Teach Your Children Well (About Money)

My Dad was a math and science teacher, and he did not teach me much about money. There was one lesson he gave me, though, that I never forgot and has paid dividends throughout my life. He told me when I was just a teenager that “there are two sides to the money equation; income and expenses and the income side is fairly unpredictable often. The one you can control is the expense side.” Thank you, Dad.

Very few schools today provide any kind of solid financial education, which is truly a shame. Some of our team members do financial educational outreach for high school students in their spare time and we have seen amazing results as young people apply these basic principles. Another good option would be to take virtual classes as an adult and have the children join in and then discuss it with them afterwards. There are many organizations out there that provide such training. For example, ramseysolutions.com has classes listed on their website.

I think a good start if you want to teach them yourself would be a lesson on how to balance a checkbook. Most of us use electronic systems to pay bills and balance the accounts these days, but the basic principles are still the same. I would show them how to do it manually so they can learn how it works and then go over the electronic version.

Another important concept they should learn is the power of compound interest. One concept to explain would be the idea of the $55 candy bar. If you took five dollars you were going to spend on candy and invested it in the stock market and the returns were the same over the next thirty years as they were over the past thirty, you would have $55. If you gave up the candy bars for 30 years and put the $5 away each month that would be $13,941 after the 30 years. The total amount that was invested was only $1,800!¹

You can also use this example to explain the danger of debt. If you bought that candy bar with a credit card and did not pay it off right away the cost would be considerably more than the $55, since credit card interest rates are much higher than the historical returns in the stock market. Additionally, starting a habit of buying things on credit has a huge compounding and ultimately devastating effect.

You can easily teach them some basics about investing. Give a basic orientation of how the stock market works. They need to understand that it represents ownership in companies. The companies make a profit and return some of it to their shareholders (investors) as dividends. They also invest some of it in growing the company, which leads to increased share prices. Help them understand that the values fluctuate in both directions and that a big key to doing well is to stay in when the markets are down and not panic. Maybe you can choose a company that is of interest to both of you and buy it on paper and track how you are doing.

Finally, I recommend a basic explanation of inflation. The erosion of purchasing power from inflation is one of the reasons saving and investing early is so important. If you have lived in the same home for many years, you could use the example of what you paid for it and what it is worth now. I attended college in the 1970’s and my tuition was $1,800 per semester. Today, Arizona State is $5,650 per semester and that is one of the least expensive schools.

I hope that you will take up this challenge to teach your children (or grandchildren) well about money.

¹ The average return shown is for illustrative purposes only. Past performance is not a guarantee of future returns.

Dennis J. Rogers, CPA, CFP® is a Registered Principal offering securities and advisory services through United Planners Financial Services. Member FINRA/SIPC. The information contained in this article is general in nature. You should seek professional tax and financial advice prior to implementing any of these ideas. FireSky Financial and United Planners Financial Services are not affiliated. He is a partner in a financial advisory practice in Phoenix that focuses on helping clients make smart decisions about their money based on their personal core values. He can be reached at drogers@FireSkyFinancial.com or 602-748-1900.