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Relying on schools to educate your kids about personal finance is generally not going to be a smart move… most schools don’t even have a curriculum to teach them the basics. When it comes to teaching kids about money, the onus falls on you.
That’s good news because you have an opportunity to ensure that your children are learning the right information. Just as many parents haven’t been educated about personal finance, many teachers themselves haven’t been either.
If you don’t understand the “whys” and “hows” of money, it’s time to get educated and then pass that wisdom onto your children. Otherwise, your misunderstandings or mistakes are likely going to be passed onto your little ones to repeat the same cycle.
Our daughter, Faith, is almost 11. We’ve been fortunate enough to be able to homeschool her over the past couple of years. Lisa does most of the work in the homeschooling. But because we have some flexibility in the curriculum, every Friday, Faith gets to have a personal finance class with her dear, old dad. Depending on the topic, it can be anywhere from a half-hour to a little over an hour.
Between that and learning on-the-fly when we run into a teaching moment in “real life”, she’s been learning quite a bit for a kid her age. The goal is to have a financially responsible daughter who understands that money (though not the end-all, be-all) is extremely important, and using it correctly can help shape her future.
So here are some of the things I’ve been teaching Faith about personal finance lately and the approaches I’ve been taking in it along the way.
Teaching Kids About Money – Debt… can you really afford it?
Debt, especially consumer debt like credit card debt is bad. It can be a monster that can ruin your life.
Faith understands that credit cards can be extremely valuable. If used correctly, not only do you get a convenient interest-free loan from the issuer every month, but the benefits can be extraordinarily valuable. The amount of free travel we’ve earned since we understood how to leverage travel rewards has saved us thousands and thousands of dollars.
But I’ve also taught her an important lesson:
If you can’t afford to pay it back, you can’t afford to borrow it.
If you’re not going to be able to pay off a credit card completely when the bill comes due, you’ve done something wrong (in almost all cases).
How I’m teaching this
Debt is a tougher topic to demonstrate in real life to a child. They don’t really have a way to see how badly it can affect your life.
The best I’ve done with this is to explain my past mistakes with credit cards. At one point, I was about $30k in credit card debt. That was due to nothing but stupidity and naivety about money and it cost me a lot of time and headaches to dig my way out.
I told Faith my story and how that kind of debt hurts you twice:
- You get charged interest every month making it even more difficult to pay off your balance.
- The money that you’re paying every month could be going to your savings/investments instead. You’re missing out on time to build a stash. That’s time you’ll never get back.
Teaching Kids About Money – Saving early and consistently
If you haven’t heard of the “magic of compound interest”, that something you’ll want to get a grasp on… it truly is magical!
Because wealth builds on itself, the higher the percentage of return and the amount of time your money can grow, the bigger the pot will be in the end. In other words, start early. Most people don’t start saving what they should be until too late in life. Make it easier on yourself and start earlier.
$1,000 saved and growing now is a lot more valuable than $1,000 saved 20 years from now.
You could just drop some money into an account and let it go at that, but that’s not going to be very powerful. Instead, be consistent and put away money whenever you can.
How I’m teaching this
This has been a much easier topic to cover with Faith since she can see results. It’s probably also one of the most important facets of personal finance she can learn.
The biggest lesson I’ve been pushing on her over the years is to save half. Whatever you earn, put away half. That’s it.
This is easy for her now, but it’ll become harder in her early twenties when finances tend to get tight. Fingers crossed that instilling this habit in her now though will help her withstand tight finances and the temptation of lifestyle creep.
I opened a UGMA (Uniform Gift to Minors Act) online savings for Faith at Ally a little over four years ago. Whenever she earns money for random chores (we don’t do a regular allowance) or receives money as a gift for her birthday, Christmas, or whatever, she gives me half. I then take it and blow it on booze and cigarettes. Just kidding, but I wanted to see if you’re actually reading this!
Because Lisa and I also have an online savings account at Ally as well, I can easily then just transfer money from our savings to hers.
The other component involved in making this worthwhile right now is “the daddy match.” Anytime she gives me money to put into her savings, I match it. She realizes how valuable this is and will sometimes just randomly give me extra money (above our 50% rule) just so she can take advantage of this. I probably won’t be able to keep this up forever, but for now, it’s a good incentive to save more.
