Teach your kids about personal finance
It’s back to school month, and many parents will be busy getting their kids ready to head off to class. But one class your child probably isn’t taking is personal finance. Most young people go their entire academic careers and never take a class in the fundamentals of personal finance. According to the 2018 Survey of the States, only 17 states require any sort of personal finance classes for high school students, and colleges generally require none. That leaves the financial literacy teaching and advocacy mostly to parents.
Given the struggles most young adults have with finances, it’s worthwhile to help your kids understand the fundamentals.
Here are the top four things I think parents should help their young adults understand:
Budgets. People in general hate budgets because they impose discipline and limitations. But they are essential to personal financial security. Every young person should understand how to track their income and expenses on a monthly and annual basis, and how to plan to live within those parameters. Even if your child doesn’t have a job, it’s helpful to do a budget. Income will be $0, but they still incur a lot of expenses. Developing the skills and discipline to track financial transactions is the point. One day, they’ll have to pay for all of this themselves, and if they have no idea about the costs of the lifestyle they are living, they are likely to fall into debt pretty quickly.
Accounting. Every young person should take a basic course in accounting. The most important thing to understand is what’s called double-entry bookkeeping. It’s an elegant way of tracking income, expenses, and the creation of wealth. In your personal life, having basic accounting skills will help you run a better budget and calculate your net worth. Without some accounting skills, you’ll often be at a loss to figure things out.
Moreover, if your child ends up working in any position of authority someday or wants to start their own business, they’ll have to deal with things like budgets and projections. Understanding how to read and make sense out of them is important.
Smart Debt vs. Stupid Debt. While debt in general should be avoided, there are times when debt can help you advance your personal finances. Smart debt is basically debt that will help you build more income or assets. Stupid debt is debt that’s incurred for lifestyle reasons and has no ability to enhance your earning capacity or your wealth.
A good example is student loans. We all know that a college education generally leads to higher career earnings. If you borrow money to get educated and qualify for a higher paying career that can be smart debt. But the debt has to be in proportion to your earning capacity. Someone who wants to be a school teacher shouldn’t borrow as much as someone who is qualified to be a software engineer or physician.
Debt used to buy a house is also smart debt because it fixes your cost of living and helps you build equity. Someday when you your house is paid off, you’ll also have a free place to live. Debt to buy a car can be smart debt. Most people need basic transportation to get to and from work. But debt to go to Cancun or for a fancy new mountain bike is stupid debt.
Investments. Young people should understand the basics of investing and the workings of financial markets. Their ability to retire four decades in the future will depend on the choices they make starting in their 20s. The basics of adequate savings and prudent investing are the foundations. These are what you might think of as the “blocking and tackling” of a sound long-term retirement strategy.
Yet, most people don’t understand the basics, or by the time they understand them, they are 50 years old and it’s often too late to make a difference. There are usually introductory courses on investing available at most colleges, but kids can also learn on their own. Jonathan Clements, who was a financial journalist for many years at the Wall Street Journal, recently wrote a book called “How to Think About Money.” It’s a good place to start if you want to introduce your kids to the financial concepts they’ll need to master as they age.
Charlie Farrell is a CEO of Northstar Investment Advisors LLC, and guides the firm’s investment philosophy. He is the author of “Your Money Ratios: 8 Simple Tools for Financial Security.” This article is for information and education purposes only. It does not constitute investment, tax or legal advice. cfarrell@northstarinvest.com