Financial advice is simple on the surface. Save your pennies. Don’t buy without shopping around. Do your homework. Don’t spend more than you earn.
The details surrounding the financial basics, though, are always changing, and therefore require some knowledge and training to navigate.
I have spent some time examining how financial experts advise their own grandchildren, and the secrets necessary to teach your “accounting students” are actually quite simple.
Start Them Early
Good financial habits are so important, you should take action to instill in them your grandchildren as early as possible. Spontaneous lessons as opportunity arrives are just as important as deliberate money-management planning strategies such as maintaining a budget and having a savings.
Help Them Choose Wisely
Laying a foundation of money management skills can start with simple lessons.
Two year old Jax wants everything when I walk into a store with him. Setting limits and expectations early is an important lesson, so sometimes I will say no, and talk about the importance of staying within our family budget. Or I will force him to choose one item under a certain dollar amount using a brief explanation about staying within our means or not dipping into savings for things we want.
Discussions on wants versus needs can occur everywhere: the grocery store, the mall, even at the playground, when you grandchild says she “needs” and extra five minutes of playtime.
Conversations on the value of their time (using the “time is money” statement), and how much of it to dedicate to one activity over another can occur anywhere around the house.
Teach them to Save & Spend Smart
Your grandchildren can’t save much if they aren’t spending their money shrewdly. Helping them plan specific financial goals, knowing what amount of money is required to fund them can start at any age.
Joe Kovac, a former CFO and founder of JTK Consulting, suggests starting off with a modest allowance: “Have your grandchildren accept responsibility for some of their own expenses, even at five years old they can learn to spend carefully. Instead of buying them a treat at the grocery store, have them purchase it. This teaches them how far a dollar really goes, and helps them learn to make choices.” If you cringe at not spoiling your grandchildren, you can provide the allowance – and the lesson. In addition, he advocates having children save fifty percent of their allowance a week, starting immediately.
“I use a 50%, 30%, 20% model. My grandchildren can immediately spend 50% of their allowance on anything they want, place 30% into what we call ‘short term savings’ for bigger items they want, like a toy or a doll that may take three or four weeks to save for, and 20% into what we call ‘long term savings’. Long term savings are for special occasions, like free spending on a summer vacation. I use the words ‘long term’ relatively, three months is an absolute eternity for a five year old, but a year is reasonable if your grandchild is ten”.
Set the Example
The most influential financial advisor isn’t the one your grandchildren will hire — it’s you, according to John Brown, the author of How to Run Your Business So You Can Leave it in Style (Amacom Books, 1993) and founder of the Golden, Colorado-based Business Enterprise Institute, an organization that helps business owners sell their companies or leave them to the next generation.
His advice, regardless of what your child does for their career: “You have to be consistent. If you’re telling them not to spend a lot, but you do the opposite, it’s not very effective.”
Steer them Away From Unnecessary Risk
It is hard not to become attracted to credit cards. They are so readily available and allow them to attain more now and pay later, so it’s easy to understand why your grandchildren may be pulled into purchasing more than they can really afford.
Teach your grandchildren about the importance of living within their means and finding creative inexpensive solutions to satisfy their needs.
Investing Wisely
Some debt is good. It is possible to intelligently balance borrowing with investment returns. For example, rather than prepaying a tax-deductible 6 percent mortgage, the extra cash could be used to contribute to a retirement plan that could earn a tax-deferred 8 percent average rate of return.
You can teach your grandchildren to write out a financial plan, including their goals, starting at a very young age, and have them practice thinking through all of their options before making financial decisions.
You can’t stress enough to your grandchildren to start investing as early as possible. Those who start saving at age 25 have, on average, 40 percent more money when they retire than someone who begins at age 35, because the money has more time to grow.
Materials:
GrandmaCents 