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November 16, 2017

Six Ways To Teach Your Kids About Money

401k advisor annapolis in maryland at SCM

Save early, save often.

By Greg Ostrowski, Managing Partner, CERTIFIED FINANCIAL PLANNER®Scarborough Capital Management

Teaching children about moneySome people think the methods CERTIFIED FINANCIAL PLANNER™ professionals use are extremely complex, and they just don’t have the mindset to grasp those concepts to use in their own financial planning. I can tell you however, that as a CERTIFIED FINANCIAL PLANNER™ myself, most of what I do each day has been built on a foundation of lessons on the basics of money management and common sense that my parents taught me.

In other words, it’s never too early to teach a child about starting off on the right financial foot.

If you want to help teach a young person solid financial basics, here then are some of the lessons I learned that may help you start that conversation.

Pay yourself first. At age 12, as a paperboy, my parents opened a custodial investment account for me, and I’m glad they did. In fact, I think a large part of that early investing experience led me to my career today.

While an IRA may or may not be right for your child, teaching them to save definitely is. Maybe they get some money for doing chores around the house, shoveling a neighbor’s driveway, or from running a lemonade stand. Teaching them that the first thing they should do with that money is put some way for themselves for later is a critical lesson.

Save early, save often.

Worry about yourself first. This may come across at first glance as a lesson on how to be a selfish person. It’s not. It also may come across as the same thing as “pay yourself first.” It’s not that either.

What it means is to make sure that your financial responsibilities are taken care of before you follow what your friends are doing. For example, if your teen has a car payment coming up, make sure he has enough money to cover that before buying that concert ticket, even if “all his friends are going.” What he also may not understand is that some of his friends put that ticket on a credit card, which won’t be paid off until much later.

Pay off your credit card every month. Credit cards are a great way to pay for things conveniently or to earn points from rewards programs. What they are not, however, is a free line of credit that allows you to borrow how much you want, for the time period you want, with zero interest. A good rule of thumb is if you don’t have the money in the bank to cover your next statement, then don’t put it on the card and don’t buy it at all. Online accounts also allow easy ways to monitor purchases so there are no surprises.

Delay gratification. In the now famous “marshmallow test,” Dr. Walter Mischel and researchers from Stanford conducted an experiment that tested what children would decide to do if given the choice between getting one marshmallow now, or two marshmallows about 15 minutes later. (And keep in mind how long 15 minutes is for a child.) The researchers found that after studying these children for years after the test, the ones that could hold off on the one marshmallow for the reward of a second had better SAT scores, a lower BMI, and better educational outcomes.

All of that said, it’s not a bad way to teach a child about delayed gratification and how interestworks. If they can avoid the instant gratification of having something now, they will have a better chance of having more later.

Buy whatever kind of car you want, but buy a good used one. We all know that cars lose value the moment you drive off the lot. If you purchase a new car, the value is going to be reduced drastically more than if you bought a good, used one. I’ve found over the years that I’m much more apt to buy a nicer luxury car used than I ever would be willing to spend on a new one.

And with how much information on cars is online today, your homework can be done well in advance of ever stepping foot in a dealership. Knowing your numbers ahead of time puts you, not the salesperson, in the driver’s seat.

Invest in yourself. Unlike the purchase of a flat-screen TV or expensive new shoes, investing in education appreciates over time. You can even say that knowledge is a “worldwide currency.” I’ve tried to take every opportunity to better myself and always be learning. The smartest people I’ve met over the years are the first to admit they have much to learn.

Another way to look at this is not “this book or course is going to cost me X,” but “this book or course is going to allow me to earn X times the cost of what I invested in it.” Think of it as the return on investment for yourself.

So, as you can see, there are several ways to begin the conversation with kids to get them started on their way to better financial habits. And while getting them to eat their greens might be a struggle, hopefully the ideas above will make discussions about money a little easier.


Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results. Diversification and asset allocation do not guarantee positive results. Loss, including loss of principal may result.

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