What grade would you give your parents for how well they prepared you to manage your finances? What grade will your kids give you someday?
There are six basic financial principles your kids need to know before they leave the safety net of home.
NO. 1: HOW YOU SPEND AFFECTS YOUR FUTURE
Kids need to know that if they spend their money without thinking about their choices, they will probably make bad decisions. Teach them how to stop and think before making any spending decision.
NO. 2: CREATE GOALS FOR HOW YOU WILL SPEND YOUR MONEY
A goal is like a roadmap. It shows where you are and where you want to go. When setting goals, think short-term, medium-term and long-term. Short-term goals might have something to do with tomorrow. Medium-term could be months or even a year away. Long-term goals are far away. Here’s a secret: Until goals are actually written down, they’re not goals at all. They’re dreams. It’s important to get into the habit of writing down goals and following with a plan for how to reach them.
NO. 3: YOUR VALUES INFLUENCE THE WAY YOU SPEND MONEY
Your kids’ values are more likely caught that taught. What you do speaks louder than what you say. Let them catch you in the act of saving, giving to others and saying words such as “budget” and “savings.” Instead of saying, “We can’t afford it,” say instead, “We don’t choose to spend our money that way.” Let the kids know that you save first and spend later and that debt is a cruel master.
NO. 4: UNDERSTAND THE DIFFERENCE BETWEEN WANTS AND NEEDS
Sometimes, it’s not easy to tell the difference between a want and a need. A need is something required to sustain life, health or safety, or to comply with a legal obligation. Food, shelter, clothes, medicine and paying taxes are needs. But it can get a little complicated. Are Levi jeans a need or a want? Clothes are a need, but paying a lot of money to get a certain brand crosses over to a want. There is nothing wrong with wanting things. It’s important for kids to be crystal-clear on whether something is a need or a want.
NO. 5: OPPORTUNITY COST IS REAL
What we give up when making a spending decision is called the “opportunity cost.” Let’s say you have $5. You can save it or spend it. If I choose to spend it, you can do that only once. You lose the opportunity to save it and to derive all the benefits that come with saving. Is that one-time purchase worth the opportunity cost? Train your brain to calculate the opportunity cost of every spending decision and you will start making better choices with your money.
NO. 6: YOU CAN’T HAVE IT ALL, BUT YOU CAN HAVE ENOUGH
Every day, we make decisions, and many of them involve money. Let the kids know that as they prove they can be responsible with money, they’ll have more of it to take care of. Making good decisions with their money now will make their lives much more enjoyable in the future.
Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, “Ask Mary.” Tips can be submitted at tips.everydaycheapskate.com/. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog and the author of the book Debt-Proof Living.