This is a guest post from Pauline of InvestmentZen.com
Raising kind, responsible, smart kids is a pretty tough job, that requires a lot of work on your side, on top of what they learn at school. Speaking of which, one thing the school curricular completely overlooks is financial education. One of the most important life skills one can have is forgotten by the education system. So it is your job as a parent to make sure your kids have solid bases for a bright financial future.
The basics of personal finance
Kids love to understand how “grown-up things” work, and money is one such thing. From a young age, they can sum up the cost of groceries at the supermarket, make sure the family stays under budget for the week, and other simple math equations. By showing your kids money is a limited supply, they will get curious about how to get more. Time to start a lemonade stand!
There are many ways to teach kids about money. The most important concept for them to learn is you have to spend less than you earn. If they receive a weekly allowance, they can save every week to buy a bigger toy, or they can get candy immediately. Not both. And if they do save, they will get that empowering feeling that comes with delayed gratification.
Every life event can be a money lesson. Sitting down with them to share how much the bills and family budget represents helps them realize life is expensive. Prioritizing family holidays over Christmas gifts can be a great lesson in planning for a big goal.
Planning for a solid financial future
Most habits and personality traits are formed during the first years of life. Turning a shopaholic teenager into a responsible saver will be much more work than instigating healthy money habits in early years. While you’re not going to start discussing the specifics of IRAs and 401k with your first grader, talking about their future goals, and how saving and investing will help them make dreams happen is very important.
Some kids don’t have the entrepreneur gene, for as much as you try, but there are some odd jobs they can get as teenagers that are a great way to show them how money is earned and how it should be respected. Getting a paper route, walking dogs for neighbors, etc. can easily be done around school hours.
One of my biggest realizations as a kid working her first jobs was that the things I wanted cost quite a bit of money. Say I could have that $1 slice of pizza, or I could sit down in a nice place, and have a $15 pizza. I wanted the $15 experience once in a while. And that was hard to achieve on minimum wage. Instead of complaining life was hard, I just found ways to make more money to afford my lifestyle. Kids are very resilient and once again, the earlier you start, the easier it is.
The power of compounding
Another big revelation as a kid was that money makes money. That is the wonder of compounding interest. If you show a kid that he has 50 years ahead of him to become a millionaire, and by investing in the markets small sums every month, he can make it work easily, chances are he’ll play along.
As a matter of fact, you just need $4 a day to turn your kid into a millionaire 50 years from now. Assuming a rate of return of 8%, if you invest $125 a month, you will have $1,007,978 in fifty years. Your 12 year old can retire with seven figures at 62 for the price of a latte.
If you have been saving that amount on their behalf for the first 12 years, they can retire at 50 with one million!
But the figure your kid will probably understand best is that of total deposits. $125 per month amounts to $75,000 over 50 years. The other $925,000 are compound interest, since the period is so long. If you only had 10 years to save a million, investing $5,000 a month, and $600,000 in total would not be enough, giving you $922,176.