Raising Financially Aware Kids
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It is important that your children learn what they can do with money early in life so they will apply the lessons learned at home as they face the real world in future years.
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Raising Financially Aware Kids
- 1. Yes, You Can… Rai e Financially Aware Kids Help Your Kids and Grandkids Appreciate the Value of a Dollar Mike Davis, CIS, CTS, CAS, CFS Vice President Private Financial Advisor See how you can get the free e-book, “Yes, You Can Rai$e Financially Aware Kids” at the end of this presentation! Non-FDIC Insured ● May Lose Value ● No Bank Guarantee This information is for educational purposes only and is not intended as investment advice. © 2010 American Century Proprietary Holdings, Inc. All rights reserved. ACI-0810-2603
- 2. Agenda Why Is This Important? How Can You Raise Financially Aware Kids? • Understanding • Allowance • Money Management Examples and Illustrations © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 2
- 3. Why Is This Important? “It is important that your children learn what they can do with money early in life so they will apply the lessons learned at home as they face the real world in future years.” James E. Stowers Jr., Founder of American Century Investments © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 3
- 4. Your Children and Grandchildren are Targets By the time they are five they will have been hit with 30,000 advertisements Turning your curious child or grandchild into an insatiable consumer Children’s influence on the economy: • $188 billion in direct influence • $300 billion of parental spending influence • $25 billion of their own money © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 4
- 5. Teach Your Children and Grandchildren Well Whether you know it or not, a survey of high school students revealed that 88% of what they learned about money came from their parents. What lessons are your financial discussions and behavior teaching your kids/grandkids? What do your kids/grandkids need to know to be financially successful and strike a financial balance? • Ways to Earn Money • Saving for the Short-Term • Investing for the Long-Term • Spending Wisely © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 5
- 6. Your Role as CFP (Chief Financial Parent) Whether you are thrifty or not, a business owner or employee, you are your child’s CFP – Chief Financial Parent Kids whose parents or grandparents talk to them about money are more likely to be “savers” rather than spenders. Talking about money and financial behavior is critical to successful financial education. © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 6
- 7. How Can You Raise Financially Aware Kids? Understanding Allowance Money Management © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 7
- 8. Where to Begin - Understanding “Money” Definition: Something generally accepted as a medium of exchange, a measure of value, or a means of payment: as a : officially coined or stamped metal currency. (Merriam-Webster Dictionary) To your children and grandchildren, “money” is your value system personified through your financial behavior. Are you financially living your values? Discuss “money” = Important Demonstrate good “money” behavior = VITAL © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 8
- 9. Where to Begin - Understanding Understand your own beliefs about money What money principles did you learn growing up? • Did you experience hardships or success growing up? • What stories did your parents and grandparents tell you? • What did your parent’s actions show you about money? • Did it feel as though your parents barely made ends meet or was there always enough to go around – and then some? © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 9
- 10. Where to Begin - Understanding It begins with having – “The Talk” • Talk to your kids/grandkids as early as possible – younger the better. • Act casually. • Leave money in its proper place. • Know your audience. Above all – make it a dialogue, not a lecture. © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 10
- 11. Understand a Child’s Needs and Wants Ask questions to better understand the child’s perspective What you think is a want could be a very real need for your child You may think… Your child may think… Stuffed Animal Toy Comfort Designer Clothing Cheaper alternatives Peer acceptance MP3 Player Distraction to homework Safe place to focus Avoid judging their priorities Focus on the value of what they are getting and the potential opportunity cost © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 11
- 12. Put it into Practice - Understanding How young is too young? • Kids as young as age 3 can understand some basic concepts – Bartering (“I’ll give you this for this.”) – Earning (“Put your toys in the box and you can watch your video.”) – Saving (“Put one penny on each finger. You have five pennies.”) – Investing (“When you have a penny for each finger. I’ll give you one more.”) – Currency (Not always money, but can be what is of highest value to a child such as TV or game time, play time, etc.) Older kids can handle greater challenges – including an allowance. © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 12
