The Two Most Important Financial Lessons To Teach Your Kids

If you read this blog or others or you get a copy of my book, there are hundreds of awesome lessons to teach your kids about money, finance, debt and investing.

But if you boil it all down to the two most important financial lessons.  If your kids are like most and want the bottom line please and then leave me alone to play video games then it's these;

  • Live beneath your means
  • Stay out of debt

Instill these two super important lessons and you will have done them the biggest favor you can.  I don't care how wealthy you are and how much you leave to your kids, if they haven't learned these lessons, they are doomed.  We all hear about kids inheriting millions only to end up bankrupt.

Look out for teachable moments regarding living beneath your means.  It's ok to say, we cannot afford that and if we did buy it, here is the problem that would create.

Teach them about debt, when, not if, but when they come to you when they need something that you agreed would come from allowance but they've already spent their allowance, allow them to borrow money from you at 15-20% and enforce this next allowance, they will quickly learn that borrowing money is money down  a hole that they'll never see again.

Teach them that instead of borrowing at 15%, that they could save at 5%, the difference is a massive 20% and use any online calculator to literally show them what it means to them, they will get it.


What To Teach Your Kids About Money And When

We all know that teaching kids about money is important.  We all get busy, soccer, baseball, hockey, lacrosse, next thing you know it's another season and a few months and you haven't sat down with your kids to discuss money, debt, saving or investing.

You must make time.

Kids learn about money as early as age three.  You need to be the person who teaches them the value of money, how it works, how interest works (either for you or against you) and all about saving and investing.

Kids have questions, make sure you know what to say.

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Read Contracts With Your Teen

As parents, we get a few chances to teach our kids something important that may help them later in life, at least we hope so.

Your teens first few contracts are great opportunities to teach.  Take the opportunity to read through your teens first few contracts with them, line by line.

It may be a cell phone contract, car loan and yes, its boring but super important.

Ensure that they read and understand all the information and the fine print.  The interest rate.  Late fees.  Overages.  Etc.

Hopefully you have discussed and made your teen aware that this new responsibility is important and can affect their credit.

Make sure they can afford this new purchase too, its not a right, its a privilege.


Saving Is Good

Teaching our kids about saving is extremely important and can't go underestimated.

It isn't very long before our kids go from asking for legos to asking for a car.  They do grow up fast.

Besides college, one of the biggest expenses kids will have is car.  College is a different subject addressed in a different article.

The best way to instill some money management and responsibility in your 16 year old is to have them pay for their own wheels.  However the reality is that what they may be able to afford may not be the safest, most fuel efficient car on the road.

The compromise is this and it depends on your ability to help out.  As they save, make a deal that you will kick in 1X, 2X, 3X whatever they save.  This gives them an incentive to save.

Open up a separate bank or brokerage account (I like fidelity) and set it aside for the eventual car purchase.  This gives them the visual picture of saving and money management skills.

Its hard to start this account too early and kids start talking about wheels about age 9-10 so that's an ideal time to get started.

Why Give Kids An Allowance

Most everyone agrees that giving our kids an allowance is a good idea.  A couple of tips from the eBook. 

  • allowance is not payment for chores (kids should be helping out around the house as part of the family)
  • make a list of items that the kids are responsible to pay for out of allowance (its not just for candy or toys of their choosing)
  • allowance should be given on a regular basis, usually weekly
  • if allowance is $5, give five $1 bills and encourage saving one of the $1's (more on setting up a savings account in the eBook)
  • remember the goal behind an allowance is learning money management and the value of money
As kids get older, teach them to keep good records of how much money they have made, how much they have left, where the difference went.

Keep an eye out for teachable moments.


Teaching Kids The Value Of Money

It is becoming increasingly difficult to show our kids the value of money.  Money is more confusing than it used to be.  Kids see the exchange of plastic or numbers being typed onto a screen and it can be misleading.

Kids see paper and coins from time to time but not very often.  They are taught at school that 2 quarters and a dime is sixty cents or that 2 tens make a twenty but with so many transactions being conducted digitally, the relative value is lost.

Instead of an iPad costing $600 which would be a lot of cash, 30 twenties, all they see is 1 swipe of plastic into the machine and voila, they have an iPad!  This is very likely confusing and without any explanation, kids lose respect for how much things cost.

Parents need make sure kids understand what things cost and the easiest way is to put it in relative terms.  This iPad cost the same as 600 songs or games on iTunes, a new game every day for a year and a half, wow, you will be 9 years old by then!

Older kids can be taught real world lessons.  Let them pay for their cell phone out of an allowance or from money they have earned.  Let them fail occasionally at managing money too because it's better to learn a hard lesson as a teenager than as an adult!


Help Kids Learn Difference Between Needs, Wants & Wishes

You probably do a great job as a parent teaching your kids about making good choices.

Do you talk about good and bad choices as it relates to money?

The best way to teach young kids especially to make good choices is to offer two (only two) choices and hopefully they will make the correct choice but the wrong choice isn't a time for scolding, its a time for learning - a teachable moment.

You cannot start too early discussing the difference between needs, wants and wishes.  This on-going discussion will prepare them for making good spending decisions in the future.

In the book, "How To Teach Your Kids About Saving, Debt and Investing", I outline what I believe are needs, wants and wishes.