As a child, you probably heard the saying “money doesn’t grow on trees.” If it was said in response to your request for a new toy or the latest pair of shoes, you understood it to mean that you can’t always afford what you want, or it simply may not make sense to purchase it at a certain time. But how do you learn to save for your financial goals? At SageVest Kids, we believe it’s never too early to begin teaching the fundamentals of money management. Here we share tips on how to raise a financially savvy child.
Identify and Master Your Cash Flow
Teach your children to understand inflows and outflows. Typically, you have a set amount of cash flow available for expenses each month. The term “budget” can be off-putting, but it is essential to at least have a thorough understanding of how much money is available, needed for expenses and potentially remaining for savings. As your child begins to earn their own money, have them chip in towards their cell phone plan or other expenses that they benefit from such as gasoline for the car if they’re driving. Remember that an ultimate goal is to give your child enough real life financial experiences that they’re adequately prepared to manage their finances when they graduate and leave home.
Automate, Automate, Automate
Expand your child’s financial skills using digital technology by teaching them online banking functions. Personal financial apps can help them budget and monitor spending. Lead by example and treat saving (for both short and long-term goals) as a fixed expense. Creating dedicated saving accounts often helps people fund and achieve their goals, such as a set aside account for vacation and holiday spending. By putting savings and fixed expenses on auto pay you aren’t tempted by the cash sitting in your checking account. As your child’s income increases from allowance, to part-time jobs, to full-time employment, they will have the habit of automatically saving a portion of their income. Building healthy financial habits from the start is critically important.
Spend Less Than You Earn
This is the simplest but most important tip. Understand your cash flow to ensure you are spending less than you earn. Teach your children this lesson from a young age. When they earn money or receive monetary gifts, allow them to treat themselves to something with a portion of the money and save the rest for the future. And, when they need more or spend more, teach them the lesson on managing debt to cover excess expenses. It’s far better to learn this lesson under your watch than when they’re on their own.
Save, Save, Save
As children mature, they should understand that it’s not necessary how much you make but rather how much you keep. The amount you save is the determining factor for accomplishing your financial goals, be it something small like a toy or a new electronic, or large like paying college tuition or buying a car. There is no one size fits all percentage but it’s important to set a target, say 15% – 20% of pre-tax income and create a pathway to do so. It may seem daunting, but the key is to start somewhere and increase the percentage as your income increases.
As young adults enter the workforce, encourage them to enroll in their employer’s retirement plan to begin saving as soon as they are eligible. While they may not grasp why they should think about retirement on their first day on the job, it will help set the foundation for a brighter future.
Plan and Review
Teach your child to set financial goals and review progress. Younger children will need more frequent updates to maintain their enthusiasm whereas every couple of months might work better for teens. Create fun activities or incentives to keep them engaged. As children get older, show them how to outline their competing financial interests and prioritize their importance. Young adults might be saving to move out on their own, fund expenses for college or ultimately have student loans to pay off. Show them how to write down goals and put together a plan that allows them to make deliberate steps toward achieving them. Make sure it’s measurable so they can determine if they are making adequate progress and adjust as necessary.
When instilling good financial habits in children it is important to lead by example. It’s never too early to begin having financial conversations with your children to teach them the importance of earning and saving money. SageVest Wealth Management is a fee-only wealth management firm, proudly serving as a fiduciary for all clients. We are dedicated to the financial well-being of you and those you care about. Contact us and make a wise investment in your family’s future today.