- 13. Allowances Kids who receive an allowance tend to save more than those who do not. Common questions parents ask - • Should I give an allowance? • If so, when should I start? • How much should it be? © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 13
- 14. Should I Give an Allowance? The allowance experience can provide hands-on training for a financially responsible future. Three different philosophies … • Allowance without expectations – Unconditional, no requirements • Allowance tied to specific actions – Based on chores completed, grades, behavior • No allowance – Pay as you go to encourage development and control spending Make it a learning experience … not a power struggle. © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 14
- 15. When Should I Start? Determine your child’s allowance readiness … • Have an interest in wanting an allowance • Should understand the value of money • Count small sums of money • Have a safe place where it won’t be lost • Understand the difference between needs & wants • Willing to practice the discipline of saving © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 15
- 16. How Much Should it Be? Factors to consider: • Child’s age – younger children have less need for money • Why it’s given– if it’s pay-for-work, it could be different each week • Your own income – it needs to work within your budget • What it’s for – what expenses will your child be paying – Entertainment – School Supplies / Lunches – Toys / Gifts RULE OF THUMB: – Clothes $1 for each year of age ($12 for 12 yr old), unless expected to cover expenses such as school lunches, clothes, gas, etc. © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 16
- 17. Giving a Raise “I need more money!” • Have them keep a monthly journal of spending and/or a budget plan • Review it with them – Did they get their money’s worth? – Are they still enjoying it or is the excitement gone? – Would they rather have the money back? – Did they really need it? – Could they have bought it somewhere else for less? • Listen carefully • Get feedback from other parents • Do what you think is right and supports the money values you want your child to grow up with © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 17
- 18. Setting Expectations – Money Management Involve your children/grandchildren in your finances • Explain – Budgets – Income – Savings / Investing – Expenses / Spending Plan • Discuss – How you earn money – What you need to do with your money – What you want to do with your money – How you stay in control of your life • Show – Demonstrate “paying yourself first” through Spending Plan FIT Tool 401(k)s, regular investing, 529 College Simple Detailed Savings Plans, etc. © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 18
- 19. Financial Goal Setting – Money Management Having a goal and a plan means personal control Possible saving goals Major purchase – car, video game console … Special event – prom, senior trip … Personal growth – college, summer camp … Savings Goal FIT Tool © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 19
- 20. Keeping Goals on Track – Money Management Approach to staying on track 1. What do you want to do? 2. If you could only do one thing, which one would it be? 3. What changes might enable you to achieve your goals? – Extra odd jobs? Changing spending habits? Saving more? 4. Make decisions that support your primary goal! – Will using my money this way get me closer or further from my goal? Decisions regarding how you spend your money are easier when you have a plan. © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 20
- 21. Additional Opportunities – Money Management Turn “earning” into “learning” by giving kids the chance to: • Discover their passion and special abilities • Recognize the relationship between time and money • Think creatively and problem solve • Increase their independence Ways to earn more – • Chores around the house • Helping neighbors • Part-time job after school © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 21
- 22. Put Your Money to Work – Money Management Four keys to accumulating wealth • Start as early as possible • Save on a regular basis • Begin with the largest sum possible • Reach for the highest rate of return that’s acceptable for you Compounding • Takes into consideration time and rate-of-return • Nature is a wonderful teacher • Money, properly cared for over time will grow and multiply © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 22
- 23. Think Before They Spend – Money Management Questions to ask before the purchase: • Is this a need or a want? • How many week’s allowance (or hours worked) does this cost? • Have I found the best price? • Am I getting good value for the money? • Can I negotiate a better deal? Remind them: “You can always spend what you save, but you can never save what you spend.” James E. Stowers Jr., Founder American Century Investments © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 23
- 24. Examples and Illustrations © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 24
