by Joe Firmin 4 ½ Minute Read
Before we instituted a rule at my house that the kids can’t ask, “Can I have this?”, it was a familiar question. Meanwhile the continuous job of reminding them to turn off lights and quit wasting water looms large. As parents, it’s easy to feel like the kids have no respect/understanding for how hard we work to provide our children this incredible life. I’m sure we were the same with our parents… 😏
The thing is, most parents don’t know where to start when it comes to teaching their kids about money. It’s a big, wide-ranging topic that might even come with some personal baggage, so it’s easy to begin feeling overwhelmed as you’re just thinking about having a conversation!
Here we are, learning a ton, investing to the best of our ability, hustling at our day jobs, and doing our best to manage the family finances in a way that not only sets us up for a great, freedom-filled life but also passes on wealth and knowledge so that future generations don’t have to struggle like we did when we started out.
So, what’s missing? Well, while we remember the struggle like it was yesterday, our kids only see what life is like today. With full bellies, all the toys they can handle, a plush bed, and a sweet vacation each year, they don’t necessarily understand the value of a dollar or the sweat and tears it took to reach where we are at.
This is why it’s even more critical that we talk openly with our kids about giving, spending, saving, and investing and that we instill positive financial values while they’re young. We want them to be equipped with the tools to care for themselves, care for others, build their wealth, responsibly use the wealth we pass to them, and positively impact the world when it’s their time.
In this article, you’ll discover a few simple concepts you can teach your kids and tangible lessons you can implement as part of your plan toward creating generational wealth.
When Kids Can Grasp Financial Concepts
Of course, you’re not going to begin your first conversation teaching compounding interest to your 4-year-old! Children can understand a little more with each year, and you slowly build on their math skills and present simplified financial concepts based on their age, the situation, and the lesson you’re shooting for.
Young kids between the ages of 5 and 9 just need to learn basic arithmetic and have practice earning money, saving some, and spending some. This teaches them the basics of how the world works - you earn $10, you save $2, and you can buy a new toy for $8. Simple, right?
When kids can connect that each thing we do or have is paid for somehow, they’ll start to be more considerate of your household budget. Leaving the lights on, for example, might make the electric bill higher, and you have the opportunity to present and share the statement from the electric company and discuss this financial obligation that exists month in and month out.
Between the ages of 9 and 15, children can understand adult-like financial concepts like credit cards, compound interest, investing, and compute complex equations. At this point, it’s highly recommended that you share much more about your income, your bills, mistakes you’ve made, and, yes, your investing choices with them.
Teaching concepts to our children while they’re young, while they have time to practice and experiment with money under your wing instead of when it matters (like with rent or their credit), provides them an even greater chance at financial success.
Teach Your Kids To Save AND Invest
The most important thing, no matter the tools you use, is that your child gets access and experience with money. That means earning it, making choices whether to spend or save it, losing it, investing with it, borrowing it, paying it back, and everything that we adults do with our money but on a child-size scale.
Provide opportunities for them to earn some cash, and walk them through what to do with those earnings. In our house, the kids receive an allowance each month – not based on chores. Each month, they split that allowance into 4 buckets: Giving, Savings, Investing and Spending.
As you encourage them to save some, spend some, donate some, and invest some, talk to them about why these choices are important and share about similar decisions you’re making with your own money.
Don’t be afraid to share more significant concepts like the impact they could make on a large scale with donations, mistakes you’ve made and what you learned from them, or how they can double their money investing as you do now in real estate syndications. The real lightbulb moment will be when they begin to understand that investments provide passive income - so much so that, if done well, they can choose whether or not to work.
You get this beautiful opportunity to guide them in earning their first several thousand dollars, building up their savings, and gaining exposure to the fantastic world of investing. Just imagine how much more opportunity for freedom and impact they have just by exposure to these concepts. Amazing!
The #1 Mistake Parents Make With Money & Kids
In general, talking to your kids about money is a million times better than avoiding the subject. It doesn’t matter how much or how little of an expert you think you are on the subject. They need to know about your financial mistakes to learn from them just as much as they need to know about the great decisions you made so they can emulate them.
