Concept # 1 in putting a financial house in order is to start now, and this summer could be a great opportunity for you to help shepherd children or grandchildren into better and lifelong habits in dealing with their money.
Putting money into perspective is important early and frequently in the conversation, and that perspective probably is based on your personal experiences. If you have been historically good with it, then the modeling of your behavior is great. If you were poor with it and learned some valuable lessons, then you have plenty of teaching moments at your disposal.
In my case, everything I believe and do with money stems from several family tragedies early in my life. I come back to one core belief – “money buys you choices,” and not having money limits your choices.
Since you are reading this magazine, it is assumed you are in a certain age bracket that probably makes your children part of the Millennials – the generation born between the 1980s and 2000s. There are mixed messages about how they are doing financially and about their attitudes toward saving. Just last year, the financial press was writing stories about what poor savers they were – “Why Millennials Still Don’t Save Enough” – US News & World Report. This year, new data and surveys have led to a slew of articles indicating their savings habits are good, and maybe better than the Baby Boomers – “Millennials Are Getting Surprisingly Good at Saving” – BloombergBusiness.
While reading about these trends is interesting and possibly a good source of information to understand some characteristics of the Millennials, the fact is that your children and grandchildren are not statistics. They are individuals in real situations with real jobs (we hope), real challenges and real goals. Wherever they fit on the bell curve of financial literates vs. financial illiterates, we need to meet them where they are and encourage moving forward from there.
If “starting now” is Concept # 1, a good place to start your conversation about money is some instruction on the value of compounding interest. There are plenty of charts to show you its value for savings and how time is one your side IF you start young. (If it’s too late to start “young,” it still is possible to impress the importance of starting sooner rather than later). This article from Business Insider shows the value of compounding, and the clear advantage to starting sooner. You can also find plenty of illustrations on how compounding works against you if you carry debt, which is equally instructive. The conversation about compounding interest easily translates into other investments and their long-term benefits (with the important caveat that “past performance is no guarantee of future results.”)
There are two basic approaches to saving:
1. Save what’s left over after other expenses
2. Save first, and then learn to live on what’s left.
I believe, the second option works, the first often doesn’t.
The “four bank” approach can work with children, and the concept works with adults. With kids, you can use four jars labeled SAVE, GIVE, INVEST and SPEND. Notice that they are listed in order of the action. Decisions and commitments are made in advance on the first three, and that limits what is left to live on. The SAVE jar can be used to set up an emergency fund and for a long-term purchase. GIVE is for charitable purposes. INVEST is for longer term goals, such as education or retirement. SPEND, clearly, is what is used for living.
While the “four bank” approach is for children, the concept of dividing up the use of available funds into usage categories is common practice with budgeting experts. For adults, an Envelope System is sometimes recommended, with cash going into envelopes on a monthly basis for such budgeted item as groceries, restaurants, entertainment, etc. When the cash is gone from that envelope, you are done for the month. If cash is left over, you can treat yourself, or even better, put it into savings or an investment.
Another key component in educating children today is on the appropriate use of credit, particularly credit cards. They see us whip out a plastic card and buy things without using cash. It gives the appearance that there is an endless supply of money. Sadly, that is an accurate rendering of how some adults can develop problems with credit card debt.
Finally, it can’t hurt to explain the concept of taxes. It is not uncommon for a young worker to open his or her first paycheck and wonder who is this person “FICA” and why is he or she taking part of my pay? While we might grumble about taxes, they aren’t going away and we should take opportunities to explain the necessity of them for certain things we value in modern society.
I want to call your attention to two other websites with some good basic information that can be used for teaching, or learning. The first is feedthepig.org, sponsored by the American Institute of CPAs and the Ad Council. This site is targeted for ages 25-34, but the concepts are basic and apply to a much wider age bracket. The other site is themint.org, an educational site operated and maintained by Northwestern Mutual, an insurance company. This is aimed at children, teens, parents and teachers to help with financial literacy.
For an instructive article on tasks you can do with youngsters, read this from Forbes: “The 5 Most Important Money Lessons to Teach Your Kids.”
This discussion has been about the budgeting and accumulation stage of life. I recommend professional financial help for a long term plan. Our economy has changed dramatically in the past few years and the only certainty for the future is that there will be more change. There are few jobs and careers with pensions any longer, and the math would indicate there could be adverse changes long term in Social Security. A professional planner can help make some sense of the maze and offer an unemotional view of where you, your kids or your grand-kids are now, and how you can get where you want to be.
Securities offered through LPL Financial, Member FINRA/SIPC. Financial Planning offered through Lifestyle Planning Solutions, a registered investment advisor. Investment advice offered through Stratos Wealth Partners, a registered investment advisor. Botsford Financial Group, Lifestyle Planning Solutions and Stratos Wealth Partners are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
For a list of states in which I am registered to do business, please visit www.botsfordfinancial.com.
