What Have You Taught Your Kids About Money?
We all want what’s best for our children, and we want them to have a better life than we did. It’s the remarkable selflessness of parenting.
If this is true it begs the question, what have you taught your kids about money? What they know and believe about money will profoundly shape the course of their lives. It will impact their opportunities, marriage, and their relationships with their own children, and possibly even their relationship with you. This knowledge and belief can empower them to greater things, or the lack thereof can provide predictable misery as the stats below show (and these numbers were prior to the COVID pandemic).
- 4 in 5 American adults live paycheck to paycheck(1)
- 55% of American adults have revolving credit card debt(2)
- 58% of American adults couldn’t come up with $1,000 in case of emergency(3)
While the above numbers are sad, the biggest impact money will have on their life will be through their relationships. After all, money is a leading cause of divorce.
Take my family for example: My late father was amazingly kind, deeply religious, and an incredibly loving father and grandfather. He contributed greatly to his community through selfless acts of service. My mother is an amazingly kind, deeply religious, and incredibly loving mother and grandmother, and contributes greatly to her community through selfless acts of service. Yet, after 25 years of marriage they divorced mostly because they couldn’t communicate about money. Both were raised with different philosophies regarding money, and they could never discuss these differences (see my first blog for more about these different philosophies: https://www.betterplanningbetterlife.com/blog/financialplanning-is-personal). There was a lot of stress and heartache that preceded my parent’s divorce, and I believe that if they had talked about money previously with their own parents, it would have been easier for them to talk with each other. Maybe it wouldn’t have saved their marriage, but it certainly would have decreased the stress and heartache.
I wonder how we can we expect our kids to speak to their spouses about money if we haven’t had these conversations with them first?
In addition to better relationships with their family, your kids will have more opportunity, more choices, and really more freedom to control their destiny if they understand money. They will create more wealth through the miraculous power of compound interest and spend less money on interest. Take the following two examples:
Less Interest Paid
Individual A buys a home for $500,000 with $100,000 down and has a $400,000, 30-year mortgage. Let’s assume they understood money, have excellent credit, and secured a 3.5% mortgage rate.
Individual B bought the home instead for the same price, with the same down payment, and same 30-year mortgage. However, Individual B failed to understand the consequences of not paying off the credit card used in college to finance their fun and secures a mortgage with a 5.5% interest rate instead.
Individual A would have a monthly mortgage payment of ~$1800 but Individual B would have a monthly mortgage payment of ~$2275. Over the course of the loan individual B will end up paying an extra $170,000 for the exact same house. The additional $475 that Individual A isn’t paying in interest can be used to fund their retirement, furnish their home, save for their kids’ college, or be used to see more of this beautiful world. If they chose to invest this money and earned a 7% average rate of return, at the end of the thirty-year mortgage they’d have $576,000 more than individual B would. That is the power of understanding money!
More Money for Less
What if your child understood the power of saving early? Let’s say starting at age 25 your child starts investing $5000/year until age 35 ($50,000 in total). If they earn a 7% average rate of return that $50,000 investment would grow to over $560,000 at age 65 even though they stopped contributing at age 35!
Now let’s say a less knowledgeable person waited until age 35 to start investing, but invested $5000/year until age 65 ($150,000 in total), and earned the same average rate of return of 7%. They would only have $505,000 at age 65. Even though they invested 3 times as much, they would have less because of the delay.
What a difference it could make for our children’s future if we taught them these principles.
Recently I read an article in Barron’s regarding family conversations about money(4). The discussion was for ultra-high net worth families (net worth > $250m), but the truths contained therein are applicable to all of us. Here are some of the highlights:
Values determine how we manage our time and money. “Without an understanding of values, you can’t really make great choices,” says Jim Grubman, a family wealth psychologist.
Teaching children the value of a dollar or the satisfaction of earning and saving money requires conscious, and sometimes heroic, efforts—as anyone who has said no to a screaming child can understand.
The goal shouldn’t be for everyone to have the same values. Rather, families can use these values to find common ground and ground rules for decisions. For example, a family may talk about principles of lifelong learning or hard work, but how individuals apply those can differ based on their own values.
The real question is what have we taught our kids about budgeting, taxes, investing, Social Security, Medicare, saving for retirement, etc? If we haven’t taught them, who will? What mistakes will they make, and what pains could we have them avoid?
Finally, I’ll add that while most parents want their kids to have a life better than they had, we often don’t teach them the principles required to achieve it. I offer a service to my clients to teach their children about the financial fundamentals of building wealth. Many have taken me up on the offer to discuss the principles of budgeting, discipline, saving, investing, taxes, and compound wealth with their children. I am certainly no substitute for what parents can teach their children, but I’m happy to augment these efforts.
If you are a client, and you’d like to schedule a time for me to help your conversation with your kids about money, please reach out.
Best regards,
Jonny West
2. https://www.cnbc.com/2019/01/23/most-americans-dont-have-the-savings-tocover-a-1000-emergency.html
3. https://www.cnbc.com/2019/05/17/55-percent-of-americans-have-credit-carddebt.html
4. https://www.barrons.com/articles/how-to-instill-values-when-teaching-kidsabout-money-51590192190
