Managing Money: A Guide to Teach Your Children
The 4 Routes of Money
When it comes to managing money, one generally has four options: save, spend, donate, or invest. These may not seem like a lot of options; however, a majority of people are only spending their money or have no idea how to start implementing the other three choices. People are not learning how to properly use their money. “American’s lack financial literacy— less than half of the U.S. requires high school students to take a personal finance course.” If people are not learning personal finance skills in school, then where are they learning them?
Oftentimes, your own home can be a great place to begin learning about finance. There is certainly no rule on when a child can begin learning about how to handle their money. You wouldn’t want your child graduating from high school and not have a clue as to what to do with their money as they step foot in the real world.
Honesty is the Best Policy
Managing your money doesn’t need to be so private—it’s a good subject to talk about. It helps when you can lead by example and teach your family (and especially your children) how to best manage their money. It’s important to be open and honest with them. This way, you hold yourself accountable while also establishing the importance of a good relationship with money. If there is no conversation about what to do with money, then there is also no thought about what to do with money.
A few topics you can discuss may include personal finance goals (having goals helps with motivation), how to set a budget, how much to save versus how much to spend, defining your wants versus needs, how to invest your money, etc.
When to Start a Relationship with Money
To begin your child’s relationship with money, you can start with a few little things. For example, when you go out to eat, hand them the cash and have them pay for the meal. They can begin to understand how money works. This demonstrates, once you spend your money you can’t necessarily take it back, so each purchase should have a purpose in mind.
You can also have them earn money through chores/weekly allowance. This can give your child a realistic idea of how you work to earn your money in the real world, thus helping them build a realistic relationship with money. Once they have the money, they have the power to make decisions about it. This is why it is important to help them build strong money habits from a young age.
A great app that can help foster this is called The Busy Kid app. Within this app, your child will earn based on chores completed, and then have a percentage of that money automatically saved, the ability to spend, invest in real stock, or donate their money to charity. Once your child can understand the basic four options they have with money- save, spend, invest, or donate – they can better set their financial goals and establish a long-term financial plan for their future.
Goals = Motivation
As your children get older, you can begin to discuss specific goals with them and options they have for their money. It’s helpful to have a budget and set financial goals to see financial habits develop and to make sure every dollar you have has a purpose.
Imagine your child has a goal to attend college- a huge expense. There is an option to set up a 529 Plan — a tax-advantaged college savings account where withdrawals are tax-free when used for appropriate educational expenses: tuition, books and supplies, and room and board. With 529 plans there are different investment options to suit your needs, and depending upon the state you reside in, there are even pre-determined portfolio options built out for you. This is something you/they can put their money into so that they may have little to no debt after graduating from college.
If a 529 plan is not something they want to put their money towards, they could still set up a savings account so that if needed money is still available. Although, as a parent, you should make it known that savings accounts have small room for growth.Yes— they are a safe option— but one that won’t grow rapidly or return much in interest. Low risk means low reward.
Investing in stocks or mutual funds is where you can have your money really grow. It does come with higher risk, yet also a higher reward. And, with the right guidance, you can safely invest your money with help from a financial planner.
Tony Jones, Financial advisor at rebel Financial, states,
“To be a successful long term investor, an investor needs to understand costs, diversification and how to handle their emotions when it comes to the markets. While some people have a good understanding of what it takes to be successful, most struggle with it and would benefit from help. That’s why it can be beneficial to work with a financial advisor. “
Investing your money can be the most beneficial for your future financial wellness. The most common retirement investment account options include IRA, Roth IRA, 401k, and Roth 401k. With a Roth account, the contributions are with after-tax money. Then the money grows tax-free and can be withdrawn tax-free (though there are exceptions). Whereas “Traditional” means to contribute pre-tax money, but you will have to pay taxes when you withdraw the funds.
Utilitze Financial Resources
Managing money is never something in which you have to feel alone—there are many great resources for anyone to utilize. The ability to research on your own can help you learn to be more financially literate. Start with resources such as the Dave Ramsey podcast, budgeting apps, Youtube channel with a certified financial advisor, and newsletter and blog posts from professionals.
Don't Forget to Reward Yourself
No matter what, you and your family should always be aware and understand what options are available when it comes to managing your personal finances. It is important to set a budget and have financial goals. In doing so, you are aware if you are meeting these financial needs and goals. And if not, reassess and explore your options. See where you can implement better money habits, such as investing more money or maybe opening a Roth IRA might work best for you.
Lastly, never forget to reward yourself. Make sure to set aside money for wants or fun experiences. It is crucial to have financial discipline but it is just as important to stay happy and motivated.