Seven crucial money lessons every parent must teach their child
Friday, May 1, 2015/
Money regrets – we all have some.
We’ve all made financial decisions we would ‘undo’ given half a chance. It might be the under-performing property we wished we’d passed on or that great property we wish we had really chased.
Given how important financial skills are to navigating life, and the fact that schools don’t teach children about money, as a parent here’s a few important financial lessons you can teach your child as he or she grows up:
1. The sooner you save; the faster your money can grow through compounding
It takes money to make money, so teach your kids the importance of spending less than they earn.
The trick is to then save the difference and keep investing (and reinvesting) until you have sufficient money to buy appreciating assets.
Part of this is learning how to budget.
You can start by teaching your children the art of saving for ‘big ticket’ items once they’re old enough to earn a few bucks for washing the car or bathing the dog.
2. You may have to wait to buy something you want
This is a hard concept for people of all ages to learn. However, the ability to delay gratification can also predict how successful one will be as a grown-up.
Children need to learn that if they really want something, they should wait and save to buy it.
The problem is we all want the best for our children, which is why a common trap for parents is giving their kids everything they feel they missed out on growing up.
Trampoline in the backyard? Check. Brand new clothes each season? Check. Entitled, impatient attitude geared towards instant gratification? Check!
It may make you feel good to give your child all the toys and gadgets they desire, but in doing so you’re not doing them any favours.
The lesson you want to demonstrate is not one of instant gratification, but one that shows how much reward comes from putting in incremental amounts of effort.
If your child patiently saves $2 per week for a few months to buy a $20 toy, how much do you think they’re going to love their new prize?
And more importantly, when lessons like this are learnt young, it will encourage them to manage their money more smartly as they get older.
3. You need to make choices about how to spend money
It’s important to explain to your child that money is finite and it’s important to make wise choices, because once you spend it, you don’t have more to spend!
4. Understand the three types of debt
One of the most important lessons I believe you can teach your children is the different types of debt and how to use debt wisely.
Necessary debt is the money you borrow for your house.
Good debt is when you borrow against appreciating assets and of course bad debt applies to any purchase that depreciates in value.
5. Surround yourself with smarter people
If you’re the smartest person in your team, you’re in trouble.
The most successful people in the world know this, so it’s an important lesson to share with your tiny protégés.
Surrounding yourself with good people is essential if you want to get ahead in any area, because successful people lift you up to their level. They inspire and motivate, and lead by example. Better yet, they encourage you to explore ideas and situations that you may not normally pursue on your own.
Of course, your child’s first experience of someone they look up to will be you! So the best way to educate your kids on all things money and finance is to ensure you do a great job of educating yourself.
6. Get a mentor
In so many areas of life we teach our children to look towards more accomplished and experienced people for guidance. Why should it be any different when it comes to money?
Mentors have been helping everyday people become more successful in various facets of life for centuries.
A mentor is essentially someone who inspires you, who has achieved what you want to achieve and, importantly, who has kept it for a long time.
So whether you want to become a pro-level tennis player, learn to speak Spanish or master property investor, it makes sense to turn to an expert for formal advice.
Now, whilst I advocate for surrounding yourself with smarter people, including mentors, it comes with this strict caveat: you must qualify your experts.
There are far too many sharks and spruikers out there who are angling to make a quick buck, so be sure to carefully investigate the track record any mentor you decide to add to your team.
7. Only use a credit card if you can pay the balance off in full each month
Buy now – interest free! No repayments for 24 months!
It’s all too easy to slide into credit card debt, which gives your child the burden of paying off credit card debt at exorbitant interest rates.
Plus a default could affect their credit history, which could make it difficult to, say, buy a car or a home.
There are plenty of other money messages you may want to share with your kids, but these lessons offer a good grounding in financial literacy and independence.
It’s never too early to start teaching your children how money works – and of course, showing them how it’s done is always far more powerful than simply telling them.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.