Now, saving with a jar system is nice because you can physically see the cash. Saving in an online account, however, doesn’t grant you that benefit. At least she’s getting some interest in the bank though. Regardless, I make sure to update her monthly and show her how much money she’s made and what her current balances are.
For another couple of lessons, I created a quick spreadsheet that allowed me to show how compounding interest can help her accounts grow tremendously. She’s able to see why time is such an important factor in saving. Compound interest is probably the most important valuable component of personal finance.
If you’re teaching kids about money and you’re not a big spreadsheet dork, you can also just use a compound interest calculator. They’re a dime a dozen on the internet. Here’s one from Investor.gov that can easily demonstrate this lesson.
Teaching Kids About Money – Investing your $$$ simply is the key to long-term growth
Money will get eroded over time due to inflation… it needs to be put to work. Saving is important, but investing will help your money withstand the test of time.
This can be a tough area to face when teaching kids about money because many adults don’t understand investing themselves. I don’t know every intricacy about investing, but I do understand how to invest correctly now.
There’s a lot of bad information out there because Wall Street is looking to stay fat and happy so they throw out a lot of noise to confuse people.
If you ignore the noise and focus on what really matters, investing can be very simple and effective. One of the best understandings of investing I got was from The Stock Series by JL Collins. He also cleaned up this information and published it in an extraordinary book called The Simple Path to Wealth.
How I’m teaching this
I’ve spent some of our lessons explaining how stocks work (we’ll get to bonds eventually!). We’ve also discussed how there can always be volatility in the stock market in the short-term but it continues to grow over the long run.
Our conversations have also covered the good and bad of owning individual growth stocks and how dividend stocks work. And we’ve covered the simplicity of index funds and why buying the entire market has a lot of advantages.
Index funds are what we’re focusing on for the time being. If she wants to study dividend stocks at some point down the line, she’s more than welcome to head in that direction.
So I opened up a UTMA taxable brokerage account for Faith at Vanguard last year. Then we moved $500 of her savings over from Ally to Vanguard and bought 3 shares of VTI. We then bought a couple more shares throughout the past year.
With this last stimulus check that went out (yes, we got the stimulus check even though we’re early retirees living in Panama), we decided to take $1,000 of that money and put it in Faith’s account. So I did that and we bought another 5 shares. So she now has 10.052 shares of VTI (the fractional shares due to dividend reinvesting).
This is a good start and allows me to show Faith how her account is doing. She knows that it may go down (even dramatically) but should continue to grow over time.
Teaching Kids About Money – Don’t forget to enjoy today
A sometimes missed part of teaching kids about money is to not forget to enjoy the present day. Yes, saving and investing everything you earn can put you in a fantastic financial position in the future. But, if you die tomorrow, was it worth it?
So, my lesson to Faith is to put away half, then pay your bills (when you’re older), and then enjoy whatever’s leftover.
How I’m teaching this
I made the mistake of forgetting this lesson for a short time while we were on the path to financial independence. Thank goodness I had a wake-up call that helped me get back on track. So I make sure to tell Faith to never forget about the present as well. Balance is the key to happiness and a successful financial future.
Sometimes it crushes me to see what she wastes her leftover money on, but that’s her money – enjoy it! Other times, she takes her money and does great stuff like buy supplies for the humane society… she’s a good kid with a good heart.
Teaching Kids About Money – Financial freedom is the goal
I retired early and have no regrets about that. Maybe one day I’ll go back to working (even part-time), but for now, I’m loving every minute of this freedom that we have.
That doesn’t mean that early retirement is right for everyone. Maybe you love your job or you started your dream business. I have no problems with anyone who decides to work until they’re old and gray.
But there’s a big “but” on that.
Everyone should work toward financial independence as best as they can. You never know what could change in life and being prepared is so important.
How I’m teaching this
This is one of those non-tangible lessons right now. Teaching kids about money is one thing but teaching them about freedom is a different ballgame for sure.
The best thing I have going for us is that we’re showing her the path. She knows that we’re retired. She knows that we had the freedom to move to Panama just to try something different.
And she wants that same freedom. Right now, she plans to work at a high-paying job (maybe a programmer?), own rental property, and make and save a ton of dough. Then she wants to retire from all that and build or buy a zoo to run.
I have a feeling some of those dreams may change as she ages, but who knows? Maybe that’ll happen.
