My Financial Advice to My Kids
Learning about personal finance is more important than math, science and language.
A rich man is nothing but a poor man with money.
— W. C. Fields
When I was 20, my older brother walked into my bedroom and I was lying on the bed crying with the phone lying next to me.
My brother rushed to me and asked if I was OK. I couldn’t speak through my tears. He picked up the phone and asked, “Who is this?”
It was our father.
We had been discussing money. My dad used money as a tool to control. So did my stepfather.
I have worked since I was 12 years old. I paid for my college through a scholarship. I left home when I was 18 for school and then lived independently since I was 22 years old. I’ve done well in my life. I worked very hard and of course there is always a little luck involved. Anyone who tells you otherwise is lying. But even if I removed the lucky piece I still would have been OK.
I believe that learning how to cook, clean, do the laundry, manage a home, budget, invest and manage finances is as, if not more important than math, science and language.
My wife and I are very involved with our teen children’s learning. We don’t hover, nor do we care about grades or test scores. We want them to learn, follow their own path and enjoy life.
Their life is not my life. I don’t want it to be. But I can give them support and guidance.
One area I work with my kids is on money and finance. We speak very openly about money and involve them in discussions.
I am no expert. But I know a few things through my 57 years and the work I have done in the technology, education, Coworking and non-profit sectors.
Here are 8 thoughts I share with my kids.
1. Money is a Tool
Money has a role whether we like it or not. But it isn’t the end-all-be-all. We need enough to cover our needs in life. I have seen too many people who have a terrible relationship with money, myself included. Whether too much or too little, how we relate to money can create stress in our lives.
2. Save Now
My kids have saving accounts. Anything they earn, even if just a small amount, I tell them to put half into their savings account. This is the smartest thing families can do.
You need to separate savings accounts from spending accounts.
The only way to do that is to have an account that you won’t touch. And children understand this, the math is so very easy.
If they start at 15, with an initial investment of $100 and put in $20 every month for 10 years with a quarterly compounded interest rate of 5%, they will have $3,250 by the time they are 25. Most everyone can find $20 a month. This should be a minimum investment.
Now this doesn’t seem like a lot of money. And once they get over 20 they will be able to double this amount if not triple, leading to $10K instead of $3,250 by the time they are 25.
If they then take that $10K and contribute $100 per month for the next 10 years at the same low 5% growth rate they will have over $30K by the time they are 35, a figure few people in the US have in their accounts right now.
You can play around with this yourself here with this investment calculator:
3. No Debt
This is an ongoing debate and the arguments can be made on both sides. The argument for debt is if you can take out a loan at 5% but make 10% on that money then it is worth the risk.
If you don’t have debt you significantly lower any risk exposure you may have.
I meet people every day, both rich and poor, who have debt and lots of problems.
The only exception here is with a mortgage OR a business loan that is backed by an outstanding business plan. However, I would argue that people should do all they can to pay off their mortgage.
I had a friend who got married and took out a mortgage for $600K. Her marriage went south as her husband was a cheat. I started to help her with her finances after they divorced. They had not paid off one penny of the original $600K principal loan. 20 years later she still owed the bank $600K but she had paid over $500K in interest.
People do not see the issues with credit card debt and loans. Interest is the silent killer. If you have no debt, you have no interest to worry about.
4. Needs vs Wants
Everyone will learn this at some point. Many learn it too late.
What we need in life is food, clothing, shelter, education, health and community. Beyond that everything else is a want.
We are pushed by advertising and companies to buy, buy, buy.
I could walk through anyone’s house anywhere in the world and I can guarantee half of what is there isn’t needed.
And, most likely, the house they live in doesn’t need to be as big and as expensive.
All of this is wasted money.
This doesn’t mean we can’t buy things that we simply want. But having an understanding around this is a powerful guiding light.
5. Budgeting
I have worked with a lot of friends and family on their finances. It isn’t my job but I have a fair bit of experience running businesses and consulting for companies (both for- and non-profit). I am amazed at how few people know the most basic idea of financial budgets: don’t spend more than you make.
Anyone can take a piece of paper and list all the money coming into their accounts and just below that list all the things going out. If the number is negative, that is bad.
When I do this exercise with people it is fascinating what they don’t include.
People don’t believe a Starbucks, Netflix or Disney+ are expenses. But these three items alone total almost $2,500 a year and none of them are necessary.
