Teaching kids about personal finance is one of the best gifts that you can pass on to your children. Most kids learn very little about how to manage money when they go to school, yet this is one of the most important skills that they can learn. If they learn well, the can avoid much that could lead to financial stress as they enter and go through adulthood. Here are some tips that could help.
Teach About Cars
One of the biggest expenses that most families will have is a vehicle. In most parts of the United States and Canada, cars are pretty much a necessity. However, an expensive car is a choice. Kids will want to have a car to show off, but it will make their bank accounts anemic. A cheaper car that’s reliable will be much better for the wallet. Remind them that the cost of a car is not just a car payment. There’s also insurance, maintenance, and gas to pay. This is where finding a car insurance quote that adequately covers young drivers at an affordable rate can really help out a monthly budget.
Teach About Compound Interest
Albert Einstein is often referenced as saying compound interest is the most powerful force in the universe. If your kid starts saving early, they can actually see their money grow to a nice amount without having to save as much as their peers when they get later into their lives. That’s because a penny saved today will be worth several pennies in 40 or 50 years.
Properly invested, each dollar can get a return of between 4 and 10 percent annually on average, depending upon the investment that’s chosen. Then the interest will start to earn the same return each year, and the interest on that interest will start to earn the same returns. It’s a virtuous cycle, but compound interest needs time to really start to bring in big gains. Starting earlier is definitely better than later.
Teach About Saving for Retirement
Money that’s saved in tax-advantaged retirement accounts can start to grow even more quickly than those that do not have the tax advantages. Teach your kids that the 401k, the 403b, and the IRA do not have to be confusing. If their employers offer a retirement plan with matching funds, encourage them to take advantage of the match. The money will really start to add up because the tax is avoided either going into the account or coming out, depending upon whether traditional or Roth accounts are chosen. The power of compounding will help them survive with more than Fancy Feast to eat.
Teach About Debt
While not all debt is considered equal, most of the time, less debt is better. The power of compound interest can work for you, or it can work against you. When you owe a debt, rather than building up wealth, you’re sending your wealth to the bank or credit union.
It’s important that kids know that student loans, mortgages, and other useful forms of borrowing can usually be alright as long as the payments only take up a reasonable percentage of monthly income. Credit card debt, on the other hand, is something which should be carefully considered first.
One of the best areas of advice that you can give to your kids is in the area of personal finance. If you’ve made mistakes and learned from them, your kids might be able to learn from your experience as well. If you know other people who have made mistakes that you’ve avoided and your kids can learn from them, it’s even better. The time to start with financial education is now.