- 25. Which Would You Rather Have? A check for $1 million, or A penny that doubles in value every day for 30 days? © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 25
- 26. Take the Daily Double The Amazing Power of Compounding $6,000,000 $5,000,000 $4,000,000 Value $3,000,000 $2,000,000 $1,000,000 $0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Days © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 26
- 27. Take the Daily Double The Amazing Power of Compounding $6,000,000 $5,000,000 $4,000,000 Value $3,000,000 $2,000,000 $1,000,000 $0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Days © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 27
- 28. When Could An Investment Double in Value? The Rule of 72 Rule of 72 is a mathematical formula which calculates approximately how many years it will take for an investment to double with an annual compounding interest rate. 72 interest rate = years until investment doubles $500 earning 8% interest could be worth $1,000 in 9 years 72 8% interest rate = 9 years Compound Interest FIT Tool © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 28
- 29. Helping Them Understand Why It’s Important In the 20th century, the dollar lost 95% of its value What a dollar used to buy in 1900, now costs more than $21 today 1900 2000 Bureau of Census and Bureau of Labor Statistics © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 29
- 30. Additional Learning Educational programs geared toward children and their interests Clip and share articles from financial magazines Help your children/grandchildren connect with people they admire Take your children/grandchildren to work Encourage them to talk to others – including relatives Visit YesYouCanOnline.info © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 30
- 31. Questions Mike Davis, CIS, CFS, CAS, CTS GAAM, Inc. Send me an email to Arizona: 480-366-5983 request the book! Tennessee: 423-247-8840 Toll Free: 800-677-4445 Email: mdavis@gilbert-aam.com Twitter: @MikeDavis_GAAM LinkedIn: http://linkedin.com/in/planwithmike/ © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 31
- 32. Yes You Can…Raise Financially Aware Kids Performance focus for 50+ years Pure play business model Privately controlled and independent Profits with a purpose •You should consider the fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus, which can be obtained by calling 1-800-345-6488 (or by visiting www.americancentury.com/ipro), contains this and other information about the fund, and should be read carefully before investing or sending money. •American Century Investment Services, Inc., Distributor, ©2010 American Century Proprietary Holdings, Inc. All rights reserved. © 2010 American Century Proprietary Holdings, Inc. All rights reserved. 32
Notes de l'éditeur
- Today we’ll focus on three primary areas:Why is it important to raise your kids in a financially aware manner?How can you raise financially aware kids and grandkids?We’ll wrap up by showing some examples and illustrations to prove several key points.
- Many of you may be wondering, “Can I really raise financially aware kids?” And the answer is, “Absolutely! Yes, You Can”.Today, I’m going to share some ideas and concepts from the award winning book – Yes, You Can… Raise Financially Aware Kids. In the introduction to this book, American Century Investments founder Jim Stowers reminds us of two things – One: It’s important that kids learn about money at an early age, and Two: That the lessons they learn are mostly learned at home.
- The reason these key lessons are important is becauseevery day, whether we realize it or not, our kids are the target of marketers. By the time they are five years old, the typical kid will be hit with 30,000 or more advertisements.These ads are aimed at impressionable children with the goal of making them insatiable consumers.And it’s working. Annually, children have a powerful influence on our economy. They directly influence $188 billion worth of spending for their personal wants and needs. As advisors to their parents – imagine that, kids are advising their parents how they should spend their money – they influence $300 billion. Think about the last time you bought a car, or one of your friends bought a car, was it solely the parents decision or did the kids come along and have their vote as to what type of car to get?As consumers, kids yield a lot of financial clout. Over the course of a year, they contribute $25 billion into the economy of their own money. That’s a lot of spending for birthday checks and allowances.
- A recent survey of high school students found that 88% of what they know about finances they learned from their parents. So just as your children may have inherited your unique genetics, they are also inheriting your money habits.That means they’re learning their money habits from you. Even today, whether you tried to or not, you probably taught your children something about money. You taught them by your actions and attitudes.So what lessons do your kids need to know to be financially successful? It really boils down to four things:Ways to earn moneySaving for the short-termHow to invest for the long-term, and,How to make wise spending decisions.
