Top Ten Things Kids Should Know About Money
“What should my kids about money?” That’s one of the first questions I get when I tell them that I run this Kid Wealth website. It’s a fair question, but I had never set down and tried to make a comprehensive list… until now. Here’s the obligatory “Top Ten” list of what your kids should know about money.
- Create a Budget
Tracking where you spend money is crucial at a young age. Budgeting is more challenging to teach than I initially thought it would be. Kids generally don’t have to be responsible for many needs (clothing, food, transportation) that adults do. It’s easier to “budget” when allocating your allowance to wants like Pokemon cards.
- Being Frugal for Frugal Sake
Developing a frugal mindset at a young age will pay off for a lifetime. Kids that learn this are less to spend more than they can afford on their house and car. Those two purchases alone can be significant setbacks to the goal of financial freedom.
- Make More Money
It can be either through entrepreneurism or focusing on a career that has a high average salary.
- Compound Interest
I’ve covered this a lot recently. It’s important to teach kids compound interest. Making your money work for you is when personal finance becomes fun.
- Get Your Head in the Money Game
Grit, motivation, having a positive attitude – it’s all important.
- Avoid Bad Debt
Usually, I like to teach compound interest as a positive – how to make it work for you. However, bad debt like credit card and payday loan interest work powerfully against you.
There’s a gray area of debt, like mortgages and student loans. Generally, they are good debt, but sometimes they can spiral out of control.
- College Planning
It’s easy to get caught up in the big business of college. That can leave you with a lot of debt and a degree that doesn’t make enough to pay it off quickly. To learn about the inner workings of the college business check out The Price You Pay for College. The subtitle is appropriate: “An Entirely New Road Map for the Biggest Financial Decision Your Family Will Ever Make.”
It’s easy to forget about insurance until a disaster happens. We teach kids about preventing dangerous situations, from avoiding strangers to using crosswalks. Most kids don’t need insurance, but they hear parents talk about it. Protecting their hard-earned money may be the most important thing on this list.
- Tracking your Net Worth
There’s an old saying, “What gets measured gets improved.” I started tracking my net worth in 2006, and it was motivating to see that good money decisions like saving and investing were paying off. Tracking your net worth can take a little time to set up, but once you have a system, it’s quick. I have a dozen accounts, and I can update my monthly net worth spreadsheet in half an hour.
- Spend Less Than You Make
I saved the most important one for last. It’s a combination of the first three items on the list. If there’s one golden rule of personal finance, it’s this. This topic easily flows into discussing savings rates and investing/compound interest.
Here are a couple of bonus topics that I felt fit just outside the top ten.
- Automate the Process
This is a top candidate to move into the top 10 in a future update. Everyone is busy and managing various aspects of their lives. Few people want to add more to their to-do list. A surprising amount of money management can be automated. I never think about writing a check to a credit card company or paying a cable bill. The kids’ college 529 plan gets new money invested every month. Our mortgage and rental properties get paid automatically, and we build equity without action. Saving money in a retirement account is a “set it and forget it” event.
I wish I could automate the dishes, laundry, and cooking as much as I can money management.
While on the topic of dishes, laundry, and cooking, there are a lot of general “adulting tasks” that kids should be aware of. They can help with all those, but we can add anything that requires running a home, such as fixing stuff, getting health care (not as easy as it seems in cases), and anything in between.
Kids don’t need to know much about this; they’ll pick it with their life experience.
- How Taxes Work
Kids should know that adults pay taxes and what they are used for. Older kids should know how tax brackets work. Too many adults wrongly believe that it’s financially disastrous to land in a high tax bracket. Growing up, I had a friend whose father had a saying, “I don’t mind paying a lot of taxes – it means I made a lot of money.”
- Investing 101
You can get kids started with investing by explaining how one fund, a total market index fund is all you need. In most cases, it will have low expenses and beat all the professional stock pickers.
This list is useful for more than kids. That may make sense since kids become adults and have to work with adult money situations. Preparing kids for those situations earlier is usually fine as long as the explanations aren’t too complicated.