Instead of putting a priority on teaching kids about investing, start teaching them about how to budget. That's really the lesson that most people need to learn. When you look at the housing crisis, a lot of people bought houses they couldn't afford. Or they could afford the house only if they got a mortgage with a low teaser rate. Then they got in trouble when their mortgage rate went up years later.
Budgeting lessons are much more important than investing as a beginning framework. Here's a good example. One of my daughters was planning a party, so I gave her a budget. She wanted a restaurant to cater her party. I said to her, "There's no way you can afford to have it catered." She responded: "Sure I can. How much can it possibly cost?" She found out that the catering costs a lot more than she thought, so she went to Costco to buy appetizers and other food and made the whole thing work within her budget. If you give kids a budget, whether it's for school clothes or a party, it can offer a valuable lesson.
It's also important to stick to a budget when you're in a store with your child and she begs you to buy an impulse item—something she wants now but doesn't need. You shouldn't simply say: "No, you can't have it. We have a limited amount of money because we have a house payment, a car payment, and are saving for your college education. We can't just buy anything we want, any time we want it."
Many parents are hesitant to talk about money with their kids. Some might think that their kids will learn about money in school. Unfortunately, schools generally don't do a good job of teaching kids about personal finance. That's one reason why, as they get older, they're racking up all kinds of credit card debt and buying stuff they shouldn't buy.
When you talk about money with your kids, you don't have to get very detailed about your finances. They don't need to know your exact salary and the amounts you have to pay for your monthly mortgage and car payments and other bills. However, starting in middle school, you should start teaching kids that money is not an unlimited resource.
Here's how you can explain it to your children: "I make a certain amount of money at my job. When I get paid, the government takes money out of my paycheck, typically about one-third of it, for taxes. So now I have about two-thirds of my paycheck left. Then the first thing I have to do is make our house payment, because it's important that we have a roof over our heads. Then I have to pay the monthly bills to cover gas, electric, water, phones, and cable. I also have car payments each month. And if I don't pay them, the bank will take our cars. Then we have some money left over. I want to you to understand that if I buy this for you, that means we can't buy something else because our money is a limited resource."
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You can give kids a weekly or monthly allowance. The problem is, it doesn't teach them budgeting. Their food and shelter expenses are already taken care of. Kids can pay for certain things with their allowance—like going to a movie or getting treats at the mall—so they do have to make some choices about how to spend their allowance, but it's really not budgeting like they're going to have to do someday when they're financially independent and on their own.
Saving money is hard. Kids have to learn that if they buy something today, they won't be able to pay for something else. When they get older, if they buy something with a credit card because they don't have enough cash, and then make a habit of it, they can ultimately build up a lot of bad debt and get into financial trouble. Teach your kids that many things are worth waiting for. If they really want to buy that awesome new phone or pair of jeans, they should save money and pay cash for it.
If you offer simple advice about how to keep on a budget, your kids will thank you for this valuable lesson later in life.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast to coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.