Do you want to set your kids up for financial success? Make sure they understand and can live by, these 3 financial rules for kids.
As a single mom of 2 little kids, I want to make sure that my girls don’t make the same mistakes I did.
In particular, I want to set them up for financial success, even now when they are still very young (3 and 5). (It’s not too early to start teaching kids about money!)
Thankfully, I’ve learned how to live frugally, stay out of debt, and plan a bit for the future. But these are lessons I learned late in my adult life when I should have started financial planning in my early teenage years!
Related: Help your teens graduate college without debt!
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After my divorce, when I realized that I really needed to get my finances in order, I found this great, easy-to-read financial book:
A Simple Path to Wealth by J L Collins.
Prior to reading this book, I felt scared and overwhelmed at the thought of taking care of my finances and planning for my future (and my kids’ future). This book helped me conquer my fears and take charge.
In this book, Collins lists 3 basic money rules that everyone should live by, (and that you should make sure your kids know!):
- Spend less than you earn
- Invest/Save the difference
- Don’t get into debt
Let’s unpack these a little bit.
Three financial rules for kids: what they need to know and live by
1. Spend less than you earn.
This rule seems very obvious.
If you don’t have the money on hand for something, you shouldn’t buy it.
BUT, so many adults don’t get this idea!
I frequently see adults who:
- live in bigger houses than they can afford.
- spend more money than they have (on vacations, electronics, cars, etc.)
- always buy the latest gadgets (whether they need them or not)
You need to help your kids understand that money is not limitless.
They need to learn how to spend less than they earn and live within their means.
I once read an article by a money guru who said that he hates the phrase “Spend less than you earn” because he thinks it limits you to poverty.
I’d rather look at it like this: Yes, teach your kids to spend less than they earn, but show them that if they want to spend more, they should find creative ways to make more money!
You can also teach your kids the value of:
- asking for a raise
- searching for a better paying job
- finding a lucrative side hustle
- saving a little each month toward a more expensive purchase
Another phrase I remind myself of often is “This is not my forever.”
Yes, I might need to live very frugally for a time (and spend a lot less than I would like), but I can take steps to make my future better!
Related: Frugal tips for how to live on one low income
Your kids should also know the importance of:
- building wealth
- having an emergency fund
- staying out of debt
- how to responsibly use a credit card
- how to use a budget
These lessons will not be very effective if they don’t understand how (and why!) they need to spend less than they earn.
2. Invest/save the surplus
If you teach your kids to spend less than they earn, then they need to do something with the difference.
They should start with:
- creating an emergency fund
- saving for college
- having a special savings account (to buy a car, a house, or any other large, special purchase, like a vacation)
After establishing an emergency fund and a savings account, your teen should start investing the rest.
One he starts working, he can contribute to a Roth IRA.
After funding a retirement account, there are other investment options available. Collins does a great job of outlining a “simple path to wealth” in his book.
3. Stay out of debt
Consumer debt has hit an all-time high. Talk frankly with your kids about the different kinds of debt, including things like:
- loans
- credit card
- mortgages
- medical bills
Related:
When you have debt, you owe someone something. Teach your kids to avoid debt if at all possible.
It’s not impossible to live without debt, but it certainly goes against the general cultural mindset and might require a shift in thinking.
Related: Habit of debt-free people
Related: How to graduate college debt-free!
Another one of my favorite investing books is The Bogleheads’ Guide to Investing.
Set your kids on the right path by making sure they understand and learn to live by these 3 financial rules for kids. Then you won’t have to worry about them when they become adults because they will know how to be financially self-sufficient and prepare for their own futures! How have you prepared your kids to manage money well?