What I do like is that we talk about how she envisions her future. And then we talk about what it’ll take to get there (on a macro level).
Depending on what your dreams are, what you want to do in life may not align with your financial goals. If that’s the case, sometimes it makes sense to think “freedom first, passion later.”
Our conversations get her brain thinking. I’m not a parent who’ll push her to do one thing or another – that’s all up to her. However, I will continue to make sure that she thinks through things and makes informed decisions to reach her goals.
Personal finance plans I have in mind
Going too in-depth while teaching kids about money can sometimes bore them. Once Faith understands the fundamentals, there’s only so much you can do without turning her off on the topic completely. Some people are personal finance nerds like myself, but most people don’t want to think too much about it. And that’s ok if they still understand the basics enough to be on the right track for financial security.
Faith will probably fall somewhere in the middle where she’s not going to be busting out spreadsheets for stupid things, but she’ll still be keen on saving and investing smartly. And I couldn’t ask for anything more.
As we get a little further down the path, I’m going to encourage her to read some things. These are all probably a little too advanced for her and would bore her to tears, but I think that by the time she’s 12 or 13, she’ll be ready for these:
- The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley
This is a fascinating read on how the wealthy truly live (it might surprise you!). If you haven’t read this one before, you should absolutely check it.
- The Stock Series by JL Collins or his book, The Simple Path to Wealth
Without a doubt, this is the most valuable and easy-to-read and comprehend guide to understanding stock market investing that I’ve ever read. No one should be allowed to invest in the stock market unless they’ve read this book or blog series first.
- Rich Dad Poor Dad by Robert Kiyosaki
Some people love the guy and some people hate him, but I give him credit for opening up my eyes to how the world really works. It is possible to find financial independence and get out of the rat race. This is not some step-by-step guide but more of a holistic understanding of the rich versus the working class.
- Cashflow Quadrant by Robert Kiyosaki
Yup, another Kiyosaki book. This book can put into perspective why employees earn less and pay more in taxes than big business owners and investors.
- The Automatic Millionaire by David Bach
This book explains, in a straightforward way, a path to becoming a millionaire. I read this book probably a year or two before I retired and found that it was very similar to what I was finally doing. I wish I had found it years before.
- The Bogleheads’ Guide to Investing by Mel Lindauer, Taylor Larimore, and Michael LeBoeuf
Investing smartly and simply… a very useful read.
The other topic I’ve touched on somewhat before with Faith that I want to dig deeper into is that of retirement plans. I want her to understand the differences between pre-tax and post-tax accounts. I also want her to comprehend why the tax advantages of these accounts are so important.
Writing this post motivated me to open a Roth IRA for Faith as well. I know that Joe Udo from Retire by 40 has been having his son do something similar for the past few years and I think it’s time to start doing the same over here. The idea of paying Faith a fair wage for her to take photos and be a model for this site could be worthwhile.
You need to have earned income equal to or greater than the amount you can contribute to a Roth IRA each year. If I paid Faith something like $50/photo, that could be a little bit of a head start on building up what’s arguably the most important retirement account she’ll ever have.
The downside is that I’ll have to file a simplified tax return for her each year. That’s not the worst thing in the world when teaching kids about money but it’s still another step that would need to be done. By the time you read this post, I should hopefully have her Roth IRA opened up at Vanguard with some more shares of VTI purchased.
Finally, I want to dig deeper into the pros and cons of entrepreneurship with my daughter. Whether it’s starting a business to grow, working a side hustle, or buying rental properties, a lot of good can come from having multiple cash flows.
Teaching kids about money is helpful when they can actually see positive results from doing the right thing or negative results from doing the wrong thing.
In our case, educating Faith on personal finance the best we can and then giving her the breathing room to succeed or fail has been tremendously beneficial. Watching her savings account build and her investments grow is something that she’s happy to see.
On the same token, she’s spent money before on stuff she doesn’t need and then doesn’t have enough to buy something else later. It’s tough not to cave in giving her the buck or two she needs to get something, but it’s worth it. Being able to understand how spending decisions matter is fundamental. In the future, this may help her to make well-thought-out spending decisions.
I hope that learning more about personal finance now pays off for her down the line.
Do you teach your kids about money? What $$$ lessons have you instilled in them?
Plan well, take action, and live your best life!
Thanks for reading!!