By Chip Munn, Senior Wealth Advisor and Author of The Retirement Remix: A Modern Solution to an Old School Problem
It’s as essential as ever for children to have a solid understanding of money. Alarming rates of debt, bankruptcy, and low savings are impairing the future of today’s youth.
When students graduate high school, they are sure to face decisions about credit cards, loans, and managing living expenses. But less than half of all kindergarten through 12th-grade schools in the US require a personal finance course before graduation. Without a sound financial education foundation, they risk making poor financial decisions and bearing the unfortunate consequences.
Here I offer insight into three financial principles that can be taught to kids at nearly any age, at any time, to help them prepare for, and live a financially healthy life.
Why Teaching Kids About Money Starts with Retirement
Hearing what kids have to say about retirement or a time when they stop working is one of the more charming and illuminating discussions you will ever have as a parent. Kids can be sure of their chosen profession, even at a young age. I wanted to be a pilot when I was a kid, certain I’d be the first in the Munn family to jet passengers around the planet at supersonic speeds. Kids peer into the future, dreamy and confident of the leader or innovator they will become.
But when they’re asked what they plan to do when they stop working altogether in the future—the surprised expressions and empty pauses tend to reflect what they’ve never imagined. Not because they can’t imagine retirement, but they have not been introduced to it (besides, envisioning yourself as a fearless world-explorer or singing sensation is much more exciting).
Thinking about retirement at a young age and allowing children to imagine themselves at retirement age supplies valuable financial life lessons. If we can get our children to think about a day when they stop working—what they will be doing and how they will be living—then perhaps we can better prepare them for a more secure financial future, starting right now.
Speaking to Kids About Time and Money
The Baby Boomer generation (born 1946-1964) are, as a whole, underfunded for retirement. They have not saved enough to live, or maintain, the lifestyle they want after they quit working. As a result, some of that generation are now trying to catch up or merely sacrificing their retirement lifestyle because of a lack of funds. If they only had more time to let their money earn interest and grow.
Consider this hypothetical example. A baby girl, Bella, is born today and receives $1,000 in total gifts from her family, with which her parents open a mutual fund account for her. (Of course, there are many types of financial account choices where the money can go, yet in this example, assume a mutual fund). The account earns an average annual return of 6.5 percent interest. Without adding more money to the account, by the time Bella turns 18, her account will have grown to $3,212. That’s over $2,500 earned interest plus the $1,000 principal that opened the account, and a powerful money-saving, money-growing scenario.
Now suppose that when Bella’s parents opened the account, they also put $50 per month into the account. When Bella is fanning out 18 candles on her birthday cake, at a hypothetical interest rate of 6.5 percent, the account will have grown to $23,629. (Starting with $1,000, total contributions of $10,800, and total interest earned of $11,829).
A child that can understand how time can work favorably to grow their money has a foothold on a personal finance concept that can serve their financial future favorably starting right now.
Start Learning Healthy Saving Habits Right Now
My mother was a teacher in our local school system for over thirty years, and she was fortunate to benefit from the school system’s pension plan. The school system was responsible for putting aside and investing money to provide her with retirement income after she stopped teaching.
My mother’s type of pension plan, while once commonplace, is much less prevalent nowadays. Employers have shifted the responsibility of saving and investing for retirement firmly onto the shoulders of employees. Saving for retirement usually does not come up in financial discussions until we’re adults in the workforce on our own. That’s disadvantageous for our children because the principle of saving money for a future goal, such as retirement, is essential for most of us. Plus, saving money is a fundamental concept that children begin to understand very early, at least in some form. Why wait so long to teach them about saving money?
The act of saving money is really about choosing what to do with it. Making wise choices with money can be taught, and starting when a child is young may help stave off bad spending habits and nurture good ones. Until recently, most schools in the US only taught kids how to identify and count money but neglected to teach kids good spending and saving approaches.
Consider some of these lessons about saving money. One of the first lessons with a child can be about spending money on items you really need, like food. A common misunderstanding for younger kids is that money is an unlimited resource. By middle school, explain how budgeting works, and stick to a simple budget when you’re out together buying clothes, for instance.
If your high schooler has earned money from a job, consider a discussion on paying themselves a portion of their check first by putting some away in savings and then allocating some for spending. They will be surprised how quickly regular periodic amounts squirreled away can build up into a sizable amount for something like education or travel. Prepaid cards and money apps offer ways to teach kids about spending, saving, budgeting, and investing. Providing children with money of their own lets them experience these decisions first hand.
Live for Today and Plan for Tomorrow Hits Home
Sound financial health achieved through planning invariably involves expectations about events in the future. So how does a parent talk about planning for anything when a child can’t foresee something simple like milk spoilage by failing to return the container to the refrigerator?
One example that hits home is, well, a home. That’s right, a discussion of homeownership tends to resonate with the independence that kids crave, dream about, and cherish. When I speak with adults about retirement, the beginning of the conversation is sure to involve where they see themselves living—comfortably in a house near the mountains, a beach home, or perhaps in their ideal current home.
So prompting kids to think about living in a house of their own is perhaps the spark needed to motivate them into a planning frame of mind. Rest assured, you can convey some very beneficial financial information to children about financial planning without going into the intricacies of 30-year mortgages.
Homeownership remains a top objective of Americans. A recent survey found that nearly 90 percent of Millenials (born 1981-1996) wanted their own home. Sadly, the survey found only 5 percent would be able to purchase a new home in the next year as they lacked enough for a downpayment. A financial lesson for our youth is that planning and saving for a future purchase like a home can help you achieve your dreams.
Kids won’t learn all the money lessons they need over a lifetime from parents and teachers, so understanding that professional help is available once they are on their own is reassuring. According to one survey, nearly 80 percent of adults said they could benefit from simple financial advice from a professional. Kids need to know that professional financial help is available should they need it, too.
There’s No Better Time Than Right Now To Teach Children About Money
Teaching children about money provides a foundation of knowledge and behaviors to prepare them to become financially responsible adults.
There’s no better time than right now for children to learn about money. The interest illustration above, for example, can be visualized via online videos and mobile apps, games, and interactive tools that have made financial education for kids more accessible (and more fun!) than ever.
Parents and teachers will continue to play an essential role in providing guidance and instruction about money in children’s lives. Sound financial principles, such as those we can glean from planning for retirement, can influence our children’s financial habits for the good of their long-term financial well-being.
Chip Munn is a senior financial advisor and CEO of Signature Wealth Group. He is the author of The Retirement Remix: A Modern Solution to an Old School Problem, and host of Maximum Advisor and The Retirement Remix podcasts. For more information visit www.chipmunn.com and connect with Chip on Twitter @chip_munn.