It’s the end of September and this time of year is always an exciting time for me. As the temperatures drop from summer highs and the leaves begin to fall from the trees, it is clear that a new season is upon us. For me, the other telltale sign that it is fall is all the Back to School activity. On my drive to work, I enjoy seeing kids with backpacks walking, riding their bikes, or waiting for the bus. Personally, I think education is one of the most important gifts that we can give our children. It enables them to achieve many of their goals in life and sets them up for lifelong success.
In my opinion, one shortcoming of our educational system has been financial education. While there have been some improvements in recent years, there is still a lot lacking when it comes to the way that we educate our children about money. Sound financial education can be invaluable no matter what income bracket a child is in as an adult.
I have known people who made below-average salaries but, who had above-average financial knowledge. They managed to save enough to retire at average retirement age (62-67) with enough retirement savings to live comfortably for the rest of their lives. I have also known people with above-average salaries who had below-average financial knowledge. In this case, they were often unprepared to retire at the age that they wanted while still maintaining the lifestyle that they had grown accustomed to. Some of the most difficult conversations that I have in my office are the ones in which I tell someone that they need to cut spending, pay down debt, save more, and/or delay retirement to be able to make their savings last through retirement. It is often a sobering conversation.
Even if you are not a money expert, you probably have a lot more to say to your kids than you realize. All it takes is a little bit of honesty about your financial successes and mistakes and lessons learned along the way. I really enjoy speaking with kids and young adults (my own and others) about finance so that I can instill the basics necessary to have the financial knowledge they will need to work toward their future goals and increase their chances of achieving them. As I thought about it, I realized that I could narrow it down to some basic principles: 123s and ABCs.
I like numbers so let’s start there:
- Pay yourself first. A common mistake is deciding to save what’s leftover at the end of your paycheck. All too often there is nothing left, and months and months go by without saving anything. You should decide what you want to save first and take that money out right when you get your paycheck. If the money is out of sight in a savings or investment account it will keep you from spending it. If a true emergency happens and you need to borrow from your savings you can always do that but, paying yourself first will help to ensure that you have a healthy savings account that can support emergencies or help you to save for big-ticket items that you truly desire.
- Debt is bad, avoid it at all costs. When you incur debt either for necessary expenditures or for frivolous desires, you borrow from your future self to pay for your current life. The more you borrow now, the harder you make it for yourself in the future. If you cannot live within your means now, you probably won’t be able to in the future either. Make every effort to get out of debt and stay out of debt. When you pay yourself first and live within your wage, you will continue to get further ahead making life that much better for your future self.
- Start early, compound interest is a real thing. One of the biggest benefits of investing at a young age is compound interest. There are countless examples detailing the benefit that comes from investing early and letting the compound interest drastically grow your investment. The earlier you can invest the better, even if it is a small amount.
Now for the ABCs:
- Accountability – When I set a goal, I tell someone about it. Whether it’s going on a diet, attempting to exercise more, trying to save more money, or some other goal, I always tell someone about it. I tell someone else so they can keep me accountable. Knowing that someone will be checking up on me to see if I am working toward the goals that I have set for myself motivates me to keep at it. Want to save for a big vacation, a home purchase, or your retirement? Set a measurable goal and tell someone about it. Make sure that the goal is realistic so you can stick to it. For instance, tell your friend that you want to save $150/month to go on your dream vacation. Pay yourself at the beginning of the month and allow compound interest to help you. Ask your friend to check in with you occasionally to make sure you are still working toward your goal. Miss the goal one month due to unforeseen expenses or poor judgment in spending? That’s ok, resolve to start saving again next month. That’s what accountability is for, it encourages you to keep moving toward your goal.
- Balance – Having balance in your life is important in all things, including money. Saving is a wonderful thing but if you save at the cost of enjoying life it’s not really worth it. Spending occasionally on things that really matter to you (spending time with family and friends, travel, and other creature comforts or hobbies that you enjoy) makes the hard work of saving worth it. It’s never a good idea to be all work and no play. Remember to budget for a few fun and/or frivolous things that really matter to you. On the flip side, spending is easily done in excess. There is always a sale that you just can’t miss, a once in a lifetime concert that you have to attend, a dinner party that you can’t miss. If you say yes to everything, especially when everything comes with a steep price tag that isn’t in your budget, you can quickly find yourself spending your way into debt with little or nothing to show for it. Make a budget that keeps balance in mind. Allow yourself to splurge occasionally on things that really matter but, reign it in to make sure that you aren’t overspending and stealing your future happiness.
- Consistency – Budgeting, investing, and even thoughtful spending are all habits that a person with a good knowledge of finance establishes early in life. By establishing these habits at a young age and consistently practicing them, you will be able to work toward a balanced life that will allow you to spend on the things you want and say no to the things that will sidetrack your goals. Good habits will help you to avoid debt and will help you to prepare for the future. Accountability will help you stick to the habits you create.
There is a lot more to learn when it comes to understanding finance, budgeting, spending, saving, investing, and the many other aspects of your financial life but hopefully, these 123s and ABCs have made you a little smarter.
Want to learn more about these topics? Give us a call and we would be happy to answer your questions, discuss it further, and help you stay accountable for your financial goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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