Imagine if you just cut out these three items and put that money into savings?
Now continue to look through your list of things that you spend on that aren’t necessary.
This isn’t an exercise in punishment. It is realistically looking at your situation and then making decisions from it. If you really want a Starbucks and it is genuinely making you happy (not an addiction) then enjoy your coffee.
As a family we all sat around and went through this exercise. Once my kids had completed it I then asked them questions about things they had left out. It is a very eye opening tool to do with your kids.
6. Planning: Investing vs Gambling
You should be cautious with anyone who has a “tip” for you on what to do with your money. I would walk away from them. There is a huge difference between having a long term plan with your money, investing, versus a short term desire for a big win, gambling.
Most people are gambling with their money. And this is why the smart people who are investing are making money off of the gamblers.
You may occasionally hit the jackpot. In the longterm you will lose. It is guaranteed.
All of this requires a plan.
I meet couples and individuals who are living day-to-day enjoying their life. There is nothing wrong with this and I applaud their decision. As long as it lines up with future plans.
Often people living these lives say they want to own a home someday. If you want to buy a $500,000 home you need to put down about $100,000. If you haven’t been building towards this number for the prior 20 years then there is no way you can get the home.
People then get frustrated, angry, resentful. They blame the system.
Not everyone is given a fair deal in life. Many do need help. But many can be saving and planning but don’t or won’t. This is the hardest lesson to teach people. Sadly, the lesson is learned too late when little can be done about it.
7. Learning by Doing
I like to speak with my kids about money. It is only a small part our life discussions but an important one.
I did a free online course on Coursera about investment and financial management with my 15-year-old daughter. It was a course offered by Yale and to be honest it was mostly boring. But we worked through it and learned some things together and had some discussions.
My daughter asked me if we could invest in some crypto. I knew this wasn’t a great idea but I told her to research the topic. We picked an online investment platform (Coinbase and Schwab) and we did some moderate investments.
As a baseline, I also invested in the Vanguard Total Market ETF which basically follows the entire market.
I had a good idea what would happen.
Her crypto investments have lost 70% over the last year.
The Vanguard ETF is only down about 10% at this point.
This has been a huge piece of learning for her. Crypto is a hot topic and we have heard a lot of stories about people making money. Now we are hearing a lot of stories about people losing money.
She saw, however, that a less aggressive investment in the Vanguard fund paid off as it protected that money in the massive downturn over the past year. (I talk more on Vanguard below).
8. One Piece of Advice
I am asked all the time by my kids, nephews, nieces and other younger family members what they should invest in. I walk them through all of the discussion above but they often want one simple answer.
First of all, you do not need $10K to start investing. You can open an account online easily and begin investing today just as I did with my daughter (just don’t put it all in crypto!).
The only single answer I ever give when pushed is to read JL Collins book, Simple Path to Wealth.
Let me be clear, I can’t stand financial and get-quick investment books. The vast majority of these people are just trying to make money through their books and promising on something they cannot deliver.
For me it is about being practical. Collins’ book is perhaps the only book I’ve ever read that made sense on investing. He wrote it for his daughter which struck a chord with me.
In sum, he shares the same view as I shared above about a total market fund. He highlights the failures of the majority of investment advisors. Not even the top investment managers in the world can outsmart the markets. Warren Buffett states this all the time that no one can predict the future.
The only way to best guarantee making money is to invest in the broad market. But too many people don’t have the patience to do this as they want quick returns. Collins suggest investing in the Vanguard Total Market Fund or something similar. If you do this, you will beat 90% of the investment managers.
Here is a link to his book.
Final Thoughts
I grew up in a very unhealthy relationship with money. I am still scarred today by the situation.
Money does not provide happiness. But it is part of the equation to have a healthy and peaceful life.
Get-quick schemes rarely if ever work. If people plan early and are patient then they will see the benefits.
For those of us who are older, we can still apply these practices in our lives. And if we are parents we can help our children by exploring and perhaps following some of these ideas above.
I am no expert. I have learned by doing and experience. I also utilize financial planners. I don’t have all the answers but I do know having healthy, open discussions and developing a good practice will pay off and allow for a better life.
And that is all I want for my kids.
I hope some of this was helpful.
Thank you and let me know what your experience and thoughts are.
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