The education system today may be fantastic at teaching our children reading, math and writing skills, but when it comes to teaching them about real world issues like money, it gets a failing grade. Where did you learn about money? Did you have rich parents that taught you everything? Did you read about it? Or did you learn by trial and error in the real world? As a parent, the best gift you can give your child is knowledge about these basic money management strategies
Pay yourself first
Managing money and building a secure financial future is not all about rates of return and investment amounts but more about habits. As soon as your child is old enough, and starts dealing with money, start teaching them one of the core principles of wealth creation, pay yourself first. We all know if we take the route of paying all the bills and then investing what is left over, there never seems to be any left over. So instead, take the alternative approach of paying yourself first. Teach them to get in a habit of setting aside 10% of whatever they earn and put that money aside for long term investing. They are to treat this like any other bill the HAS to be paid. This money can then be invested to start the little miracle of compound interest working for them. By starting them with this habit at a young age, they will continue the habit into their adult lives when they actually have bills, but with the confidence they can actually pay their bills.
Dollar cost averaging
This is another habit strategy to teach your children. As children are entrusted with money, even if it be a small amount from an allowance or money from a part time job, once they start employing the “pay yourself first” they might have income to invest. By setting up a regular amount they invest every month they will start accumulating wealth. There are thousands of mutual funds available and a good financial advisor or your bank can recommend one that matches your child’s risk profile, but by investing a set amount every month, the price will have less impact on their wealth accumulation if they employ dollar cost averaging. When prices go down, as they will at times, you just buy more shares. For example
- Month 1 Invest $50 Share price $10.00 Buy 5 shares
- Month 1 Invest $50 Share price $5.00 Buy 10 shares
- Month 1 Invest $50 Share price $7.50 Buy 6 2/3 shares
Think you lost money? The share price is down 25% from $10 to $7.50? But in actual fact your investment of $150 has grown to $162.50 – 21 2/3 shares X $7.50. You bought more shares when the price was “cheap” at $5.00!
Rule of 72
When making future investing decisions, this little rule will come in handy when making investment decisions. The rule simply states the number of years for money to double is determined by 72 divided by the rate of return. For example at 8% money will double in 9 years (72/8) while at 12% money will double in 6 years (72/12).
Our education system is great at many things, but money management is not one of them. Taking the time to teach your children these skills at an early age will help them create financial security that will last a lifetime.