Financially Speaking: Teach Your Children Well
There is an old expression, “It’s always darkest before the dawn.” Basically, things always seem at their worst just before they get better. As I write this on July 21, it feels as if it rings true with our economy. The S&P 500 is down 17.7%, and the Bloomberg US Aggregate Bond Index is down 10.2% year-to-date. The Federal Reserve Bank (the Fed) is raising interest rates to curb inflation, which came in hot at the end of June (9.1%), and we have all been feeling it at the gas pumps and the grocery stores. The war is still raging in Ukraine with no end in sight, the supply chain is still disrupted as China continues to close its cities, and oh, that’s right, COVID is still a concern even though it’s not in the news every day. But with all of the above, I believe that things will be a lot better by year-end.
We hear enough of that in the daily news, so today I want to focus on our children. It is difficult for many of them, since they never wanted for anything while living at home. The Gen Zers (ages 10 to 25) are like deer in headlights. We might as well throw in some millennials (26 to 41), who are still drifting back to home for shelter (maybe due to divorce) or for a withdrawal from the Bank of Mom and Dad.
It’s not too late, or is it? Consider the Lao Tzu quote, “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” That is what most of the baby boomers’ parents did; they taught us. I’m from a large family of 10 children, and I remember growing up in a three-bedroom, one-bathroom twin home with 10 people living there — seven boys, my parents, and my aunt. We moved to a large single home when my sister (sibling No. 8) was born. It seemed that most people in our neighborhood grew up with more kids than money. At early ages, we delivered papers or babysat, whatever to earn money. Parents encouraged their children to work. By the time we graduated from high school, most of us had been working part-time for three years or more. That was a great lesson learned. Can you imagine raising 10 children today? One of us always went to the grocery store with Mom, since we consumed three carts of food weekly. Also, this was at a time when both bread and milk were delivered to your home.
I believe that most baby boomers (ages 57 to 75) grew up differently from their children. Unfortunately, since many baby boomers didn’t have much growing up, they overcompensated by giving more to their children than they had ever had.
If your children or grandchildren are very young, start by reading one of the many books about money for kids such as The Berenstain Bears’ “Dollar$ and $en$e” or “One Cent, Two Cents, Old Cent, New Cent” from the Cat in the Hat’s Learning Library. If they are in grade school, take a page out of what many grandparents did to manage and save money. When I first started in business (a lifetime ago), I met people who used the coffee can or envelope system for their bills and savings. Does this sound familiar? Basically, the breadwinner would hand over their pay, and the person paying the bills would separate it into various cans or envelopes. It may sound funny, but this was the generation that grew up during the Great Depression when banks failed. By month’s end, there was money to pay their mortgage, buy food, save for Christmas or vacation, etc. For the very young, start with a piggy bank (yes, they still make them), so they can see their money grow.
Next, open a savings account at your bank. Most banks and credit unions offer special kids savings accounts to transition from a piggy bank in their bedroom to learning how to save and use a bank account. Be mindful of any fees or minimum balances. At this tender age, habits are developed that will last a lifetime. When they earn money from working, receive an allowance, or receive a gift, have them put part of the money into their savings account. The balance can be used for things they want. Discuss having a goal for what they are saving for.
In high school and college, introduce a budget to them. Many of them may be (or should be) working part time; now is the time to show them how to budget their money. Perhaps they are saving for a car, car insurance, cellphone bill, college, or eventually to buy their first home. I know that the cost of homes has increased with low interest rates, but it doesn’t mean they will never be able to afford a house. With their budget, discuss needs and wants. The most basic needs (Maslow’s hierarchy of needs) are food, shelter, and clothing. If you want them to eventually move out of your home, they need to understand these three basic needs.
With a budget, the most important aspect to teach is to “pay themselves first.” This expression was first coined in the 1920s by George Samuel Clason. Basically, you can’t spend the money if it is out of sight. They should start by paying themselves 10% of whatever they earn and deposit it into their savings account. As they grow older, we can teach them about dollar-cost averaging into an investment. Hopefully, you are demonstrating this by investing into your workplace retirement plan.
When we work with young adults, we stress paying themselves first. Several years ago, I worked with a young college graduate to develop a budget, the first step in a financial plan). She said she had never been able to save money. She grew up in a family that bought whatever they wanted on credit. When the credit-card bills were delivered monthly, there were always lively discussions on how to pay them. Her family always carried credit-card debt, which can have interest as high as 23% depending on one’s credit score. We worked with her to complete a budget, and she opened her first mutual fund with $100. Each month, she contributed $100, which seemed high to her at first, but we showed her that it was only $3.33 per day based on a 30-day month. It took more than four years, but she finally saved $10,000. It became infectious. After the first year, she said she could afford to save $5 per day, then it was $10. Once she saw the mutual-fund statements each month, she could not wait to do it again. We had the mutual-fund company withdraw the money directly from her checking account, so she could pay herself first.
If you want to become wealthy, one of the first things you must do is spend less than you earn. It is that simple.
Now that you have figured out how to get the kids out of your house when they grow up, grab your beach chair, a good book, and perhaps a beverage, and head to the beach to enjoy an Endless Summer. Don’t forget the sunscreen.
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is President of Planning Directions, Inc., a registered investment adviser, and Common Cents Planning, Inc. He also offers securities through Commonwealth Financial Network, member FINRA/SIPC. Advisory services offered through Planning Directions, and fixed insurance products and services offered by Common Cents Planning, are separate and unrelated to Commonwealth. Fred may be contacted at 800-647-0762, by e-mail at fdunbar@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342. He’s always happy to meet with you “down the shore” at 6606 Central Avenue N. Sea Isle City, NJ, 08243.
This commentary is meant for general informational purposes only and is not intended to be a substitute for professional financial, tax or legal advice. Investing involves risks including the potential loss of principal. Past performance is no guarantee of future results.”
All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
S & P 500: The Standard & Poor’s (S & P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
