First, make sure you discuss financial matters with your children.
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Most families refrain from talking about money issues, as they are often considered a taboo subject. But children learn from the lessons and experiences of their parents.
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Involve them in basic discussions about the economy and your own budget. Most importantly, talk to them about tradeoffs you need to make with your budget and solicit their input, where appropriate, regarding these decisions. Share with them your regrets and lessons learned.
Do you wish you had saved more early on in your career? Did you make a bad investment that turned sour? What have you learned from your mistakes?
Second, teach your kids the value of money and work by establishing an allowance when they are very young.
This should be tied to satisfactory completion of chores and school work. This reinforces the concept of compensation for a job well done.
A good rule of thumb is to give them a weekly amount of dollars equivalent to their age. For a four year old, $4 a week would be reasonable, and for a 17 year old, $17 a week would suffice. As you increase their allowance, increase their responsibility for paying their own expenditures, with the expectation that by the time they are gainfully employed, they are totally financially independent.
Setting this expectation up front prevents an “entitlement mentality” that lingers into their 30’s.
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Here are some basic guidelines for increasing your child’s responsibility for expenses over time:
• Age 3-9 they pay for special “wants” — candy, toys, gifts.
• Age 10-15 they pay for non-essential items — dessert and sodas if they are out to dinner with you, any entertainment with friends-movies, video games, family gifts.
• Age 16-18 they pay for gas and car expenses, any luxury items, some clothing and help pay for their extra-curricular activities. At this age, you can encourage them to get a job or do special chores for extra money.
• Age 18+ add books and expenses at school, entertainment, extra meals at school.
Once employed, ideally they should assume full responsibility for their expenses; make sure they pay for their cell phones and car insurance. Also, make sure they have a budget and start saving at least 10% (preferably 15%) of their gross income.
Finally, encourage investing as early as possible. Emphasize the incredible power of dollar compounding. Early savers let time do the work for them thus reducing the total savings burden over their career.
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Here is a simple illustration:
Power of Compounded Savings Over Time
Hypothetical value at age 65 assuming 7% compounded growth:
$100 per month investment beginning at age 20 = $379,259
$100 per month investment beginning at age 40 = $81,007
The difference? $298,252.
The monthly amount a 40-year-old would need to save to catch up to the 20-year-old = $468/mo. or more than 4x more.
Remember, you are your child’s role model and teacher when it comes to all things financial. Your attitudes and behavior surrounding money matters will greatly impact your children’s “money scripts” for the rest of their lives.
Take the time to teach your children well.