Either way, discussing finances and allowing your child some exposure and experience with money and financial conversations provides them more knowledge and confidence with money than if it were never discussed at all.
Unfortunately, there is one glaring mistake we’ve probably all made.
Most of us can admit that we’ve said, “We can’t afford that,” at least once to our kids in response to their request for something.
While that may be the easiest, most automatic quip, it’s a missed opportunity for a teachable moment. Sometimes you’re just tired of saying “No,” but it’s important that we lean into that conversation about why we’re not buying it and why/how we’re making different choices with our money.
The truth is, we probably can afford that. So, instead of accidentally frightening your kid into a scarcity complex (yep, that’s what really happens), intentionally replace that phrase with a new, more precise, more truthful expression like, “That’s not why we’re at the store today,” or “That’s not in the budget right now,” or “The money I’m spending today is only for groceries.”
It’s okay to tell them the truth about why your answer to their request is no, and it’s even more okay to have an in-depth discussion about budgeting, spending money on meaningful purchases, and investing for the future instead of instant gratification. Honestly, we adults struggle with these concepts too, so it’s a great idea to introduce them at a young age.
If you replace the ‘we can’t afford that’ thoughtless response with an open conversation about financial choices, you and your kids will be much better off.
What Should You Do Instead
The best thing you can do toward teaching financial literacy to your children is to model your own financial choices openly for them. Talk them through the options you have, why you’re making one decision over another, what bills you’re paying and why, and even the trade-off we all face in spending money versus saving it versus investing it.
They need a taste of reality while still living at home to learn about decisions they will have to make when they are out on their own. Allow them to exercise their own spending habits and make the $20 or even $100 mistakes now because those are much better to learn from than the $1000 + mistakes they could make with rent money when they’re older.
Share about your income and bills so they can see what it costs to live their current lifestyle. At the same time, share openly about what it was like for you when you first started out. Although it might be hard to talk about your mattress-on-the-floor and ramen noodle days, they need to know that your life wasn’t always cashflow positive. This is important!
This openness can help them realize that it’s okay to start small and that, realistically, they won’t be living their current lifestyle when they move out. While that might be scary to some, you must help them see the value of that independence. With your help, they’ll begin their independent financial life with accurate expectations and knowledge of what utilities, transportation, food, and other necessities cost, and they’ll be less likely to feel like a failure in comparison to the lifestyle you’re able to provide.
One of the things we did this year was buy our 11 and 8 year old the board game Cash Flow. It teaches financial concepts, investing, basic accounting and budgeting. Super cool, and they like it although they needed some help with some calculating at the beginning.
Positively Impacting The Next Generation With Financial Literacy
Create open lines of communication between you and your kids about money and financial subjects so that they can always come to you with questions, dilemmas, wins, and losses, and so that you’ll continuously have the chance to guide and teach even as they grow into early adulthood.
We’re always learning, right? So, again, it’s a great idea to model that for and discuss your journey with your kids. You don’t need picture-perfect finances to be an authority on the subject with your children. They’ve already looked to you for every answer they ever needed their whole lives, and they aren’t stopping now.
In fact, it’s better if things are a little messy because they need to see firsthand that you’re always learning, winning, failing, researching, and trying again. Remember, share your wins and your losses so that the lesson you’re teaching is realistic and they can develop accurate expectations for their own financial life.
The big thing is that you teach them the power of investing and help them get the correct accounts set up to practice and begin getting financial experience. Just imagine how different your trajectory would have been if you’d known about compound interest, passive income, and real estate syndication investments when you were their age!
Most of us didn’t get much of a financial literacy lesson from our parents, if at all. Fortunately, most of us are also absolutely determined to teach our children about money and break the cycle of financial illiteracy, struggle, and living paycheck-to-paycheck. With the simple tips and encouragement in this article, now we all have an opportunity to positively impact the next generation by teaching financial literacy to our kids!
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