- So, what’s your role in teaching your kids to be financially aware? I like the term CFP or Chief Financial Parent to describe your relationship in teaching your kids about money.Now we all value money differently in our lives, maybe depending on how we were raised and how much money we have to save or spend.But the number one thing you should take away from this presentation today, if nothing else, is that just talking about money with your children can have a profound impact on them and they will have a tendency to save more because you took the time to discuss it with them. Many parents agree that talking about money is easier than talking about sex with their kids. It just doesn’t occur to parents to talk about money. The good news is – kids are curious about money and they want to learn about how to earn it and what to do with it.
- Many of you may be wondering, “Can I really raise financially aware kids?” And the answer is, “Absolutely! Yes, You Can”.Today, I’m going to share some ideas and concepts from the award winning book – Yes, You Can… Raise Financially Aware Kids. In the introduction to this book, American Century Investments founder Jim Stowers reminds us of two things – One: It’s important that kids learn about money at an early age, and Two: That the lessons they learn are mostly learned at home.
- Money defined (read the definition).The most important thing to understand is that discussing money is important, but demonstrating good money behavior is vital. Your actions speak louder than your words.
- Like I said before, what your kids learn begins with how you handle money and the role it plays in your life. Before you start passing along these values, it’s best that you understand your money history.Think back to when your were growing up. What money principles did you learn? Did you experience hardships or successes? How did these make you feel? Are there times, even today, when you think back on those times? What influence do those experiences have on you today and the way you manage money.Same thing with your parents or grandparents… what stories did they tell you? What did your parents actions show you about money?Growing up, did you feel as though you barely made ends meet or was there always enough to go around? Again, how does that experience influence your relationship with money?Remember, the way you think about and manage money is very likely the same way your kids will handle it. Are you really teaching them the lessons you want them to learn that will help them grow into financially aware adults.
- Talking about money can be a challenge – especially if you don’t know where to begin. That’s why I suggest having “The Talk” with your kids.The Talk should happen as young as possible. As a parent, you’ll have the best idea as to when the right time is – but trust me – if you wait until your child is in high school, it’s too late. Kids as young as age 3 can understand some of the basic concepts like bartering. As your kids get older you can increase the complexity.Act casually. Talking about money should be no different than talking about sports, the weekly schedule or what’s for dinner. Money is an integral part of our every-day-life. Having conversations about it should be casual and relaxed.Leave money in its proper place. Accumulating money for the sake of being rich shouldn’t be the goal. Focus your conversations on how to wisely use the money you have. Living within your means is the same as financial independence.Know your audience. Direct your conversation about money to your child’s age and interest. Draw them into a talk about money in a way this is meaningful to them. Take nothing for granted. Ask simple questions to learn more about what your child thinks about money. Use stories from your own life to make it relevant. Above all, make it a dialogue. Sprinkle questions throughout your conversation and listen carefully to the answers. Everyone loves attention. Your questions and attentive listening give your children a sense of acceptance that’ll deepen your family bond.
- In your conversations with your child, you’ve probably heard some things you don’t agree with or that don’t directly align with how you think your child should be spending their money. That’s why it’s important to ask questions to better understand your child’s perspective and how they think about the way they’re spending their money.For example, a young child may look at a stuffed animal and say, “I need that!” You might think that’s a toy, it’s not a “need,” it’s a “want”. But to a young child, a stuffed animal could be more than just a toy, it could provide a real sense of comfort and security.As your child gets older, there could still be a gap between what you see as wants vs. what they see as needs. For example you might think that instead of buying designer clothing your child should find a cheaper alternative. Your child may feel that designer clothing will lead to peer acceptance.An MP3 player might be a distraction to homework to you, but for your child – who’s grown up constantly plugged in – it provides a safe place to focus on the task that needs to be done.The important thing is to understand their priorities, not judge them.Your conversations should focus on if they feel they are getting value from what they’re buying, not if they are spending their money the way you think they should. This is also a good time to talk about opportunity costs. That for every dollar they spend today, they lose the opportunity to spend it on something else or in the future.
