Personal finance skills make a huge difference in how you experience life. It can free you, or the lack of financial literacy can enslave you. As most children become independent and start their own lives, they're under no requirement to have any financial education whatsoever. So it is up to the parents to equip them with the personal finance skills they need to be successful in life.
When it comes to education, there are some things that are taught in school and others that are taught at home. Sometimes those things are in direct conflict with each other, but on some occasions, there are skills that schools used to teach and no longer do. One of these forgotten skills is personal finance.
Only six states in the US require personal finance courses in high school. In most cases, personal finance is considered irrelevant due to an emphasis on standardized tests. That responsibility was shifted to parents, many of whom themselves did not get trained in personal finance. Most kids have to go through a private course outside of the public school system to learn financial literacy. However, there are ways that we can prepare our kids before they move out. These personal finance skills are easy to start teaching early on even if you struggle financially yourself.
How to Avoid Debt
If you are in deep debt, you can be proof-positive of how much it hurts. Too many people reach adulthood already thinking debt is a normal and expected part of life. It is so ingrained in our culture. Thanks to the absence of financial training in schools and the proliferation of bank incentives, debt is a way of life for a vast majority of people. But this is not inevitable. You can avoid debt. Going into debt is always a decision, but there are other options that will set you up for a stronger financial future. So, don't teach debt. Don't teach credit scores. Teach saving and only buying what you can afford.
How to Divide Earnings
Another important lesson among crucial personal finance skills to teach your kids is how to save money. More specifically, what to do with the money they earn. When you make money, but don't have a place for it to go, you will quickly lose it. If you fall into the debt trap, that money gets allocated for you, whether you like it or not, and thus starts the vicious cycle that leads to eventual spending fast and a bare-bones crusade for personal financial freedom. Train your kids early on how to divide the money they make from a job. Tell them to allocate a percentage for saving/investing, spending, and charitable giving. The sooner they learn this financial skill, the better positioned they will be as they make larger financial decisions in life.
The 50/30/20 method breaks down the percentage of your paycheck into Needs/Wants/and savings, but you can go beyond his simplification when teaching your kids what to do with their income. Take the time to go over all kinds of costs they will face from insurance bills to gas money.
How Much You Should Pay For Rent
One of the first major decisions your child will face when they decide to move is what kind of living situation they will have. Probably, they will be renting, but there are other options depending on circumstance. Before the time comes to move, it's important that you prepare them for the costs of living on their own.
Part of that is helping them determine what they can afford so that they don't fall into debt as soon as they leave home. A good general rule is to allocate 25%-30% of your monthly income to rent. That will set you up for financial stability. If your kid doesn't make enough to afford the rent where they are going, then they will need to explore other options by either earning more money or finding more affordable options such as splitting the cost with roommates or finding a landlord who is willing to negotiate.
How to Invest in Retirement
About the time your kid is ready to move out on their own is when the most important financial skills start to emerge. That's why it's so important not to spend all of their monthly earnings on rent. They also have retirement to plan for. The late teens and early '20s is the most important time to invest in the future. The compound interest over the rest of their adult life will amply provide for them even if they stop investing entirely after about ten years. Instead of teaching your kids that they have to go into debt for college education, teach them to invest during those years whether they go to college or not. If you put off investing until your late 20's or later, you reduce your retirement income significantly. 15% of income is a good rule for how much to put away in a retirement account.
While you teach about retirement Make sure you teach them the difference between taxable IRAs and nontaxable Roth IRAs IRA investments are deducted from your taxable income but are taxed when you withdraw them. Roth IRAs are paid with after-tax dollars and are not taxable upon withdrawal after they mature.
How to Balance a Monthly Budget
Last, but most important of all. Teach your kids how to draw up and stick to a monthly budget. Teach them to keep up on their bank balances and manage their spending. Part of this is pure routine. If you teach them this skill to the point where they do it automatically, they will be much better prepared for independent life. It all goes back to how they divide their earnings and what they need to allocate funds for from month to month. Help them to go over contingencies and to address the need for emergency savings in case they experience a temporary loss or reduction of income. Then they will be prepared for anything and more free to pursue their goals and passions.
P.S. Like this post? Check these out Young Entrepreneur – 24 Money Making Opportunities for Kids and 50 (More!) FREE (or Cheap) Kid Activities