Important Financial Lessons Your Child/Grandchild Probably Won't Learn In School
There are some important financial lessons that even the most challenging class curriculums don't teach. From filing taxes to understanding debt to personal finance, there is a lot of vital financial education that isn’t taught in the classroom.
Here are some key financial lessons your child/grandchild probably won’t learn in school. We've included ways you can help them.
Understanding how debt and loans work is vital. Most kids have their dream car or college picked out but have no understanding of how to pay for it. Using real-world examples like your mortgage or car payments can be a good way to explain principal, interest rate, monthly payments and the consequences of missing them, and maturity dates. You can also explain why you chose a certain loan over your other options to help them understand what to look for.
High school is an appropriate time to start talking to your children/grandchildren about student loans including the various borrowing options—such as federal loans and private loans. Additionally, it is a good time to talk about related interest rates, what could a loan could pay for and additional options for tuition such as scholarships and financial aid.
A lot of people fear debt, however not all debt is bad. Teaching your children/grandchildren the difference between good debt and bad debt is key. For example, taking out a student loan to get additional certification that could potentially increase earnings is an example of a good debt. Taking out a car loan for an expensive vehicle is an example of bad debt since the value of the car probably will only depreciate over time. Understanding how each type of loan accrues interest can also help differentiate between good and bad debt and the urgency to pay it off. For example, credit cards accrue more interest than a mortgage, so credit cards should be paid off in full, if possible, while a mortgage can often be stretched over a 30-year period.
The graph below is a comparison in U.S. dollars.
It’s easy to negatively affect your credit rating and go into debt with credit cards if you don’t understand how they work. Start by introducing your children/grandchildren to debit cards and monitor their responsible usage. Teach them the importance of responsible spending, paying back cards on time, how much interest they’d accrue if they miss their payments and the importance of having a good credit rating.
3. Personal finance
Opening a savings account and learning to save regularly even if it’s a small sum of money can encourage the habit of saving. Your children/grandchildren are going to thank you one day for teaching them to save. Knowing how to write a check is also helpful knowledge to have.
4. Investing 101
Teaching the basics of investing can be very helpful. Understanding that stocks are issued by publicly traded companies and bonds by companies, governments, agencies and municipalities to raise money is a good starting point. Talk with your children/grandchildren about the importance of having a retirement plan, the benefits of starting early and diversifying their investments.
5. Compound interest
Now let’s talk about investing and the potential for accumulating wealth since many college graduates will have the option to open a 401K or contribute to a Roth IRA.
Have you heard of the Rule of 72? The Rule of 72 is a formula that calculates approximately how long it'll take for an investment to double in value based on its assumed rate of return. The Rule of 72 applies compounded interest and can be applied to anything that increases exponentially, such as GDP or inflation.
The benefit of contributing to a Roth IRA is that your money grows tax-free and can be taken out in retirement tax-free. A Roth IRA contribution is made with after-tax dollars.
Another good idea: Have your children/grandchildren speak with your financial advisor, who can help provide guidance on planning for the future.
If you have specific questions related to your own investments or financial planning needs, we welcome you to contact us to set-up time to discuss how we can assist you.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.