Money is a very powerful thing. It can bring freedom in areas of our lives and empower us to accomplish our dreams and goals, but it can also blind us and keep us from living a full life. That’s why teaching and passing along lessons we’ve learned about money to our children is so important if we want the next generation to grow further than us. Below are four areas where parents can positively influence their children to help them build sound financial skills and a healthy relationship with money.
Though this term is not a “sexy” topic when it comes to finance, it is a vital and necessary skill to teach if we want our children to become financially healthy adults and stay financially healthy throughout their lives. Teach them budgeting skills as soon as they start earning money, whether that is through an allowance or a part-time job. You can do this by teaching them to earmark a certain amount of their earnings to meet their essential needs (if they have any), an amount they can spend on whatever they want and an amount they should put away into savings.
A good place to start is the 50/20/30 rule. It breaks down each paycheck (or allowance amount) into the categories allocating 50% to their essential needs, 20% to their savings and 30% to spending on things they want. You can change the numbers around to accommodate what makes the most sense for your specific situation as long as you have something allocated to all three categories. You may also want to allocate a percentage to consistent giving, which we will look at later. Teaching your children about budgeting is something they will be thankful for in the years to come.
The discipline of saving money on a regular basis needs to be taught to the younger generations as early as possible. Saving can provide many benefits. Having money set aside in a savings account can provide a safety net in the case of an emergency. Additionally, it can provide for a future need/want, i.e., college tuition, house down payment, or retirement. Saving at least 10% of their income is a good place to start.
Investing needs to be taught early and often because it can provide so many benefits. An important aspect of investing that we should be teaching the younger generations is the benefit of compounding interest. The definition of compound interest is interest paid on both the principal and on accrued interest. In other words, it means investing will allow you to earn interest on your interest. The earlier we can teach younger individuals this foundational principle of investing, the better off they will be. Saving early and investing are key to building a nest egg for retirement.
Of the four skills generosity may be the one most ignored or forgotten, but it is the area that can provide the most benefits when it comes to quality of life. Research shows that individuals who are generous with their time, energy, or money experience less stress, feel happier, have better mental health, have better marriages and live longer than those who are not generous.
When it comes to teaching younger people beneficial money skills, I believe generosity must be included. Not only do we want to instill good money skills into the younger generations, but we also want to introduce them to ways that can improve the quality of their lives and the quality of other people’s lives.
What if your children need your financial help? Visit our post for advice when children ask for financial assistance.