Seven Personal Finance Principles to Teach your Children

img_0131Like it or not, you are the primary people who teach your children how to handle their money.  They are watching the choices you make and will likely replicate them, even if they act like you’re absolutely clueless on everything.  If you buy new cars on payments every two years, they will as well.  Buy a house you can’t afford and be home poor, and they’ll follow suit.  Some children may take the initiative and pick up a book on personal finance or two, meet someone else who is doing well with money and use them as a mentor, or maybe even follow The Small Investor and learn some good habits, but the majority will just follow Dad and Mom, both in how to handle money and even with who is the spender and who is the saver/budgettor.

To get your offspring out on the right path so that (maybe) they don’t come back in a few years, and hopefully they’ll be financially stable enough to take you in during your old age if needed, here are seven principles to teach them now:

1.  An emergency fund is key.  Having an emergency fund is what keeps you from going into debt when bad things happen.  Everyone should have about $5,000-6,000 in cash plus maybe another $3,000-$5,000 in an accessible bank CD to take care of emergencies that pop up and things like a job loss.   Otherwise, emergencies all goes onto the credit card or personal loan, and then the debt starts to build up.

2.  Pay cash for cars.  Buying new cars on credit will cost you a lot more over your lifetime than buying used cars for cash.  Not only do you pay interest, but you also lose lots of money to depreciation.  During the first four years you’ll lose twice as much per year for a new car as you will during the next four years.  Get your kids to save up and buy whatever they can for cash, moving up in car every four to eight years, and they’ll have enough to do things like save for their children’s college and save for retirement.

3.  Learn to cook.  The other big budget killer is eating out.  Learn to cook simple meals at home and you’ll save about $100 per day for a family of four.  Even a single will save $20-$30 per day by eating in.  For example, a single person could make seven meals out of a $6 chicken.

4.  Budget.  Some people think that a budget will be a constraint, but really it is just a way to make sure your money is going where you want it to.  In fact, many people who start a budget feel wealthier since the money they were spending without thought is now available to buy things they really want.   An important part of any budget is putting some of your money away into savings and investments.  Doing so increases your income later in life.

5.  Start an IRA or 401k.  While it’s hard to believe at 21, almost everyone will need to have money to retire some day.  If you start out putting money away right when you start your first job, it is a lot easier to amass as much as you need than it is if you wait until “you have the cash to save.”  Not only will it help you keep your lifestyle in check, but it will also allow your money to make money by investing in different businesses.  Even if it is only $25 per paycheck, teach your children to start putting money away right from the start.

6.  Work your way up in house.

Children may think that their parents just moved right into the McMansion they live in now.  Help your children to understand that most people start out in a small apartment, maybe with a couple of roommates, and probably go through one or two other apartments and small houses before they finally get to their dream home.  Renting a small place to start allows children to start to learn to live on their own and save up for a down payment. Buying a smaller home to start will reduce the percentage of their income that goes towards the mortgage, which will reduce their risk substantially and allow them to do other things like save for retirement.  Many people will also tell you that the days before they had the big house and all of the upkeep that goes with it were some of the happiest of their lives.

7.  Save short term, Invest long term.

If you really need the money to be there next year, it needs to be in cash assets like bank CDs and money market funds.  The price of stocks and bonds one year from now is totally unpredictable.  Hold assets in cash assets for a long period of time, however, and you’ll lose money to inflation, plus miss out on the opportunity to actually grow your money.  Money you will not need for ten or twenty years belongs invested in stocks, bonds, or real estate.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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