As Father’s day approaches, I think of my dad and all the wonderful life lessons he taught me - like how to throw a football, change spark plugs, and evaluate if something is a need or a want. Some of these lessons don’t have much impact now but it does spark the conversation on teaching finances to our children. Depending on your child and your family’s comfort level with finance, you may approach these pillars at different times. This topic is not meant to be a 15-minute TedTalk but instead should be a lifelong discussion that evolves as they grow.
Tackling the Basics: If you get money where does it go?
Early on (2-3 years old) when our son would get money, we decided to put three containers in front of him labeled: savings, spending, and giving. Our son didn’t need to know the main objectives behind each category, the point was to involve him in the decision making process. We would celebrate it all the same.
As he got older (5-6 years old) and the containers were a little heavier, we set up bank accounts for each of these containers. Instead of putting them all in the same bank, we separated the savings account into a high yield bank and put his spending/giving accounts with a bank that was easy to access. I like this for a couple reasons. First, it breaks the stigma of needing to hold all your money at one institution because you’ve been a customer for a while. Second, when you divide it up between banks it puts the significance on the purpose of the funds therefore aligning to what is best suited for your needs. Around this same time we introduced a new rule, you can put as much as you like in spending BUT you need to match it in savings. A simple change that helps him understand the value of money and how he shouldn’t spend outside his means.
One day he proudly came up to us and wanted to use his money to buy a gift for a friend. Out of all the categories the giving tends to be the hardest for kids to understand. This simple choice shows he is comfortable with his savings and doesn’t feel the need to spend money on himself because his needs are met. At this point he demonstrates an understanding of how each category works and it’s time to move to the next opportunity, investing.
Investing 101: When do you introduce investing?
Coincidentally, the Roblox IPO was available which provided several learning opportunities. Roblox has an internal currency called “Robux and he understood that he could purchase “Robux '' to buy things within the game. He connected with the idea - if he bought Roblox instead of Robux his money has the potential to grow without doing more chores. Of course these are not exactly the same but it was similar enough to peak his interest. He purchased Roblox with his own money. At the end of each month, we would say “it's time to look at how much your Roblox has made”. Then I would ask him, “are more people buying or more people selling?” This review helped him understand the highs and lows of investing. In fact, one day when he came home from school, I was preparing his birthday and I said I have good news! His reaction was priceless "Did my Roblox stock go up?”
He is still showing interest, so we proceed to share more knowledge. As he gets older, we will look at more visually based tools that allow him to research his investments and compare them to the S&P. As he grasps these concepts more, we discuss how long to hold those investments and when is the best time to move to another investment.
Just like anything with kids you need to establish a program, set up a routine, and encourage questions. Before you set up an account for your child make sure to understand the difference in account types by reading my 3-part series, Better than Basics: Level Up Your Financial Literacy, or book an appointment with me below. Teaching our next generation about finance is our opportunity to build a strong foundation early on and ensure financial independence for their future.
If you fail to plan, you plan to fail.