Parents can set a good example for their kids by passing on these pearls of wisdom, but remember that kids can tell if you are only paying lip service to any principle, so if you are going to talk the talk, make sure you can walk the walk. The following are a few financial lessons every parent should impart to their kids.
1. Live Within Your Means
This piece of advice has been passed on for generations across many different cultures simply because it makes good sense. The only way it will ever be possible to improve your financial situation is if you can manage to live within your means. Essentially, this means not buying things you can’t really afford or getting into debt just to keep up with the Joneses.
The basic formula of spending less than you earn can be enough to make sure you stay afloat financially and if you can invest what you manage to save then you’ll be one step ahead of the rest.
The ability to show some restraint when it comes to consumer purchases can mean the difference between saving your first million and ending up filing for bankruptcy. Of course, it is even better to live below your means because this automatically leaves excess money behind to increase your net income, but mastering living within your means is a great place to start.
2. Don’t Throw Good Money After Bad
This is a smart principle to live by and a great one for parents to pass on to their kids. When you continue to fix the old car, even though it has broken down a million times before for the same reason, you throw good money after bad. When you make a poor investment and it goes under but you add more money into the fund because you think “things can only go up from here”, you throw good money after bad.
There must come a time when you recognize your “sunk costs” or the money spent that cannot be recovered and move on. It really doesn’t help the situation to throw more money into the same pit.
3. Don’t Pay Interest… Earn It
This simultaneously speaks out against getting into debt or using credit loosely while emphasising the need to invest, so there are two foundation rules neatly rolled into one short and concise piece of fatherly advice. Teaching kids to avoid debt whenever possible is a great way to ensure they value money because you have to point out that there is a cost involved whenever you accept credit. To set your children on the right financial path it is healthy to help them to see the benefits of earning interest instead of paying interest to someone else.
4. Cash is King!
It might seem old fashioned to cling to the notion that cash is king, especially in a plastic age, but exposing especially teenage kids to the message that you shouldn’t buy what you can’t pay for in cash is a strong lesson that can pay huge financial dividends. By using only cash, or preferably cash, you reiterate the need to live within your means and show them you should not depend on credit cards to artificially inflate your income.
5. It’s Not How Much You Make, But What You Do With It
If you make a million dollars a year but you spend two million to maintain your lifestyle, you may be operating with large numbers but you are still in debt. This can be an eye-opener even for adults who often use the excuse of waiting to make more money before they can start saving or investing. It really doesn’t matter how much money you bring in, but how you spend and invest it that makes you a financial success.
Whether it is something your parent used to say or simply the things they did or didn’t do every parent leaves a financial imprint on his child. The financial example you in turn set for your child will affect their money management skills in their adult life, so isn’t it a good idea to put some thought into how you come across?