- Earlier I said, kids as young as age three can understand some basic concepts. Let me give you a little more detail: Bartering – sit down with your child and offer to trade one item for another. It could be a toy or stuffed animal. Notice how they value one over the other. One item is worth more to the child than the other. Same concept when they get older and they are deciding how to spend their money. They think about what’s worth more, the cash in their hand or the item for which they are considering trading the cash.The concept of earning can be shared through household chores. Your child can earn the opportunity to watch a video if a certain task is completed.Talking about saving is as simple as counting. Have your child put a penny on each fingertip and count with them as they do. Once they have all five fingers covered, put the money in a savings bank and talk about how that money is now “saved” so they can use it later if they choose.Building on this exercise, do the same thing but tell your child that you’ll give them a penny once they’ve saved enough pennies to cover each finger. This is the concept of investing and earning interest.Currency is not only money, but it can be whatever a child values the most, such as TV or game time for a younger child or “driving time” for a 16 year old. Think outside the box when explaining concepts such as currency, bartering, etc.As your kids get older you can go deeper into each subject.
- An allowance is a great way to teach kids to appreciate the value of a dollar. Even better, research has shown that kids who receive an allowance tend to save more than those who don’t.So you’re probably wondering:Should you give an allowance? If so, when and how much?Let’s answer these questions.
- No doubt, giving your child an allowance provides them hands-on training for the future. And, really, that’s probably the number one reason to give your child an allowance is to help teach them to manage money.Here are three different philosophies to help you determine how to manage the allowance experience:Some parents believe allowances should be given without expectations of chores completed, school grades maintained or good behavior. They suggestthat children should strive to meet these expectations as members of their families, regardless of whether or not an allowance is being given. Allowances are given unconditionally. Under this philosophy, the entrepreneurial spirit may still be rewarded if children have a special goal and would like to earn additional money. Help them find some useful work around the house and pay for its completion.Other parents believe an allowance should be compensation for work done, so children don’t get stuck in an “entitlement” mentality. Under this philosophy, expectations should be clearly set about what work needs to be completed, the quality expected and within what timeframe before the allowance will be paid. This experience may mirror job situations in which your children will find themselves in later years.Rather than rely on a set allowance, some parents develop their own system of providing children money for expressed wants and needs based on circumstances. This philosophy supports budget considerations and can be used to encourage development of work ethics and manage a child’s purchasing power.Bottom line – it’s about learning. Accept the fact that they’re going to make mistakes. That’s part of the process. Better that they should make them now when the consequences are easily managed than later in life. This should provide a fun way to help your kids grow, not a power struggle about whether they get an allowance or how much.
- Before you start giving an allowance, take some time to determine your child’s allowance readiness. One of the first things to look at is their interest level. Are they asking you for it and are they ready for the responsibility?They should understand the value of money. This includes being able to identify different coins and paper money.They should also be able to count up to 100 so they can properly count change.When you start giving an allowance, be sure they have a safe place to keep it so it won’t get lost. This is a great time to introduce them to the concept of a piggy bank or, better yet, an FDIC insured bank where they can open a savings account.While determining the difference between needs and wants is an ongoing lesson, your child should have a basic understanding of the difference between the two. This is key in making good purchasing decisions and being able to save for the long-term.Finally, are they willing to practice the discipline of saving? While the desire to accumulate can be powerful, there should also be a desire to save.
- Deciding how much to give is another decision you’ll be faced with.There are several factors to consider:Your child’s age. Younger children have less need for money. Think about it, a five-year-old isn’t dating, driving or going out with friends. There’s no reason to give a young child any more money than they reasonably would need to cover the occasional purchase.Some parents set a fixed amount for each week. Parents who adopt a pay-for-work philosophy may end up paying different amounts each week. So how much they pay each week fluctuates with the child’s performance.Your own income is a determining factor in how much you should give. It should work within your budget. Given the choice of funding your emergency fund or your child’s allowance – the emergency fund comes first.What’s the allowance for? Part of your conversation with your child is to determine what the allowance covers. By working together, you should be able to identify these expenses and determine how much to give. The challenge will be to stick to your plan and if your child overspends – be willing to let him or her live with the consequences.There are many factors that influence how much you should give as an allowance. Many parents practice the philosophy of about $1 per year of age. That means a child who is 12-years-old could get a $12 weekly allowance.
