Which money lessons did you miss as a child? Make sure your kids don’t miss out on these important lessons.
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Did you feel well-prepared to face the grown-up world of finances, bills, and expenses?
According to a small group of my friends, they didn’t. Leaving college and entering the “real world” this group of women didn’t know how to budget, live within their means or understand the basics of a home mortgage. And investing? Not even sure where to begin.
With little financial education available in schools, these women aren’t alone. According to a Gallup Poll two-thirds of adults worldwide are financially illiterate. Compounding this problem is ignorance of what we don’t know and should.
Below is a list of some of the most important money lessons every young adult should know. Let it serve as a guide for your kids as you prepare them to enter adulthood.
Mindset is everything
The first step to financial freedom is having a money mindset of freedom, not enslavement. Understand that the more you live within your means, are careful with a budget, and save for the future, you will control money and money won’t control you.
Help kids understand this with your example. Or if you’ve made money mistakes in the past (or even the present) – be open with kids about why you would do things differently. Parents are kids most important source of financial information and the more we consciously talk to our kids about money the better prepared they will be as adults.
Set financial goals
Saving money is BORING. What’s the point of putting money aside each month if you could spend it instead? That’s why it’s important to set financial goals. These goals could be as lofty as buying a house in five years to paying for a cross-country road trip next summer. Aspirational goals help motivate us to save and avoid taking on burdening debt when the time comes to fulfill these dreams.
Have kids set their own financial goals with this Savings Challenge Sheet that allows kids to write down a goal and determine how much to set aside each week to achieve it. These small exercises will lay the foundation for knowing how to reach financial goals as an adult.
Just like saving, budgeting can be a snooze. That is unless we see the bigger picture. Keeping track of how much money we spend versus bring in each month helps us get a grip on where we stand financially.
Even though kids expenses are small, there are ways parents can introduce the idea of budgeting. See how a clothing allowance taught me the importance of budgeting. Younger kids can also keep track of their spending with the My Spending sheet featured in this post.
Resist comparing yourself to others
A big stumbling block to achieving financial goals is the thought, “If they can afford that I can to.” or “All of my friends have this so I deserve it to.”
The truth is you have no idea how these friends have paid for their expenses. Did they take on debt? Are they without savings? Most of the time other people are not a good yardstick for how you should spend your money, especially if their financial goals and mindset are different.
Kids frequently make comparisons with their friends. When it comes to purchases made by parents (“Emily got an iPad!”) explain that families have the choice to make different spending decisions and that’s OK. Even though Emily’s family felt comfortable buying her an iPad, your family does not and then state the reasons why.
Be mindful of debt – even college debt
Most people understand that debt can be debilitating, but few keep this in mind when it comes to college. Today it’s not just a matter of choosing the right college academically but also how to take on the least debt.
In his book There is Life After College, Jeffery Selingo writes that college graduates who are most successful after school – a group he calls “Sprinters” – have little or no student debt. This lack of debt burden frees these graduates to pick job opportunities without regard to pay and take career risks early on such as starting a business.
If going to a less expensive, less prestigious school sounds like a hindrance to success, you may also want to check out the book Where You Go is Not Who You’ll Be, by Frank Bruni.
In any case, it’s important to educate teenagers what it means to take on a debt burden after school. This video is a great resource for parents to explain to teens how loans work.
What credit cards are and how they work
I’ll never forget a friend who acquired a credit card in college without understanding how it works. She thought paying off the minimum due each month was enough. It wasn’t until later she realized the total amount owed was snowballing with interest payments leaving her with unexpected debt.
Parents have a responsibility to at least explain the basics of how credit cards work to their kids. It might even make sense to let your teen have their own card while they’re still at home so you can coach them on the best way to use credit cards.
This guide can help parents determine if giving their teen a credit card makes sense for your family: Should You Give Your Teen a Credit Card?
Invest early and often
The thought of investing money can be daunting to the uninitiated. And who has time to research not only how the stock market works but what to invest in?
But in today’s world, adults need to have a basic knowledge of investing since it’s mainly up to them to fund their retirement accounts.
If you feel lost in the world of investment products, keep it simple when teaching your kids. Index funds are a simple solution to investing in stocks or bonds and a great first place for your son or daughter to begin.
This article is a great introduction to index fund investing: These Five Index Funds Are All You Need.
To provide a deeper understanding of the stock and bond markets, the following are investment books written for kids:
Don’t put off retirement savings
Learning the basics of investing is half the story when it comes to saving for retirement. Another valuable lesson to pass on to kids is that the sooner they start saving, the less they will have to set aside over their lifetime.
This chart from Dave Ramsey shows the impact of compound interest during the lives of two very young investors. Note that even though Ben invested only 8 times while Arthur invested 39 times, Ben still accumulates larger total savings since he started young.
And don’t forget to alert kids to matching retirement plans when they begin their first job. That’s free money in addition to salary and means an even greater impact on total retirement savings.
Have an emergency plan
What happens if you suddenly lose your job and have bills to pay? Or find yourself in need of $1,500 in car repairs?
Many financial advisors suggest that putting 3-6 months salary in a simple savings account can provide a cushion from these unexpected expenses.
Most young adults don’t realize this until it’s too late – till the first unexpected bill arrives – and then turn to a credit card to cover the cost. Perhaps the best time to talk to kids about the need for emergency savings is when your family finds itself in need of extra cash. Money lessons are more likely to sink in in the context of real life.
Most adults are well aware they need insurance to avoid major a major financial catastrophe. Auto, health, renters or home owner’s insurance are all valuable instruments and often well worth the cost each month.
Recent graduates, however, might see renters insurance as a burden and not understand its significance. They also may not understand the importance of researching health insurance options.
Parents can teach kids about insurance by simply talking about the insurance they own and why. The Texas Department of Insurance also has a kids page that explains the most common insurances in simple terms.
Preparing for the future
While we hope to send our kids off into the world fully equipped to handle whatever financial challenge comes at them, the reality is there’s not enough time (or willingness on our kids part) to cover everything.
Even as an economics major and business minor I still had questions about how best to manage my finances in my early 20s. One of the most helpful resources I found was a book called Get a Financial Life by Beth Kobliner.
In plain and simple language, Kobliner covers the basics of banking, debt, investing, insurance, taxes, and home mortgages. The book serves as a great guide to recent graduates who may still need simple guidance on complex topics. There’s even a chapter called “Crib Notes: a cheat sheet for time-pressed readers who need help now”.
Getting our kids ready for future finances isn’t easy, but being aware of lessons we can teach and discuss is a first step to helping prepare our kids for the world after graduation.
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