The easiest way to build wealth is to start early and save often. A child who learns basic money management skills will spend sensibly and save as soon as they enter the adult work force. A person in their 20's who has the habit of saving and investing will benefit from a lifetime of good money habits. How do you teach a child to manage money?
1. Give the child an allowance and a piggy bank. After the child has learned to count (at least up to 100), and is familiar with cash (coins and bills), give the child two things simultaneously. First is an allowance appropriate to the child's age. At age 7, 8 or thereabouts, something like $2 or $3 a week might be a good place to start. That's enough to buy a few little things, but not enough for the child to get into trouble. This allows the child to become familiar with money. Second is a piggy bank. It is important for the child to understand from the outset that money can be saved for future use and that saving some or all of the allowance will build up money for more expensive things. The child will learn very quickly to think about money as a resource that can be conserved and made to grow over time. It's important to give the child the allowance and the piggy bank at the same time. Receiving money and saving it should be associated in their mind from an early age.
2. Hold the Line on the Allowance. If the child spends all of the allowance and then wants a supplement before next week's allowance, don't give in. Don't acclimate the child to borrowing against future income, or you'll create future debt problems for the child. The child should learn that money is a limited resource and must be spent wisely. Increasing the allowance as the child grows older makes sense. But whatever the amount, don't supplement it. It's important for the young one to learn how to control the impulse to spend.
3. Encourage Math Skills. All aspects of handling money--spending, saving and investing--require an understanding of math. Basic elementary school arithmetic--addition, subtraction, multiplication and division--is sufficient to handle most daily money problems. A middle school level understanding of decimals, exponents and how to read charts and graphs is helpful to understanding investments. Financial markets enthusiasts and Wall Street professionals often use more advanced math, such as statistics and differential equations. The more easily a child grasps mathematical concepts, the better prepared they will be to deal with money and investments. It helps if the child can do simple arithmetic in their head, without the need for a calculator. Make a game or contest of memorizing multiplication tables; your child will reap a lifetime of rewards from this bit of knowledge.
4. Have the Child Open a Savings Account During High School. Many parents give their kids credit cards (usually with a very small limit) at some point during high school. This isn't a bad idea, since it helps the child to learn about the modern financial system. But don't just give the young one the means to spend. Teach the child how to use the financial system to save and build wealth. Many banks offer special accounts for children that allow very small balances without any fees or charges. These accounts can sometimes be opened for as little as $25 or $50. Make sure your child has one, preferably during high school. Watching the balance grow and perhaps accrue a bit of interest will teach your child about the process of building wealth. This is something a young person should understand before going off into adulthood.
5. Show Your Child Their College Fund. It's a good idea to establish a college fund for your child. A 529 account is an excellent choice, as it has tax advantages. If you can open a college fund for your child, start as soon as possible. The first year of the child's life is not too early. The sooner you start, the more you take advantage of the compounding of earnings in the account (which can really boost the value of the account). As the child approaches high school, or early in high school, show the account to your child. By that age, the child will have a good idea of the importance of college and sufficient math skills to understand what happened in the account. You can use the account statements, or perhaps graph the contributions and value of the account using a program like Excel. Explain how you opened the account and saved over the years, and how the account grew in value. It's useful for the child to see periodic dips in the value of the account caused by stock market fluctuations, as that helps the child understand the vagaries of the stock market. This is a valuable way to give your child an early lesson about saving and investing.
Tell your child how much college will cost (including tuition, fees, room and board, and whatever else), explaining the differences between in-state public universities, out of state public universities, and private colleges and universities. Then discuss how much of the cost the college fund will likely cover and other sources of funding that may be needed. If scholarships, grants and loans will probably be needed, be candid about discussing them. If the child will need to work part-time in high school and/or college to pay for schooling, include that in the discussion.
Showing the college fund to the child will likely be one of the first adult-level conversations the child has about money and finances. The child will pay attention, because this very directly involves and affects them. Give your child this valuable learning experience. Have this discussion at least once a year during the child's high school years, so the child can see how progress toward a big financial goal is achieved. That will teach the child how to achieve big financial goals in their future, such as buying cars, homes, and college educations for your grandchildren.
6. Set a Good Example.
Kids take after their parents. Set a good example
for your kids and be sensible about money yourself. You'll not only be rewarded
with good finances, you'll have financially skillful children. That's worth its weight in gold.
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