- Inevitably, your child is going to come to you at some point and ask for a raise. Take this opportunity to advance their learning to the next level and create a spending plan. A spending plan helps them track how they’ve used their money over a period of time and how they plan to use it going forward.Review their expenses and talk with them to see if they got their money’s worth. Are they still enjoying how they spent their money or is the excitement gone? Given the option, would they rather have that money back or are they happy with how they spent it?Did they really need what they purchased? Were any of them impulse buys where they got swept up in the moment?Listen carefully to their answers so you can understand their point of view. Remember, this isn’t a time for conflict, but a time for teaching.As you’re making your decision whether to raise their allowance or not, get feedback from other parents to see what they’re doing.Before you do anything, reflect on what sort of lessons you’re trying to teach your child and the money values you want him or her to grow up with.
- An allowance is just the start of a child’s financial education. The good thing about an allowance is that it provides a safe place for children to learn and make mistakes with money without lasting consequences. The down side to an allowance is that it doesn’t provide the child a context for “real world” finance.I mentioned having your child create a spending plan, this is also a great time to share your plan with your child. Show them where your income comes from, how you’re saving and investing and what you spend each month on things like your mortgage, utilities and food. This will give them a context for the real world and what they can expect when they grow up.Let me show you a couple examples of spending plans. One’s a simple plan with just a few data fields and the other is more complex. The tools I’m using here come from the Yes, You Can curriculum. These are called FIT Tools – FIT means Financially Independent Today. They’re designed to be used to help explain complex subjects to young adults. You can introduce your kids to them by having them visit YesYouCanOnline.info.Discuss how you earn money and what things on your spending plan are needs and which are wants.Show the “pay yourself first” concept in action if possible.Explain how the more in control you are of your spending, the more control you are of your life.
- That first point is really an important one to emphasize, because having goals and plans is really about personal control.Some things your child may want to save toward could include a major purchase like a car, a special event like prom or for personal growth like college or summer camp. The Yes, You Can curriculum includes a Savings Goal Fit Tool to help you demonstrate how to save for a future goal and the impact an investment interest rate will have on them being able to achieve their goal.
- If your kids are like most, keeping them on track could be a challenge. Here’s a four-step approach to staying on track:Step one: talk with your child about what he or she wants to do. This isn’t so much about what they want to buy, but what sort of experiences do they want to have? Naturally, there will be things to buy in the list, that’s okay. List as many as they can think of. Second, ask them to pick only one thing. If there was only one thing on their list that they could do, what would that one thing be?Third, determine what changes in their financial decisions might enable them to achieve their goals. Earning extra money, spending less, saving more, etc?Finally, discuss the importance of making decisions that support their primary goal. For example, if their goal is to save for the homecoming dance – then every time they’re at the store deciding to buy something, they should ask the question – “Is this going to help me reach my goal of going to the homecoming dance.”Decisions on how to spend money are easier when you have a plan – or a filter – to work with.
- Even with an allowance, your kids may find that their wants exceed their budget. This is a natural time to talk to them about ways to earn more money. This experience will give your kids the opportunity to discover their passion and special abilities. We all know, work is more enjoyable when you’re doing something you’re passionate about.Kids who earn their own money are also learning about the relationship between time and money. So as they’re thinking about their next big purchase they can think about how many hours they need to work in order to buy what they want.Thinking about ways to earn more money helps kids be creative and exercise their problem solving skills. It also increases their independence, because they won’t be coming to you every time they want to buy something.Some of the ways they can earn more include doing chores for pay around the house, reaching out to neighbors to help with their chores or getting a part-time job after school. If the last one is an option in your home, this is a great opportunity to talk about employer expectations as well as how Uncle Sam gets a portion of each dollar they earn.
