As parents, we want the best for our kids. Most schools do not do a good job of teaching personal finance. That leaves it to us, as parents, to educate them. Helping our kids become more financially savvy can help us have a lasting impact on their lives. It can also allow them to live the lifestyle they desire.
It starts with teaching them to be careful with their money. At its most basic level, this means being sure to decide to save at least a portion of your income. It includes living within or below your means. It also involves helping them understand the value of using credit cards wisely and not paying credit-card interest. While some kids may be minimalists – like my two oldest – others may tend to accumulate unnecessary things.
Two weeks ago, I shared the first six of my 11 tips:
1. Learn self-control – create a budget.
2. Pay yourself first.
3. Start saving early – Open a Roth IRA as soon as you can.
4. Take advantage of the company match.
5. Plan for the future – set goals.
6. Understand taxes.
If you need a refresher, you can find Part 1 of this blog here.
Read on to find five more tips. You’ll also find a bonus tip at the end.
7. Maintain your health
You can pay a lot for health insurance. But paying for an emergency room visit costs a lot more if you don’t have insurance.
You can also keep your costs down by keeping yourself healthy. This means eat right, exercise regularly, and maintain your weight. If you have the opportunity, consider a health savings account (HSA). If you’re relatively healthy, an HSA can be a great way to build your savings. Remember that you can invest the funds in your HSA, which will help them grow. Unused funds roll over year-to-year. As discussed in this blog, HSA’s provide a triple tax benefit.
8. Protect your wealth.
You want to ensure your hard-earned money doesn’t vanish. This means you should take steps to protect it. You want to get renter’s insurance to protect the contents of your place from events such as burglary or fire.
Disability insurance – which you can often get through your employer – protects your most important asset. What’s that? The ability to earn an income. This insurance provides you with a steady income if you can’t work for an extended period due to illness or injury.
You also want to make sure you have adequate automobile insurance. In general, you shouldn’t need life insurance until you’re married and have a family.
If you want help managing your money, you can hire a fee-only, fiduciary financial planner such as Apprise to provide you with unbiased advice that’s in your best interest.
9. Build a credit history.
Borrowing money doesn’t have to be a bad thing. If you pay your bills on time, you will build a positive credit history. If you want to buy a home of your own, you should expect to borrow money. Having a good credit history can translate into a lower interest rate on your mortgage. You can get a lower rate if you borrow to buy a car, too.
Many credit cards come with attractive incentives. You can earn cash rebates or get points that you can apply toward travel or other purchases. But make sure you pay your balance in full. Credit card interest rates are high. You don’t want to add to the cost of everyday purchases by paying interest on them.
You also want to check your credit score regularly. If your identity is compromised or your personal information is stolen, you want to know as soon as possible. I use Credit Karma as well as updates from the banks that issue my credit cards to keep an eye on my credit score.
If you do have credit card and/or student loan debt, make a plan to repay it. As I discussed in this blog, I ended college with a significant debt burden. I crafted a plan to repay it as quickly as I could.
10. Drive your cars for a long time.
Not everyone will agree with this one. Many people like to have a fancy car with the latest features. That can be great. It can also be fun and make you feel good. But it can also be expensive. Consider buying a car with low mileage that’s about three years old and coming off a lease. You’ll pay a lot less. You can get a good warranty if you buy a pre-owned vehicle. Don’t replace the car once it’s paid off either. Drive it as long as you can. Once you pay off your car, save the money that went to your car payments instead. Those savings can add up.
I leased a car once in my life. It was a good deal. The payment was affordable, and the car didn’t need much maintenance. I thought about leasing my next car, but when I ran the numbers, I decided that buying made more sense. It was going to cost me less. I paid that car off in four years. I owned it for about 14 years and drove it over 200,000 miles. That meant I went 10 years without a car payment. Regular oil changes and other maintenance helped me avoid major repairs. Buying that car and all the cars my wife and I have owned since we got married has served us well.
11. Save and invest.
Don’t wait to save and invest. Saving and investing can be challenging at the start. But putting away even a few dollars a week can have a big long-term impact. Create a budget to see how much money you can save each month. If you’re not sure how much you spend, try tracking your expenses. I did that before I bought my first house. Knowing exactly what I spent my money on convinced me I could afford it.
You can save for many things:
- An emergency fund. You want to have money set aside to cover any unexpected expenses. Doing so can help you avoid credit card debt. While I understand that current interest rates are low, you should put your money someplace where there is little risk. For example, a high-interest online savings account or a money market account. You can also consider a certificate of deposit (CD), but if you need the money before the CD matures, you may forfeit some of your interest income. Ideally, your emergency fund should hold enough to cover three-to-six months of expenses.
- Expensive purchases.
- A house
- A new car
- The future.
- Your retirement
- Education costs for you or your children
- Items on your bucket list
Saving and investing allow you to take advantage of compounding. When your money compounds it works for you. This is a key element of finance. You want to earn money on your money. If you can save $10,000 a year for 40 years, how much do you think you’ll have? Without any compounding or growth, you would end up with $400,000. That’s not bad. If you earn 5% a year, you will end up with more than $1.2 million. If you earn 7% a year, you will end up with nearly $2 million. The extra growth shows the value of compounding. It’s what happens when you let your money work for you.
I may have saved compounding for last, but it’s truly one of the most important concepts to learn when it comes to personal finance and investing.
12. A Bonus Tip.
More than anything you should talk to your kids about personal finances. If you made mistakes, share them. Talk about your successes, too. Help them realize how much things cost. Remind them how important it is to plan for big purchases. Explain to them the importance of paying bills on time and avoiding credit card debt as much as possible. Talk to them about creating a budget – or at least making sure they spend less than they make. More than anything do all you can to get them to start saving early. As discussed by Morgan Housel in his excellent book, “The Psychology of Money” and this article, one of the keys to Warren Buffett’s success was time – he started investing at age 10. His net worth would be a lot lower if he hadn’t started investing when he was so young.
The Bottom Line
The earlier parents start helping their kids understand how to manage their money, the better, even when they are teens with summer jobs.
However, if you haven’t done so and are now living at home with a son or daughter in their twenties, you still have time.
Start eliminating your [financial] involvement in your child’s life. Make them start taking ownership of things — maybe not everything at once. Have them start taking responsibility for certain bills and expenses.
In the end, it’s all about building healthy habits. Share these tips with them as well. There are others, too. There are a lot of software tools that can help them.
Saving money can be challenging, especially when your son or daughter first starts his or her career. Many young professionals discover that there’s not much left from their paycheck after they pay their rent and monthly bills. That can make it easy to put off saving for the future. But if they can start saving while they’re young, no matter how small the amount, it could be one of the best financial decisions they can make. Forming good saving habits early could have a significant impact on their ability to weather unexpected expenses, make large purchases and achieve major life goals.
If you would like someone to talk to your child about good financial habits, please schedule a free call. I would be happy to talk to them. To do so, you can either send me an email at firstname.lastname@example.org or schedule a free call using this link.
I’ll be back next week with “Apprise’s Five Favorite Reads of the Week.”
Have a great week.
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Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.