Empower Your Kids with the Tools They Need to Achieve Future Success
It seems like yesterday that my daughter, Nina, turned one year old and was an adorable, chubby little girl. Now, she’s a beautiful 15-year-old teen who loves reading, skiing, tennis, travel, choir, and piano. As a parent, I feel the urgency to teach her essential life skills before she goes off to college, especially around financial literacy and money management, which are critical for her success and happiness.
So, this blog post is written for her and the teens in your life. Be sure to share it with them.
It’s never too early to start saving money and developing good habits where money is concerned. So, here are eight money tips to help you successfully start on your financial journey.
1. Write Down Your Needs vs. Your Wants
It’s so easy to spend money. What’s not easy is spending money wisely. One way to help you spend money wisely is to separate your wants from your needs and spend money primarily on your needs.
Think of needs as immediate and what you will need in the next few months. Write down what you need with those costs in one column and write down what you want with those costs in another column. Now ask yourself, “Can I do without these wants?” and “Are there alternatives to my wants?”. For example, you have decided that you need a cell phone. Is a used cell phone an alternative to a brand-new cell phone, freeing up money to spend on other items you need? Writing them down helps you prioritize your spending.
2. Start the Savings Habit
Setting money aside now, while you are young, can start a lifetime of healthy savings. You brush your teeth twice a day, and you don’t even think about it because it has become a healthy habit.
So now, when you have any income, put some of it away for the future. This will go towards goals, such a buying a new video game (a short-term goal), a laptop computer (a longer-term goal), a rainy-day fund, and college expenses. A rainy-day fund can prepare you for unexpected opportunities, such as going to see your favorite singer in concert or attending a special school event. Once you have developed the savings habit, it comes naturally for you to save later in life.
3. Create a Budget
You may have some income from weekly allowances (say, $15 per week for a 15-year-old), birthday money from relatives, or a part-time job. When you create a monthly budget, list all your income first, then list savings and expenses. Notice that I said savings before expenses. “Pay Yourself First” means setting your savings goals before listing expenses. And remember basic math: your total income should = your total savings + expenses. If it doesn’t, go back and adjust your expenses and savings so that they do total your income.
Track how you spend money by writing them down on a notepad or using something like a Google spreadsheet. You should regularly compare your actual expenses to your monthly budget and make adjustments to stick to your budget. Budgeting tools, like Mint, are also helpful in tracking expenses and working your budget.
Eventually, you will open a checking account and get a debit card. A debit card allows you to buy things online, but unlike a credit card, you must have enough money in the bank before using it.
4. Be Careful with Credit Cards
When you go to college, you will find credit card companies often entice you to sign up for their credit cards. They will try to convince you that a credit card is like having free money to spend while you only pay the minimum amount each month. This money mindset can be very dangerous, as you are more likely to rack up credit card balances quickly and become inescapably trapped in a high-interest-rate nightmare.
For example, a $3,000 credit card debt with an 18-percent interest rate will take nearly 22 years to pay off, making only minimum payments, with more than $4,100 in interest charges accruing over that time.
I recommend that, before you use the credit card, you should have the money in the bank to pay off the credit card balance on time each month. If you are late in payments, you will pay the late penalty, and that will negatively affect your credit score. A high credit score will help you obtain loans at a lower interest rate, saving money on the interest you will pay over time.
5. Get a Job
To increase your income and gain valuable life experience, you can get a part-time job (when you’re old enough) or start a side business that matches your skills and what you enjoy doing.
- · If you like taking care of kids, you can be a babysitter.
- · If you love dogs, you can walk dogs for your neighbors.
- · If you enjoy being in the garden, you can pull weeds, plant vegetables, grow flowers, and mow the lawn.
- · If you can bake great cookies and muffins, you can sell them to raise money.
Having these work experiences now will help you learn problem-solving and people skills, which will enable you to find better jobs when you’re an adult.
6. Understand the Magic of Compounding
Answer this trick question: “Would you rather have $10,000 per day for 30 days or a penny that doubled in value every day for 30 days?” Today, we know to choose the doubling penny, because, at the end of 30 days, we’d have about $5 million versus the $300,000 we’d have if we chose $10,000 per day.
Compound interest is often called the eighth wonder of the world because it seems to possess magical powers, like turning a penny into $5 million. The great part about compound interest is that it helps us to achieve our financial goals more quickly.
SEE ALSO: 5 Money Moves Single Parents Should Make
7. Start Sooner Rather Than Later
The earlier you start investing, the better off you’ll be. Consider the case of two investors, Lily and Anna, who both wanted to become millionaires. Lily put $2,000 per year into the stock market between the ages of 24 and 30, which she earned a 12% after-tax return on and continued to earn 12% per year until she retired at age 65. Anna also put in $2,000 per year, earned the same return, but waited until she was 30 to start and continued to invest $2,000 per year until she retired at age 65.
In the end, both end up with about $1 million. However, Lily only had to invest $12,000 (i.e., $2,000 for six years), while Anna had to invest $72,000 ($2,000 for 36 years) or six times the amount that Lily invested because she waited six years to start investing. It’s clear that compounding can work magic when you have more time.
8. Give Generously
When you share games with your friends, it’s a lot more fun than playing by yourself. Many people in this world are less fortunate and need help to get back on their feet. In addition to giving to your church weekly, you can do some research online to find the causes you want to support by using sites like Charity Navigator.
As you work on your monthly budget, consider allocating your income between these four categories Save (30%), Spend (50%), Share (10%), and Invest (10%).
The Time to Start is NOW!
Parents, be sure to share your own money stories with your teens. Tell them about the mistakes you have made and the lessons you’ve learned. Be open to sharing your challenges in earning money and paying for unexpected expenses. Setting good examples yourself by following disciplined savings and investing principles will help you raise financially savvy kids.
Of course, your kids will make mistakes. We did, and they will, too. But it’s okay, as they will remember what you have taught them.
If you’d like to do a self-check with your finances, I invite you to purchase my latest book, Own Your Future, where I share seven life-guiding principles, give you tools and education to think properly about your money, help you to identify who should be on your financial team, and offer insights into what each of them should deliver. Today is the best day to start on your path to financial independence.