Common sense finance should be easy, right? But it’s not. Human nature and our inherent weaknesses cause us to make serious, expensive financial mistakes. What are the most basic, yet also the most important financial tips that we would want our kids to follow? Some of these tips are painfully obvious, and we’ve included them here, but many of us still ignore them. You’re very welcome to add your own of course, in the comments section!
1. Set a Budget and Stick with It
One of the most basic rules of all, setting a budget – and sticking with it – is the best way to avoid unnecessary spending and debt. It’s super hard to implement though, and that’s why it’s good to start early. Once you help your kids form that habit, then they’ll be set for life.
2. Spend Less Than You Earn
In this respect, financial health is very similar to physical health, where you need to keep a balance between how much energy you spend/consume. Just like we struggle with resisting food temptations and not consuming more calories than our body needs, many of us struggle with the temptation to spend more – sometimes way more – than we earn.
The best way to teach your kids to spend less than they earn is for you to model that life. You don’t have to reveal everything that’s going on in your financial life, but be open about how you spend your money and be proud that you aren’t going deeply into debt just to fund your lifestyle.
3. Avoid Bad Debt
This mainly addresses credit card debt. There’s nothing good about this debt, which tends to quickly snowball out of proportion, making it extremely difficult to pay off. Avoid it at all costs – even if it means you can’t keep up with the glitzy neighbors. Teach your kids math by sharing with them how credit card companies make money. It’ll be the best math lesson your kids will ever learn about high interest debt accumulation.
4. Forget About Keeping Up
Trying to keep up with others is one of the quickest paths to financial ruin. Your kids will want to keep up too, so it’s important for you to talk to them early to warn them of the dangers of always wishing what other people have. The feeling of enough is powerful. Learn to embrace it.
5. Have an Emergency Fund
A well-funded emergency fund is the only way to make sure you are never forced to pay with credit for sudden expenses that you can’t afford. Give your kids some money and have them put some money aside. If they don’t follow your advice, then gently remind them how valuable savings would have been if they run out of money and wanted to buy something they really wanted at the moment!
6. Don’t Get Attached to Stuff
Important: family, friends, memories.
Unimportant: Things.
7. Be Prepared to Work Hard
People are supposed to work hard. It’s good for us, mentally and physically. Don’t treat work as a necessary evil. Think about each day you work as a day you stay alert, interact with others, and contribute.
Share what you do at work with your kids. They’ll want to grow up working hard, and they’ll think you are amazing!
8. Try to Work at Something you Love
Money is important – very important – but it’s not the only thing that matters. If you can find a way to turn your passion into your career, do it, even if it means earning less.
Cultivate your kids’ hobbies and let their imaginations run wild. Not every kid needs to be a neurosurgeon!
9. Save for Your Retirement
With so many severe market crashes in the past decade or two, many people are planning to work longer than 65. Some simply have no choice. But you should still save for your retirement, because your earning potential does go down after a certain age, and you simply might be too ill to work at some point.
I see a compound interest lesson coming up. Are you ready to show your kids math actually is useful?
10. Max Out Your 401(k) Up to the Employer’s Match
10. Max Out Your 401(k) Up to the Employer’s MatchIf you’re an employee and your employer offers a match on 401(k) contributions, take full advantage of this free money.
Consider offering the same deal for your kids’ allowance so they can immediately see the benefit when they start their careers.
11. Pay Yourself First
If possible, set up automatic deductions from your paycheck. Your goal is to save at least 10% off each paycheck. Your kids can do the same with their allowance or any part time jobs they get. Then show them the results every once in a while so they see the power of setting it and forgetting it!
12. Pay Bills on Time and in Full
Avoid late fees, interest payments, and fines. If you have a budget and stick with it, this should be completely doable. Have your kids pay a fine whenever they are late with anything. They’ll learn quickly 🙂
13. At Work, Don’t be a “Good Girl”
This tip is women-specific, because women, on average, tend to hesitate more about asking for a raise or asking for what they deserve in the first place. But it applies to men too: if you believe you deserve a raise, just ask for it. But be prepared to show, in tangible terms and numbers, how you have contributed to the company over the past year.
For those giving their kid allowances, don’t just give them a raise but make your kids ask for them.
14. Protect Yourself from Identity Theft
Destroy private records and statements, safeguard your social security number, secure your mail, use an up to date firewall and virus protection on your computer, review your credit card statements carefully and monitor your credit reports. Be more careful about everything and openly talk about it whenever your kids’ ask you why you are doing what you are doing. They’ll see the benefits without you actually saying much else.
15. Go to College – But Not Necessarily to an Elite College
College graduates do earn more than high school graduates, and their long-term career prospects are generally better, but as college education becomes more and more expensive, and more and more detached from other fundamentals such as inflation and wages, elite colleges with their sticker price of $200,000 for a 4-year degree simply don’t make as much sense anymore. The return on investment on these degrees has become highly doubtful. It’s up to you to speak to your children about their options. There’s more than one way to Dublin!
16. Home Ownership Is NOT a Must
In most cases, your residence is not a good investment. By all means, buy a home if you can afford it and if home prices in your area are reasonable. But don’t expect to make money from your home, and don’t feel that you have to buy even if the market is in bubble territory.
17. Buy Used Cars
New cars depreciate quickly during the first year. It’s almost always better to buy a slightly used car. These days you can head straight to the dealership and get a certified, pre-owned car that comes with a warranty. You will pay more than if you buy an older, used model off an ad on Craigslist, but you will have more peace of mind, and you will still save compared to buying a brand new car.
When it comes time to get your kids a car, help them pick a good used cool car. It’ll offer some bonding time for you and your kid, and it’ll help them realize used cars aren’t that bad of a purchase. Here are more ways to save when buying a used car.
18. You Absolutely Must Have Health Insurance
A high-deductible plan is fine, but you must protect yourself against financial ruin in case you become seriously ill or get in an accident. For the same reason, you must have basic auto and renter’s or homeowner’s insurance.
19. Teach Yourself the Basics of Investing
Investing is not rocket science. You can certainly teach yourself the basics and use that knowledge to take care of your own portfolio and to avoid relying on financial advisers with dubious intentions. In fact, learn with your kids. Start them young, when mistakes aren’t that costly for them.
20. Invest Wisely
Don’t view investing as a game. It’s your future. Invest for the long term, age appropriately. Diversify, don’t panic when the market loses value, and insist on low fees. It’s very tempting to invest in the latest fad, but they never end well over the long term. The minute your kids ask you about stock investing is when you need to be careful. Arm yourself and be ready to discuss or you and your kids could both lose your shirts!
Care to add any tips? Maybe together we can turn this list into “Top 100 personal finance tips.” 🙂