Parents sometimes ask me about money lessons they and others can share with children. To be honest, the combination of children and money isn’t my specialty.
“Youth is wasted on the young.”
George Bernard Shaw/Oscar Wilde
I once had clients, a married couple, whose college-aged legally adult daughter came into $50,000 from a court award. The parents called me in to talk some money sense to their daughter before something bad (“bad” as defined by parents) happened to the money.
I gave it my best. I explored her thoughts about the money. I brought my valuable money lessons, projections for what the money could become, ideas for future uses of the money, investment ideas, and I even shaved off a chunk for immediate fun money. All explained in ways a college student might better understand (at the time, my oldest daughter was in college and my youngest daughter was right behind her). I wanted to build a plan together so she would have ownership in the plan. I felt good about it.
The result was she bought two cars. Not a part of any plan. While I wasn’t so naïve to think I would win the war (remember I have two daughters), I at least thought I would win a battle or two. Nope. Not happening.
For those of you with college-age children, I have conducted money classes for college students. (Side note: In my distant past I was a ROTC instructor at a university. Three years teaching two classes per semester. I have experience with college students.) Don’t feel bad if you are having a difficult time getting through to them.
It’s not an intelligence thing. Many just don’t have enough life experience with money to grasp the more complex applications of the information given their current life. It’s difficult for them to wrap their heads around life as 60 year olds or investment concepts; unless they sincerely want to learn about money.
So if you’ve read this far and think I’m a cop-out, don’t give up. MOAA employs a number of recent college grads. I asked these younger staff members what they wish they would have known about money back in the day and of course I added my spin. Here are some tips.
- Keep the topics and lessons age specific. What are they dealing with financially at that point in their life? Where are they getting their money? What are they spending it on? If they get just enough allowance to live on between pay periods, the lessons are pretty limited.
- At some point teach them “A part of all you make is yours to keep.” (from ‘The Richest Man in Babylon’). If they don’t keep some for themselves, they are just giving away all their money to others. Spending the money is fun but 5, 10 years from now there will be nothing to show for all their hard work. Show them how shaving off a small portion of pay (say 10%) doesn’t impact their spending that much. Save 10%…you earned it; it’s yours! Over time, they will have something in savings for an important need. As the saving grow, split it between short- and long-term goals. A piece for retirement (even as abstract as that is for young people) is a good idea.
- If they are working, putting a small portion in an IRA might be a good idea. Maybe as parents, you can offer a match amount (as long as you don’t exceed the child’s earnings). Maybe they save 5% in a liquid savings and 5% in the IRA. It’s important to teach the lesson that putting aside some income now allows them to fund a retirement later. Or put another way…the earlier they invest now, the sooner they can stop working later.
- Show them the power of compounded money. At first, it seems it will take forever to build some wealth. But like a snow ball rolling down the mountainside, once it hits a critical mass it gets large quickly. Tell them it’s similar to a video going viral on the internet. Getting to the critical mass is the initial challenge and that just requires some discipline.
Start at age 25, $200 mo, to age 65 equals $700,000 (@8% annual average return) Start at age 35, $200 mo, to age 65 equals $300,000 (same return) What a whooping difference 10 years makes in the snowball! And they will be socking away more than $200 a month.
- Build a credit record. Building a credit record and learning how serious credit management is go hand and glove. If your child doesn’t have a credit record early, someone will have to co-sign for them later and they could be behind the credit record power curve as young adults. Pull a credit record at www.annualcreditreport.com. Get a credit card, use it sparingly and pay it off regularly. Make sure the child pays it off; not you. This reinforces the lesson for them to live within their means. So…
- They need to learn to live within their means. Credit is not a substitute for income or spending beyond their income. As long as the debt exists, their income does not belong to them it belongs to the debt. Without debt, all their income is theirs to build value and wealth. This goes for housing also. Whether in college or afterwards, rent amounts should be managed to stay within a reasonable ratio of income. Don’t be house poor. By saving 10% of their pay off the top (paying themselves first), they can live off the other 90% with a clear conscience.
Other places to cut costs are cable TV, transportation, eating and drinking out, entertainment, haggling on purchases, and buying pre-owned goods online.
- Don’t go overboard with college loans. Technically speaking spending for college is no different than buying a car or boat. If a $200,000 Bentley or a $300,000 yacht is too much for your budget, how can college expenses at those levels be justified?
Keep a cap on college expenses by finding alternatives to maintain a realistic budget. If your child is unsure of a major, why spend on high college costs as they keep changing majors and extending their graduation date? Spend less at the community college for two years figuring things out and taking core classes. Transfer to the selected university in the final two years when plans are more solid. This can also help a student get into the selected university if they are having a hard time with entrance as a freshman.
A massive debt at graduation means your child can’t afford the payments and will live at home or on your dime. Or you’ll own the debt and your ability to fund your own retirement and needs may be hindered.
- Have a budget or create a money flow chart; money in, money out. Bottom line is to ensure the money coming in is more than the money going out. Measure the money going into disposable goods versus going into necessities or assets. To build wealth, more should flow into assets than liabilities. Online budget tools include Mint.com or LearnVest.com among others. Need a rough idea how to split things?
Percentage of gross income
Investment in you: 10% minimum (short- and long-term)
Total housing and consumer debt: 40%
* Housing 25-30%, rest consumer debt (not to mean you must have consumer debt)
* What you don’t use in consumer debt (zero being the goal), you have for extra savings/investment or living expenses
Living expenses: 50% (the requirements: food, utilities, insurance, maintenance…)
- How should you pay off your debts? Generally make consumer debt a priority. Mortgage and student loan debt is not quite as bad as consumer debt. Two plans; one based on psychology and the other math.
Some people need a quick victory. If this is you, pay off the smaller debts first. Of course, you have to make at least minimum payments on all debts but put an extra amount towards the smallest debt first. When the first debt is gone, add the extra amount from this first debt to the minimum amount of the next debt. Continue this snowball of increasing payment amounts as each debt in eliminated.
The interest rate on the debt represents a negative return of your money—you are losing money. Stack the debts with the highest interest rate on top decreasing rates until the lowest rate is on the bottom. Apply the snowballing payment system from the paragraph above.
- Final idea is for the child. You can do this yourself. Mom and dad don’t have to do this for you. The MOAA financial site has all you need to learn and do. We offer you unbiased advice. We’ve been in the investment business and now provide you the tools to succeed with our financial sector experience.
Thanks to my fellow MOAA staffers for their ideas.