5 things that every parent needs to know about personal finance to raise kids who…know about personal finance.
While lots of parents know that personal finance is important for their families and their kids’ future, many parents actually teach their kids the wrong personal finance principles because they just never learned it themselves. (For starters, the amount of money you have in your checking account has absolutely nothing to do with your credit score.)
So if you feel like you’re lacking in the personal finance department, don’t judge yourself – you’re definitely not flying solo. And we’re here to make it as easy as teaching your kid their alphabet (because it’s definitely just as important.)
These are the 5 key things that you and your kids need to know in order to be financially independent.
Be a Saver, not a Spender.
The Skinny: Save while you can…because there are times when you can’t. We save money when money is flowing in for two key reasons: a) to provide for big goals in life and b) to cover ourselves during those times when money is short. That means that saving for an emergency fund, college, and retirement are not “nice to haves”…they’re critical.
The Rule #1: Follow the 80/20 rule. That means 20% of the money you earn should be directed into a savings account (or IRA or some other kind of investments). Or more if you can swing it.
The Rule #2: Save for an emergency fund. You should always have 3 months (and preferably 6 months) of expenses saved in an “emergency fund” that is tucked away in a savings account that you don’t touch. This money should not be in an account that is high-risk(a standard savings account will do), because when you need it, you don’t want to risk not having it.
Be a Producer, not a Consumer.
The Skinny: When you produce things, you have the opportunity to sell your services or your wares to make money. When you consume things, you are spending all of your money to make someone else rich…and instead of saving, are accumulating more stuff that you might not really need.
“Emotional spending” is when we spend because we’re sad, lonely, bored, empty, or angry, so instead of running to Amazon.com when we have those feelings, we should think about our next side hustle, skill set, or job that will get us on the path to producing more and consuming less.
The Rule #1: Hone a hustle (a skill set that will let you earn extra money). And then hone another one. (Need suggestions? Check out the podcast Side Hustle School for ideas.) The skills-based economy that we live in will reward you for what you can create and sell – whether it’s your products or your services.
Using an incentive-based rewards system around your house will also help your kids to understand that mastering a skill set and offering valuable services is how they can make money (anyone want to clean the stairs for $4?)
The Rule #2: Wait at least a week before buying something that you think you reeealllly want. If you reallllly want it, it will still be at the top of your mind a week later. (Make your kids wait a week too!)
Budget – even if it’s painful.
The Skinny: If you’re not living according to a budget, you’re definitely wasting money that could be saved towards important goals.
Think about it this way – if you have no idea that 2000 calories is the average amount that women need to eat daily – I, for one, would definitely eat at least 2 pieces of carrot cake per day.
Money is the same way. If you don’t know what lines you’re trying to stay inside of, it’s hard to stay inside the lines. Need a good budget template? We have one for you here: http://gph.is/2bCv0kQ
The Rule: Like we already said (but it bears repeating), BUDGET – even if it’s painful.
Use Credit to make money, not for vacation.
The Skinny: While people don’t buy houses with a Visa Card, most people buy their houses on credit. That means that we borrow money from a bank, promise to pay them back over time, and they charge us extra money for the privilege of using their money. Although“mortgage” is a fancy word for this kind of credit, it’s still credit nonetheless.
So why is this kind of credit not frowned upon like credit cards? Because when you buy a house, you’re betting on that house increasing in value over time. You’re banking on using the money that you borrow at a 4% annual interest to make a return on your investment that will (hopefully) be greater than 4% per year because the value of your house explodes! So using credit in this instance can be seen as a smart financial move.
It’s also okay to use credit to invest in other things that will help you make money, like taking a class that will increase your earning power, starting a business, or getting a professional certification or license.But beyond those, credit is mostly…well, evil. It can help increase your credit score if you pay your bills on time, but it can also lull you into living beyond your means.
The Rule: Pay every credit card bill off in full at the end of the month and you (and your credit) will be golden. You won’t incur fees from your credit card’s interest rate, and you won’t go into debt. What could be sweeter?
Invest today. Yesterday if you can.
The Skinny: Investing is for long-term goals, Saving is for short-term goals, Spending is for the Joneses’. While parents always talk to kids about saving, only 30% of parents talk to kids about investing.
And the truth is that if you’re tucking your money into a savings account for college, retirement, or any other long-term goals, you will likely never reach the mark. Why? Because today’s savings accounts don’t yield much interest, and therefore don’t enable your money to grow.
Let’s say that Aunt Bunny left you $100,000 and, starting today, you put it into an savings account. In 30 years, that $100K would be worth a whopping $106,000.
If, however, you took Bunny’s money and put it into an investment account that yielded the same returns that the stock market has over the last 50 years, that $100K would be worth (drum roll, please) $761,000.
The Rule #1: The rule of 72 says that the number 72 divided by the average annual interest rate that you earn is equal to the number of years that it will take for your money to double.
To put it simply, if the stock market yields an average return of roughly 7% (as it has for the past 50 years or so), and we assume that this will continue to hold true, you calculate 72/7, which means that it will take roughly 10 years for your cash to double. And 10 more years for it to double again. And 10 more years for it to double again. You get why investing TODAY is so important? Time is your friend when your money is growing in an investment account.
The Rule #2: Set up an investment account asap. Seriously – as soon as you’re done reading this paragraph. We love Betterment, which lets you start an investment account with no minimum, and Wealthfront, another Robo-Advisor that can set up your account online and get you on the road to investing in 30 minutes or less. We also recommend Acorns, which lets you round up purchases and invest the rounded-up portion, but you should definitely be investing more than your spare change. And, of course, your kids can sign up for a Goalsetter account, where they can save their birthday and holiday money in a savings account, and when they have a nice starter fund, move it into an investment account under your name.