Children typically don't understand the importance of saving. Many get to their late teens and early 20s and still spend their entire pay check in one hit with little thought given to the future or to how it would be best managed.
It's not until their 30s or 40s that many people start to think about investing. Some individuals may leave it until their 50s, or even later.
At The Motley Fool, we're all about investing for the long term. We do our best to ignore short-term noise or temporary issues and focus instead on the foundations upon which the companies we invest in are built. We also recognise the enormous power that comes with compounding, which is perhaps the greatest driver of returns for investors who are prepared to invest responsibly and remain patient.
It stands to reason then that the earlier an investor gets started, the better. After all, compounding works best when you give it time, while there are also clear advantages of saving cash when you're younger rather than spending it on unnecessary items.
Unfortunately, you can't expect kids to learn the ins-and-outs of real-life finance at school, so the parents and loved ones play an important role here. Rather than throwing them in the deep end and hoping they already know how to swim, it is essential to educate your kids about money.
Here are six important lessons to teach your kids about money:
- Pay yourself. Very few of us have the temperament to save every dollar we earn – we want to enjoy what we have and splash out on ourselves occasionally. I believe children should be able to do the same, but encourage them to save some as well.
- Teach them about investing early. Warren Buffett, arguably the world's greatest investor, bought his first stock at the ripe old age of 11. Not everyone will start this early, but even teaching your children the basics of investing could boost their knowledge tremendously, and give them a head start over others who leave investing until much later in life.
- Use real-life lessons. Simply saying you can't afford to buy something means little to a child. Explaining why you can't afford it – perhaps because bills take a priority or the item isn't in your budget – could provide so much more meaning.
- Involve them in financial conversations. This one isn't for everyone – some parents won't be comfortable with this and that's okay. But involving your children in everyday financial conversations – even some of the more basic ones – could expose them to real-life scenarios they could one day face.
- It is better to use cash than credit. This is a BIG one. Taking out a loan is necessary sometimes. But in a day and age where bank credit can be quite easy to come by, many individuals learn about the burden of repaying the principal and interest the hard way. Encouraging them to save for the things they want to buy rather than borrowing could help them focus.
- Save for the worst. Here's another important lesson. Having savings in case of some sort of emergency could help you and your children out of a tough situation without having to take out debt or sell assets.
Of course, this list on how to teach your kids about money is by no means exhaustive. Another way could be to set up an account in their name to buy shares, letting their value increase over time.
As an example, had you bought shares in businesses such as Commonwealth Bank of Australia (ASX: CBA) or Woolworths Limited (ASX: WOW) two decades ago, the returns from both capital gains and fully franked dividends during that period would have been incredible.
Teaching some kids about investing will be more difficult than it will be for others. While some kids don't care about their (or your) finances yet, try to start with the absolute basics and build from there. They'll likely thank you when you're older.
