point, many bad habits have already been established and opportunities missed. Instead, researchers at Cambridge University encourage families to teach kids as young as 3 years old about money and personal finance. Certainly, by kindergarten, you need to be having these conversations with youngsters.
For many families, this can be a daunting task. However, the more you keep it common-sense oriented, the better off you will be.
Children need to understand that work results in reward. The sooner a strong work ethic can be instilled, the more likely a child is to be self-sufficient in life. Instead of giving kids a no-strings attached “allowance,” make sure duties are properly spelled out with corresponding rewards. If they don’t perform, they shouldn’t get paid.
Encourage them to embrace entrepreneurship. Help kids understand if they are going to get ahead, they should start a budding business empire. This might be mowing lawns, washing cars, pet sitting, selling lemonade or anything else you might dream up. This process teaches responsibility, time management, communication skills and money management.
Help kids understand that whether they get cash from a job or a gift, part of it needs to be saved and invested. Spending part of it is fine. However, some of the cash needs to have a long-term purpose.
Match savings. When kids come into cash, give them an incentive to save. Forward-thinking families can agree to “match” funds that a child sets aside for investing. This helps them derive an immediate return on their investment and reinforces a long-term focus.
When discussing investing and the future, help kids to understand “compound interest.” In doing so, I write out the math on a piece of paper and explain it over multiple time frames. This allows me to show them the mathematical progression of how compound interest grows exponentially. In the process, the kids should learn the benefits of delayed gratification.
Teaching kids to embrace their earning power helps them understand the effort and consequences of when they want to spend cash. When discussing this with kids, I like to discuss opportunity cost. This was the best economic lesson I learned in college. Kids need to understand that if they spend money on a toy, they are affirmatively saying, “This is the best way to spend my limited cash.” This forces them to think about their spending and the future. It also helps kids understand what things cost.
Sleep on it. Have kids identify things they might buy at some point in the future. To this day, if I see something I really want, at that moment, I will write it down and then set it aside. I give myself time to think about if this is how I really want to spend my cash. The bigger the item, the longer I force myself to wait. This cuts down on impulse buying and later regrets.
Sleeping on it also reinforces delayed gratification. If anyone is going to be a successful money manager, they have to embrace delayed gratification. Yes, you can spend a dollar today. Or, you can invest it and have significantly more to work with in the future.
Make it fun. Although it may be old-fashioned by today’s standards, sit down and teach your kids to play the board games Monopoly and The Game Of Life. Both are basic, but fun and get the important points across. You can also sit down and watch the animated series produced by Warren Buffett called “The Secret Millionaires Club.” Each episode is full of great money and life lessons.
The sooner you can start embracing financial talks with your kids, the better you will equip them to succeed on their terms. None of prudent money management is rocket science. However, it requires consistent discipline, a work ethic and a long time frame.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.