|Ben Franklin’s adaption of a Chinese proverb|
How much better off would you be right now if you’d been taught the basics of personal finance as a kid? Would you have more cash saved up right now? Would you be financially independent already?
I know that I’d be much better off had someone taught me the basics of money; you probably would be as well. We would have been able to avoid making certain mistakes (or at the very least, we would have made fewer mistakes), you would have started investing earlier in your life, and generally speaking you would know more today because of the head start you got as a kid.
Their entire personal finance foundation is being built off of three key principals. This should be more than enough to establish a foundation that will serve them well for their entire lives (hell, many adults don’t even understand this stuff). Here’s what we teach:
Table of Contents
1. Spend less than you earn
“A penny saved is a penny earned.” – Benjamin Franklin
Our kids earn the majority of their cash through an allowance; they get a few bucks each year from the grandparents, but allowance is their cash cow. How much we pay them, and why, is posted here.
Rule number one about allowance is that this kids must save 50% of it, and they can do whatever they want with the other half. The goal is to establish the mindset early that you can live off half your income. Get into this habit as a kid and it will be easy to maintain as a young adult. At least that’s my hope.
2. Invest the difference.
“An investment in knowledge pays the best interest.” – Benjamin Franklin
The kids each have a Capital One Kids Savings account that earns them 0.75% interest. On allowance day, the 50% they have to save automatically gets deposited into their savings accounts. Every now and then the older kids will ask how much they have stashed up, and of that amount, how much came from interest earnings.
I love it when they show interest and ask about their money and I especially love it when they ask about how much their stash is growing. To me that’s a sign that they’re getting it: money makes money!
However, in reality it’s tough to grow small allowance deposits through nothing more than a savings account interest rate, so every now and then I’ll secretly drop $20 into their accounts without them knowing. I want them to be pleasantly surprised whenever they hear what their balance is so that they stay motivated.
Is that cheating? Nah, that’s just quality parenting! 🙂
3. Avoid Debt
“An ounce of prevention is worth a pound of cure.” – Benjamin Franklin
If I had to pick one lesson that I could guarantee my kids would take to heart, it would be this one: avoid debt! Those in debt are slaves to their creditors. I’m not raising debt slaves. The best way to stay out of debt is to never get into debt in the first place.
Sometimes the kids will ask for an advance on their allowance and I usually I say ‘nope, if you want something then you need to save up for it.” But the next time they ask, I’m thinking about saying “sure, but it’s going to cost you a little bit.” It’ll be my way of teaching them about paying interest. Maybe experiencing the pain of paying interest this way will be enough to teach them that debt is to be avoided!
My kids don’t realize it yet, but they’re all being taught about the Get Rich Quick’ish formula:
- Spend less than you earn
- Invest the difference
- Avoid debt
As a parent I don’t care if my kids are rich or not. I just want them to be happy, and money does indeed buy happiness. It does so by providing options.
Many of us look back longingly on our childhoods. We remember the happy, carefree times. Lazy summer days. Exploring the neighborhood with friends. Childhood is amazing because you’re pretty much free to do whatever you want all day long (within the limits of what mom & dad will allow) without the burden of debts, and mortgages, and the pressures of adult life.
The truth is, many of those ‘adult pressures’ are self-inflicted. Our true basic necessitates like shelter, food, clothing don’t have to cost a fortune. And when your money and investments generate enough cash to cover your basic expenses, then you’re free to do whatever you want with your time.
Financial independence – it’s kind of like rediscovering childhood – only without the limitations of mom and dad this time. And with way better toys!
This is what I want for my kids: the freedom to peruse those things which bring them the greatest joy. Whether that’s working 9 to 5, starting their own business, or working on a hobby – it doesn’t matter. When their needs are met their time becomes their own.
If you and I ever meet and you have the chance to talk to my kids, ask any one of them “what’s the best thing you can buy with your money?” They’ll all politely answer with an ever-so-slight roll of they eyes and a tone that sounds a lot like Eeyore: “the best thing money can buy is your freedom.”