Being a father to two young ladies and the fact that I am a financial advisor has really made me think about how to teach my kids about money. I feel the educational system is far behind in this area and most young adults are woefully unprepared as they head into adulthood in regards to financial matters. This is why I choose to volunteer for Junior Achievement (www.juniorachievement.org). I want to help educate young adults in regards to financial matters. I feel that it will not only make their lives better, but it will also help society if we have more people that save, invest, and handle money responsibly. Here are three suggestions on teaching your kids about money.

First, is the idea of ‘paying yourself first’. Meaning that when you get paid at a job, get an allowance, or earn any income, that you have to put some money aside into savings. You can’t just go and spend it all. I have written earlier that the key to being financially successful later in life is to save about 20%-25% of your income per year. So for every $100 your child earns, be sure to get them to save $25. I suggest the money first go into something special that they can take ownership of. Like a piggy bank or a small safe. My parents purchased a small green safe for me that I have to this day! This will involve them in the process. If they want to set a goal and purchase something in the future, that is fine! The idea is that they save and then have the money to buy something without having to ask for money or use debt. I can’t tell you how many times my kids have bought something they really wanted from a store with their own money and how happy they are when they do it! If the savings continues to grow and grow, then I would suggest opening a bank account which would then teach them about banking and responsible use of a checking and/or savings account.

Next, I would focus on education about credit cards and debt. I strongly believe starting education in this area at a young age will help a young adult greatly with being responsible about money. I would simply start by taking out a credit card and laying it in front of your child or children and asking, “What is this?”. I’m sure most of them would be able to identify that it is a credit card. Then ask, “It is a credit card, but what does it really do?” Listen to what your children say and you might be surprised by their answers. Guide a discussion about how they truly work. How you can charge things on it, but you have to pay it off when your statement closes or they will charge you interest for borrowing the money. Explain how the interest works and use simple math examples. “If I charged $100 on this card and didn’t pay them back within 30 days, then the next month I could owe them $105.” I wouldn’t go into detail on minimum payments and compound interest (unless the child is older, such as high school age). The point is to get them to understand that you have to pay back what you charge or you owe more. Also, this is a good way to introduce a credit score. Explain that if you borrow a bunch of money and don’t pay it back on time or can’t pay it back, that banks won’t trust you. They have a system to track that and it is called a ‘credit score’. If banks check on you and see you don’t pay your bills on time or you owe a whole bunch of money, then they either won’t let you borrow money anymore or charge you a high interest rate if they do. However, if you show that you pay your bills on time, then banks will trust you and charge you less to borrow money on things like a car or a house. This shows your children the benefit of being responsible with credit and how paying it off every month benefits them.

Last, I would discuss investing and how the stock market works on a very basic level. This will probably be the most challenging due to the lack of education in America in regards to this. I would start by using a simple tactic that I am somewhat borrowing from Peter Lynch, who ran the Fidelity Magellan fund for years. The next time you are in a large store that you see is busy or buying something that people really want with high demand (like the new iPhone), you can comment about how owning part of that company would be nice. Say something like, “Did you know that you can actually own part of this company and share in the profit that it makes?” Then that can lead into a introduction of the stock market. “The stock market is where people can take the money they save and buy small fractions of ownership in companies like this. If you think a company is going to make more money and do really well, then their stock price goes up. Like I wish I had bought Amazon.com back when they were new for about $20 and now they up over $1,000 a share!” You could even share with them that when they get older, how they should invest in the stock market for their future. Personally, I still remember how my father took me to Charles Schwab and helped me open a discount brokerage account for my 16th birthday present. He gave me money to invest and I read through some prospectuses and picked an emerging growth fund. That was the start of my investing career and I never stopped. The discussion around investing could also happen when your children are older and starting their first jobs. Take the time to talk with them about their company retirement plan (if they offer one) and the job benefits and make sure they are ‘paying themselves first’ with savings. If you don’t know what to invest in, then contact either the investment sponsor on the statement or a financial advisor for advice.

When I think about how little American’s save and the troubles they are going to face in their retirement, it makes me sad. Not only that, but the huge burden to society through social programs like Medicare, Medicaid, and welfare that are already financially struggling by increased demand.  In order to handle demand, taxes will have to rise and/or benefits will have to be cut. Until the educational system catches up and really focuses on teaching kids the importance of saving money, using credit responsibly, and investing, it is up to all of us to make better lives for the future generations of this country.