CWG Insight Series: Teaching the Next Generation About Money
Here at Crown, we understand that the next generation will be contributing members of our society, sooner rather than later. Scary to think about, right? As a parent myself, I completely understand the importance of giving our kids everything we can, but also think we are missing out on a huge opportunity to teach them the value of planning and earning.
Today’s world seems to be all about instant gratification with social media, tablets, and constant connectivity. It seems all of these distractions can make it almost impossible to teach the lessons and principles of simple sharing, savings, and spending their earnings. The average 3-year-old recognizes 100 different brand logos, which is why they are a marketing team’s dream! We have all heard of YouTube influencers and the insane income they make each year; they make this income because they are advertising for various companies. The more impressions, the more views, the more money in their pockets. Lots of children think they will take their shot at being an influencer…and then reality sets in that they will need a job outside of the phone screen.
Once kids are on their own, they are faced with the quick cash options. They think, how can I impress my new co-workers with a brand-new TV while hosting the company Super Bowl party? This is where the lesson comes in…Let’s take a Rent-To-Own company for example, you could buy a new 70-inch TV from them for $29.99 a week for 69 weeks which equals $2,069.31. OR you could buy the same TV with cash for $985.18, that’s a 200% markup to get that TV now vs. saving for it.
A Great process to teach our kids is the 10/20/70 process. Share 10%, Save 20% and Spend 70%.
Sharing- Ask your child, “How do you want to share the money God has entrusted to you?” then help them find an organization that supports their interest. If they love animals maybe it’s with the local humane society. You can take them to visit a sick relative or help them make cards for the nursing home. Activities like this are going to encourage them so share their time and talents.
Saving- Demonstrate the concept of interest by giving them extra money (interest) whenever they reach a designated savings goal. Have they saved $100? Give them $10 for their work and patience, teaching interest now.
We need to lead by example. We need to have the conversations of saving and working for what we have. Make it a family conversation about the next family trip to Disney. The trip is going to cost $8,000, and we want to go in 4 months from now, that means we need to save $2,000 a month, or $500 a week. How are the kids going to be able to see this? You have a conversation about their commitment to going, what are they going to be able to contribute to the trip? 5%, is a good example here, $25 a week. They must add it to the “bank” (aka mason jar) in the kitchen. Make it visual too, add a thermometer so they can color in each level they reach. I promise they will take the trip more seriously and enjoy it more if they are able to feel a sense of contribution.
Another example of making their money work is their piggy bank or whatever you choose to house their money. Each night, when they make their “deposit”, slip a bit more in while they sleep. This is going to teach them that while they sleep their money is still working for them. The higher the funds, the more the money grows. However, as soon as they spend that money on a pair of shoes or something they didn’t really need, their money is now dead and not able to work for them anymore until the funds are re-established.
When I was growing up, all the grandkids would get toys for Christmas, but we would always get a unique gift every year. The first one I remembered was a “Goofy” stuffed animal, and a note that said they had opened a brokerage account in my name and put $300 dollars of Disney Stock in it. Every year it would be something new, such as a little bag of coffee Beans which equated to them buying us Starbucks stock and so forth, I still have this account open today. As I got older, I would see the dividends pushed off into cash and it gave me the opportunity to purchase more stocks of my choice with the cash. That started my journey into planning and investing. Lastly, clip out coupons for items that your family uses regularly and invite the kids to add up the savings if you used these coupons. If you choose, give your child the same amount to put into their save piggy bank.
Spending- Probably one of their favorite principles in the beginning. Have the kids make a list of the things that they want, then write down the price next to them. After that’s done have them prioritize the wish list. Allowances are a great way to teach them this fundamental principle of spending; you have to make money to spend money. Receiving a set amount of money at regular intervals encourages kids to make intentional choices about how they use their money. Having a regular income of their own, teaches them responsibilities and lessens the sense of entitlement. When they are ready to buy the first thing on their prioritized list, make them use their money, this will help develop an understanding for how much things cost.
Additionally, some thoughts to consider…
Encourage kids to be entrepreneurs by:
- Help them with a lemonade stand
- Making things and selling them on Etsy
- Washing Cars
- Mowing lawns
It is not too late to be the teacher of compounding interest for yourself and your kids. Starting this early will give kids the best chance for success in the future. Consider two hypothetical savers, Jessie and Anthony. Jessie puts $2,000 per month into a retirement account with an estimated 6% rate of return starting at 25. Anthony starts saving $2,000 per month at 35, just 10 years after Jessie. Both continue to add $2,000 each month until they retire at 65. By the time they are 65, Jessie has contributed $960,000, while Anthony has contributed $720,000. Jessie started saving just 10 years earlier and put in only about 33% more money into her account than Anthony put in his.
Now, by the time they are both ready to retire, Jessie has almost twice as much as Anthony — Jessie has $4,024,920, and Anthony has $2,031,180. That extra 10 years of compounding returns has made Jessie's situation far better than Anthony's when they are 65.
While this can be a lot of information, it does not have to be scary. Talk to your kids about how to share their money, save, and spend. Don’t forget to make it fun, they will always remember the lesson you instill in them and how you led by example. For ways we can help you do this, please give us a call today. We would love to help aide you in this conversation. Also remember, the tablet isn’t all that bad as well. Parents deserve some quiet time after guiding the next generation to financial greatness.
Zac O'Brien, CFP - Managing Director - North