Question: Our children have seen us having to make lifestyle changes in the last couple of years due to the state of the economy. Do you have advice as to how to use this time to teach our children about the importance of finance?
A: Anyone that knows us is aware of our firm belief that children should be taught financial education at an early age. This can empower them to learn skills that can have a positive impact on their lives. We believe that financial literacy is one of the most relevant educational skills young people can learn.
The current state of the economy, as well as the pandemic and the impact on families, has highlighted the need for personal finance skills. Understanding how to pay for college, manage credit cards, entering the workforce and investing for retirement are life skills that are not “intuitive.” Teaching students the power of compounding will encourage them to save earlier because they can see and understand the benefits.
Financial education improves not only financial knowledge but has an impact on behavior especially when it comes to budgeting, saving and credit. Students should be taught critical thinking skills to help them avoid being lured into making decisions that could be financially detrimental. For example, it is so easy to go online and make purchases from retailers with a click of a button. Understanding the basics of finance allows students to understand there are consequences to their choices. So instead of the feeling of instant gratification an online purchase provides, students can evaluate the longer-term impact of their decisions as it relates to earning and spending their limited financial resources.
Since most students do not receive financial education in high school, it is up to parents to provide these critical life lessons. Without guidance it is too easy for children to develop bad money habits. This is the perfect time to for parents (or grandparents) to teach children the fundamentals of finance. Inflation is at the highest levels in decades. Talk to your child about financial stressors on the family such as increased costs of common household items, food, gas prices and travel costs. Interest rates are rising which means the cost of debt has increased. For example, you can show your child what the cost of financing a new car would have been before interest rates increased as compared to the current cost with higher rates.
Credit cards can be a helpful tool in managing finances. However, they can be equally detrimental if not used properly. Educate your child about the negative consequences of misusing credit cards and the importance of paying off monthly balances to avoid high interest rates on revolving balances.
Talk to your children about the importance of establishing an emergency fund in case the unthinkable happens (for example the loss of jobs during the pandemic) and how having available cash on hand eases the blow.
Teach your children to invest a portion of their allowance and/or earnings from a part-time job and explain the power of compounding. When our children were young, we devised a plan where they would put a portion of their earnings/allowance in various “buckets.” Forty percent of their weekly earnings went into their spending bucket, 30% went into short term savings, 20% was allocated to long term savings and 10% for a charity of their choice. We showed them how saving early in their life created greater wealth long term due to the power of compounding. We shared with them the importance of diversification (not having all their eggs in one basket) and how investing works. This is one of the greatest gifts you can give to your child – how they can invest a portion of their earnings so that their money works for them instead of them having to work for money.
Even though more schools are including some form of financial education in their curriculum, it is still up to families to teach their children and be good role models. There are many books and online sites that can help you help your children with one of their most important life lessons. It all begins at home.
Crystal Faulkner is a Cincinnati market leader with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. She also is a licensed EOS implementer working with leadership teams to increase the value of their organizations. Tom Cooney is with Wealth Dimensions, an investment advisory firm. For additional information, call 513-768-6796 or visit online at mcmcpa.com. You can listen to Tom and Crystal daily on WMKV and WLHS on “BusinessWise,” a morning and afternoon radio show that profiles highly successful people, companies, organizations and issues throughout our region.
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