THREE BIG FINANCE LESSONS KIDS NEED TO LEARN

A recent Schwab survey reports that parents consider money management the most important skill their kids should learn — outranking the topic of drugs and alcohol abuse, healthy eating and exercise habits, and safe driving.

And yet many families never get around to the topic in a meaningful way. T. Rowe Price reports that four in 10 parents are reluctant to discuss financial planning — even though the kids of those same surveyed parents say they are looking to their parents for guidance.

Part of the problem may be impostor syndrome. Only around a quarter of parents say they are extremely knowledgeable about basic planning (managing expenses). No wonder 85 percent of parents said they would be interested in enrolling their kid in a class that teaches personal finance basics.

Alas, that’s rarely on the curriculum in middle school or high school. It’s up to the parents. Drop the ball on this, and you are guiding your child into learning the hard way: from costly mistakes young adults make in their 20s, because no one took the time to teach them.

Allowances can be earned for chores. Not for good behavior or good grades. Those are expected behaviors. Allowances are earned for effort beyond basic family expectations. Eventually, stretching out a teen’s allowance to once a month offers a realworld budgeting lab, where they learn how to make the money last for more than a week.

Your attitude throughout every age is crucial. Upbeat and encouraging is how you motivate. Mistakes will happen. That’s called learning. If you scold or judge, you are failing your kid. Perhaps you have some money mistakes you could share? That’s going to be heard a lot more intently. Books such as “The Opposite of Spoiled” provide a smart mix of why and how to talk about money.

At a minimum, these three concepts need to be imparted well before your kid heads out into the real world:

1. Opportunity cost. Every dollar spent today is a dollar you are deciding to not use for something else. Taking a moment to consider opportunity cost can be a useful pause button that deters spending on unnecessary things.

As an adult it becomes the process that helps you spend the least amount on big-ticket items.

Right now it can be applied to any teen’s world. For example, a $100 pair of jeans that is on sale for $80 is not necessarily a good deal. If you don’t need the jeans, what else could you do with that $80? Save it? Invest it? Another scenario: Hold on to your smartphone for a few more years, rather than shell out more money today to upgrade. That concept might eventually help today’s 15-year-old grow into the 30-year-old who holds on to a car as long as possible to save tens of thousands of dollars.

2. What you can borrow is irrelevant. What you should borrow is all that matters. The reality of our financial ecosystem is that lenders are motivated to tell you the maximum amount you can borrow for a car or a house. But those lenders don’t have a vested interest in helping you juggle all your financial goals. Buying the 3-year-old used car will always be the financially smart move, rather than paying up for a new car. Buying a smaller house that meets your needs, but doesn’t stretch your budget, can free up cash f low that will give you hundreds of thousands more for retirement.

3. Your 20s are the best time to save for retirement. Talk about counterintuitive. This is a hard one, no doubt. But if you ever want to give your kids a huge assist on financial security, teaching the math of compound interest is the most important lesson.

Every dollar tucked away in your 20s will have more time to grow than money you save in your 30s, 40s and 50s. Invest $500 a month from 22 to 32 and you will have more than $77,000, assuming a conservative 5 percent annualized rate of return. At that point, even if you stop saving more, but leave that nest egg growing for another 40 years, it will be worth nearly $550,000 at age 72. To be clear: Over just one decade of savings, from age 22 to 32, the young adult invests $60,000 of their own money. Then at age 72 they have more than half a million dollars.

Now let’s say you instead wait until age 40 to get serious about retirement, but want to land in your early 70s with the same $550,000. To pull that off you will need to save around $580 a month, for the next 32 years. Not 10 years. That works out to a total of more than $220,000 of your own money you will have to shovel into savings to land at the same end goal of $550,000.

Simply because of compound interest.