The 3 Most Important Things To Teach Your Kids (And Yourself) About Money
Let me come out and address the elephant in the room before I start this post. No, I don’t have children yet. But my parents had an interesting and unique take on teaching me the basics of money management, and it has influenced me ever since. And maybe it’s because I like personal finance and maybe it’s because I’m nosy, but I’ve heard dozens of stories about how people’s parents influenced their relationships with money. Each one helps me paint a clearer picture of the dos and don’ts of passing on good fiscal sense to the next generation.
But first let’s start with me. My dad invested in the stock market. He even owned a few rental properties. My mom and dad both worked full time and saved money into their 401(k)s. To top it all off, my mom is one of the last rare people to actually have a decent pension at retirement. None of that is exceptional in today’s world. What’s exceptional is that my sister and I knew about it all.
Now we never really had a perfect idea of their net worth or debts they had on houses or any of the finer details on how they structured their home loans to avoid paying PMI. Nor did we understand when they met with a lawyer or an accountant and why or how to do that ourselves. There were many details deep in the weeds hidden from us. But I remember being as young as 9 or 10 and knowing three key things about my parents’ finances.
1. My Parents Had Financial Goals
They talked about saving with us. I’ve heard a lot of stories from kids with wealthy parents who almost literally thought money grew on trees until they had to get a job and make it themselves. In fact, in my experience, the people who teach the best money management techniques are less wealthy people with clear, concrete goals.
A broad group of people that fits this category are new immigrants. The stories I’ve heard from the children of immigrants are consistently positive and focus around goal setting. Unfortunately, new immigrants to the US are less likely to understand our complex financial system and tend to save in low interest savings accounts rather in real estate or the stock market (the traditional builders of wealth), but they teach their kids the right lessons about goal setting none-the-less.
As a kid, we were comfortable, and that could have led to complacency on my parents’ part. But it didn’t. They had an idea of how much they needed to retire, and more importantly communicated those goals to my sister and I. When we saw that despite wanting for very little, they weren’t wealthy enough to not work, it really put things in perspective for me. Knowing that there was a goal (retirement) and that they hadn’t hit it yet made me think about creating my own financial goals.
2. My Parents’ Goals Were Within Reach
A lot of people have goals. But if they require a winning lottery ticket or founding the next Google to accomplish, then they aren’t likely within reach. As I said earlier, I didn’t know every detail about my parents’ finances, but I did know when they hit big milestones like paying off a mortgage on a rental property. I also knew when they had setbacks like tenants who bolted in the middle of the night and left $20,000 in property damage in their wake.
Additionally, as they got closer to retirement, my parents started talking about it more and what they would do once they reached it. I have a close friend whose parents, currently in their 60’s, still talk about retirement like they did in their 30’s. It’s a goal that’s so far away, it may never come. Kids are perceptive, but they often learn the wrong lessons without guidance. I learned that retirement is possible with hard work and dedication. My friend learned that retirement isn’t possible, so you might as well spend whatever you make now. Perhaps a better lesson could have been gleaned by taking a critical eye to his parents’ finances and learning from their mistakes.
3. My Parents Had a Strategy To Achieve Their Goals
I recently learned that my parents didn’t have a hard core asset allocation strategy like I do. They didn’t divide their money to have a perfect balanced risk-adjusted portfolio. Nor did every investment they make pan out (my dad has been furious at fund advisors more than once for slapping him with outrageous fees). But they invested well on the whole, learned quickly that stock picking was a losing game, and made automatic and unconscious contributions to 401(k)s and other retirement plans.
On top of that, they were willing to put in a lot of work to become good landlords. They learned from every mistake, and I have the benefit of some of those learning experiences too. I wish they had taught me so much more. I know my dad still has a wealth of knowledge in his head about best practices for picking and managing properties that he’ll probably never get around to teaching me.
But he’s also left me with a great jumping off point to iterate from. My financial tracking system is already more sophisticated than his thanks to the power of modern technology, and I devoured every book in his financial library in addition to many new guides that weren’t around in his day and age. That’s what a good strategy does. It sets up the next generation to learn from your mistakes before they start, so the mistakes they make push them further forward.
BONUS: They Helped Me Create Realistic Goals and Strategize To Achieve Them
Part of their strategy in teaching me about money involved paying me an allowance differently than most kids. I didn’t get the same amount of money every week. I got money for completing specific tasks. Some weeks we had more laundry to be folded than other weeks. Sometimes we had guests and the dishwasher needed to be emptied more. If it rained heavily, the grass might need to be mowed twice a week instead of once. Those weeks, I’d be paid more than others.
I quickly realized that this was NOT how the real world worked unless you start your own business. Rarely do you actually get paid piecemeal in office life. The busiest 40 hours of your life and the least busy get you the same salary, and I figured out that wasn’t the life for me. My parents inadvertently taught me the value of money, and how to game the system too. I could fold a basket of laundry in 10 minutes and make $1 or unload the dishwasher in 3 minutes and make the same $1. Which one do you think I did first?
Unsurprisingly, when I had the money I didn’t spend it on small trinkets and bubble gum like some kids do. My parents had taught me to dream bigger after all. I would save up for months to buy video game consoles, controllers, and games. My strongest memory as a kid involving money was when I had saved several hundred dollars to buy a PlayStation 2, an extra controller, a memory card, and 2 games.
I already had a Nintendo 64 and my parents were nervous about me spending more of my time in front of a TV screen with objectively more violent video games (Playstation has always had edgier games than Nintendo). But they realized that I hadn’t come to the decision lightly – I’d saved over $400 over the course of a year or more. They could have taught me a lesson about parental control that would have left me bitter and less willing to save money in the future. Instead they taught me that if you save enough money, your dreams can come true.
Communication Is Key
Let’s be real, having goals, making sure those goals are realistic, and having a strategy to reach those goals aren’t exactly surprises in the long list of good things to do in personal finance. You need all of these things for yourself, regardless if you have kids or not. But communicating those things to your kids is a critical step that a lot of well-meaning parents accidentally skip.
How many times have you heard about a successful couple whose kid ended up serving fast food well into his 30’s? Or just take the staggering number of millennials who still live at home with their parents as broader proof. In theory, successful people will breed more successful people. But we know it doesn’t always work like that. If you’re bad with money, teaching your kids what not to do can be an important step to ensuring them a better future. And if you’re good with money, don’t assume your kids understand how and why. Communication is key.
Nathan is the Chief Financial Advisor at Monte Largo Financial