Thursday, March 3, 2016

Finance for Kids

If you read my last article, you know how important it is to me that we assume our role as leaders to the younger generation. I've already spoken about how we should set our long term goal for our dividend growth portfolios to be legacy portfolios but that seems to be the last step rather than the first couple that need to first be bridged. If a child has no financial background whatsoever, learning to run a portfolio is going to be like reading an alien language. Where do we start then?

The trick I believe is to start early. Even though I currently have no kids and there isn't even one in the oven (wife doesn't have a baby bump), I feel that the topic should be discussed so that I can share what I believe should be the necessary first steps to teaching finances to our kids that way I can hear what the readers believe as well and grow from the discussion. I believe that if we start very early in our children's lives, we can better prepare them to be in the position to easily absorb information about how to invest later and ultimately take on the legacy portfolio. This will require some work.

Unfortunately, children are not given these skills as part of their education in school. Did you know that only four states in the entire U.S. actually require children to take a personal finance class? Think back to your own childhood and schooling. Were you required to take a class on personal finance? Were you taught about stocks, the market, creating a budget, or any of the essentials to being financially stable? I'd be willing to be that most of us in the U.S. were left to place the pieces together ourselves. This at least leaves us knowing where we all need to start.

Kids need to start from step zero - further back from even the starting line. Before we can teach them how to handle money, they need to be taught what money is. Money can be explained by simple matters of trading because essentially, that's all it really is. Before any money is ever handled to them, we can start by teaching them how to trade items - can I have your stuffed animal? I'll trade you for one dollar. This can start the first steps into their financial education by allowing them to make the association to what money can buy and what you can give to earn money rather than simply having it provided to you. It teaches that money is backed by something and not free or something gained by luck or circumstance.

Next, we can adjust this by upping the scales. When we start with a small amount - maybe pennies or quarters, we then move to the child completing work to earn greater amounts of money. Eventually if all goes to plan, the child learns that more work equals more money. They've already learned how to get money and this now teaches them how to get more of it. Hard work can pay off.

This is the first step to establish the backing of what money is. Once established, we can move on to bigger and better things - actual financial management. I believe this is when we are to bring in the difference between needs and wants. By this time, I'm assuming that the children that are being taught are wanting to buy things with the money they have earned. This means that the necessary next step is to learn that not all things are worth buying. Just because something is shiny and new doesn't mean that it necessarily has value. This is where we've got to think a lot harder to get the same payoff as before. We as parents will have to find a way to explain the difference. Before we go any further, I want to remind myself and anyone reading this that I by no means advocate for refusing to let a child buy fun things with their money. Kids should have the chance to buy what they want - Legos, Barbies, the good stuff! There has to be a line however when the child gets to the point where they want something that is horrible for them (excess amounts of candy). An idea comes to mind when a child is inevitably put in the situation where they must choose between candy at the check out and the Lego set they've been saving for. This is a good time to (attempt!) explain the longevity of a Lego set to the short term goal of satiating a sweet tooth. Although Legos are hardly a need, they can be related to the idea of choosing the item that gains you the biggest cost benefit.

Once the child (years later? Months later?) understands the idea of choosing the item that will ultimately yield them greater time/more enjoyment over the long haul, the next step is to actually create a "bank account" at the bank of parents. I strongly believe that this is one of the most important things to teach a child before they're ever able to have their own account at a real bank. You would advise the child that you are a bank and explain the purpose of a bank - to hold your money and let you gain interest. You may have to explain it in amounts of Legos earned but you can make it work in one way or another! The next money the child makes, offer to hold that money for a certain period of time with a reward at the end if not touched. The first couple tries may not yield good results - kids like to buy buy buy because we are fed to be good consumers. This doesn't mean we should give up. Continue to try and teach this lesson until the child leaves the money in your "bank account" until they reach a period where you pay them interest (an extra dollar over a week?). The child then obtains a reward for saving money and hopefully gains the idea that not touching your money is a good thing!

Obviously these are just the basics but I wanted to make sure to write about it just in case there are parents out there that have yet to even start with the subject of saving money. Money is a tough subject to teach to children the older they get if not taught something or another about it at a younger age. Believe me, you don't want to be the parent trying to teach finance to a kid who has no feel for money because the first years of their lives they were only taught to spend it. I worked in a group home for teens in the system and trying to teach anything at all to them, let alone money saving skills, was basically as useless as trying to push an unmanned tank up a hill by yourself with only your bare hands. Teach good skills early and wait for the dividends to pay off later. Anyways, I hope that you enjoyed the quick article. If you have any other points that I missed or you want to discuss further, please comment below and open the discussion.


  1. Good preparation. I'd add an item. Each birthday add a stock to their portfolio. Establish custodial DRIP accounts (usually $250 minimum). Buy companies they can relate to (HSY, GIS, etc.)

    1. Drog,

      That's a great idea! I'll definitely add that to my planned bag of ideas :)