Money Advice Every Parent Should Give Their Children

A healthy relationship with money should start at a young age. While teaching budgeting, cash flow management, and savings are all important skills, few elementary or high schools students have the patience to sit down and discuss any of those topics. It’s far wiser to start with simply instilling an appreciation for the things one has: an iPhone, computer, car, family vacations, nice meal, new clothes, or any other luxury that may be in their lives. Teaching kids to be grateful through casual discussion not only reinforces a positive attitude towards money, but will also serve as a springboard for other financial related conversations. It will also open the child’s eyes to families that may not be as fortunate. That awareness and understanding is helpful beyond the world of just personal finance. As I tell my clients, financial planning is not only about the accumulation of wealth, it is also about the transmission of values to the next generation.

Student debt may be the single biggest financial mistake people make. Many high school seniors choose a university based on national rankings, campus life, or junior year study abroad options. In reality, college should be viewed as an investment towards a successful financial future. If a student needs to take out debt to finance their education, it’s essential that they have a well-defined plan on how they plan to repay it. If there is no repayment strategy in place, it can have a domino effect that will impact the rest of their life. Cash flows will be tighter, the ability to save will be impeded, and lifestyle goals like buying a home and having kids may need to be postponed.

Thankfully, there are many affordable ways to further one’s education. This includes choosing an in-state school, going to community college for a couple of years, or choosing a school that provides the student with the best financial package. Failing to view your child’s college education as an investment can have the unintended consequences of saddling them with an insurmountable level of debt that will derail their financial future.

As college graduates enter the workforce and begin to make money, there is a natural desire to spend that money on more things. This temptation to spend more as one’s income increases is known as “lifestyle creep.” It’s important to understand that this mindset will not lead to more satisfaction. Instead, it usually will lead to more financial strain as one tries to maintain an increasingly expensive lifestyle.

One of the smartest decisions a young professional can make is to continue to live like a student until they bolster their financial reserves and get a handle on their cash flow. For those fresh out of college and accustomed to living with roommates, continuing in a shared living space will not impact their lifestyle, but will allow them to save more money for the next stage of life. After college, I lived in a dilapidated townhouse in a less popular neighborhood with nine roommates. Looking back years later, it doesn’t seem like a pleasant way to live. However, I saved money on rent and utilities, had a wonderful social life, and was able to max out my 401(k) on an entry level salary. It turned out to be both a great life and financial decision.

When starting a job for the first time, some of a new hire’s biggest priorities should be making sure their health insurance is squared away and that they are contributing to their firm’s retirement plan. It’s astounding how many people decide not to do the latter. They often justify this decision because their employer doesn’t match their contributions or they need the cash flow for other expenses. In reality, the matching is just the cherry on top of what is a wonderful way to save for your future in a tax efficient manner. As for needing the cash flow, I often find that after careful review many find other expenses that are expendable or simply a case of lifestyle creep.

A key component of investment success boils down to one’s time horizon. As a 22 year old first entering the workforce, your 40+ year time horizon is your biggest asset. In order to capitalize on this asset, it is essential to enroll in one’s 401(k) and contribute the maximum amount, if possible. Once the money is automatically contributed, you probably won’t miss it. Odds are you will just learn to live on less. Over time, the power of compound interest will work its magic and increase your nest egg exponentially to provide for a comfortable retirement.

Many sophisticated people don’t understand how credit cards work. Credit cards exist to ease transactional burdens and allow people to shop without carrying wads of cash. The added benefit is to build your credit score. A good credit score impacts many areas, including allowing one to get lower rates on borrowed money (e.g. to buy a house or start a business), makes getting approval to rent a house or apartment easier, and potentially lowers auto insurance rates. Building your credit score is as simple as paying off your full credit card balance, on time, every month. The credit card issuer reports each monthly payment to the credit reporting agencies. This will help increase your credit score because it shows lenders that you can manage credit responsibly.

Many folks believe it’s only necessary to pay the minimum balance every month. This is the wrong approach. Interest on credit cards is astronomically high and can get out of hand very quickly. Think about credit card debt as a rapidly growing cancer to your financial health. Missing just a few payments on your credit card bills can lead to a large debt burden that can quickly derail you financially. It’s imperative to use credit cards correctly or it can be devastating.

Once one settles in a community, certain social pressures begin to build in order to maintain a particular lifestyle. It’s important to teach your children that there will always be someone who has more. There will always be a family in your social circle that appears to have a higher income, nicer house, fancier car, go on better vacations, and on and on. At all levels of wealth, trying to keep up with others is a futile goal that will only lead to unhappiness and financial hardship. It’s far more important to live within your means, save money every year, invest it prudently, and focus on the things in life that give you true joy, like spending quality time with family and friends.