- As your child begins to earn money, it may be tempting to them to spend it all. But as their CFP, you need to steer them towards saving and eventually investing. There are four keys to accumulating wealth. They are:Start as early as possible. It takes significantly less money to accomplish what you want whenyou have more time working for you.Save on a regular basis. It’s an easy way to accumulate wealth. Many of us do this through payroll deduction into a retirement plan. Your kids can do it in a similar way by automatically putting one-third of their allowance or earnings into the bank.Begin with the largest sum possible. If your kids already have money in savings, they are ahead of the game when it comes to accumulating wealth. By leaving the money there, they have more money working for them over a longer period of time.Reach for the highest rate of return that’s safe for you. Each additional percent is important. The higher the rate, the less money it’ll take to accumulate wealth over the long-term.What all this adds up to is the concept of compounding. Compounding is a way to make money with money. It takes into consideration time and rate-of-return. While this may seem like a complex subject to explain to a child, it’s really quite easy.For example, a farmer can plant a single seed of wheat, care for it and, over time, create 100 seeds from it. If these 100 seeds were planted and properly cared for, they would produce at least 10,000 more seeds of wheat. This is the same concept as compounding – money, properly cared for over time will grow and multiply.
- Bottom line, what we want kids to understand and do is – think before they spend.The lessons are really fairly simple –Determine if something is a need or wantFactor in its true cost – whether it’s comparing the cost to hours worked or the number of allowances they need to save to make the purchaseFinding the best price –Comparison shopping, whether online or by going to another store, can often lead to considerably savings on the same itemMake certain they are getting good value for the money – an inexpensive gaming system that breaks after a short while may not be as good of a value as a more expensive system that’ll last for yearsCan they negotiate a better deal – this isn’t just about price, but also includes warranties and any options which may not be included with the initial purchase.Remember the idea of opportunity costs – as Mr. Stowers puts it – “You can always spend what you save, but you can never save what you spend.”
- The following pages include examples and illustrations demonstrating:CompoundingThe “Rule of 72”Impact of Inflation
- Oneway to demonstrate compounding is to ask if a child would rather have a check for $1 million dollars today or a penny that doubles in value every day for 30 days.Most kids are going to pick a million dollars.
- That’s a shame, because at the end of 30 days, $1 million left un-invested will be worth $1 million.
- On the other hand, a penny that doubles in value every day for 30 days will be worth more than $5 million. And, if you’re patient and can wait one more day for it to double again, you’ll have more than $10 million.Of course, we’d be hard pressed to find an investment that doubles in value every day and given what we’ve seen over time in the market it could even lose money, but for the sake of this teachable moment, let’s focus on the amazing power of compounding.
- Fortunately, there’s an easy way to help kids understand when an investment could double in value. It’s called the “Rule of 72.”The rule of 72 is a mathematical formula which calculates approximately how many years it’ll take for an investment to double with an annual compounding interest rate.It works by dividing the number 72 by the interest rate. The result is the number of years until an investment could double in value. Here’s another one of those spots where I need to remind you, this isn’t intended as investment advice or a promise of performance. And, your investment could lose value. So keep that in mind.Let’s look at an example of this mathematical formula. Let’s say I have a $500 investment earning 8% interest – compounded annual – using the Rule of 72, it could be worth $1,000 in 9 years.I’ll show you how this works using the Compound Interest FIT Tool from Yes, You Can to demonstrate.
- Why is it important that your child learn these lessons. Take a look at this chart. In the 20th Century, the dollar lost 95% of its purchasing power. That means if in 1900 you put a dollar under your mattress, that dollar would buy around five cents worth of goods and service today. Put another way, what you could buy for a dollar in 1900 would cost more than $21 today.
- Here’s some ideas to take their learning to another level …Many youth organizations sponsor programs on money and finance for kids that is geared to their interests. These are organizations like the Girl and Boy Scouts, Junior Achievement, 4H and local community colleges.Subscribe to financial magazines or other similar publications and discuss the articles together.Hands-on experience is another great way to learn about money. Have your children learn as much as they can about people they admire and what traits have contributed to their success.Take your children or grandchildren to work if your company allows it.Another idea is to have a mentor for your child to learn more. A suitable role model will share your money values, has a job you admire, runs a favorite locally owned business and someone you trust. Let your kids interview them and see where they work.
- Any questions I can answer?
- Thank you for your time today!