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Personal FinanceA sorely neglected topic. One of the more neglected topics in child rearing is personal finance. Children are taught that to buy things, they must have money. But they often aren't taught about interest, savings, compounding, budget planning, income taxes, mortgages, credit cards, credit ratings, investing, retirement savings accounts, stocks, bonds, mutual funds and so on. This lack of knowledge produces children who want things but don't know how to obtain them in a financially astute manner. They become adults with serious financial problems -- or at the least, who aren't making the most of their hard-earned money. It sets them up to invest poorly, to get snared by debt in college, and to be victims of unscrupulous financial planners, consultants and stockbrokers (see the Federal Consumer Information Center for more on your rights as the client of a financial planner).
"Pay Yourself First." A common fallacy is that it takes a lot of money to make a lot of money. Another fallacy is that investing is exclusively about the stock market (actually, the market is only one of several possibilities). And many people don't understand the extraordinary "Power of Compounding." (see this page for a simple but powerful graphic on this principle). Even very small (but regular) investments can accumulate quickly. Have you ever heard the saying "Pay Yourself First"? This means that (after you have cleared off onerous credit-card balances), you should take a percentage of your pay every month and "pay it to yourself" in a good-quality investment before buying anything new. If you're disciplined about this, you might be pleasantly surprised at how fast your investments grow. Other important things to have: a monthly budget, savings and checking accounts, emergency savings, a good credit rating, a low-cost credit card (unless you don't handle a credit card responsibly), insurance (vehicle, life and medical), an up-to-date will, guardianship papers, retirement account(s), college fund for your children (and/or grandchildren), and a safe deposit box for important papers. Good financial habits include: Keeping any receipts that have a tax consequence. Getting a tax receipt for donations (you might be able to deduct donations). Going through your banking, investment and credit card statements every month and checking each entry to make sure no mistakes have been made, then reconciling the balance. Paying off credit card balances in full each month to avoid paying interest. Not trading in your car every year or so (you lose thousands of dollars the moment you drive a car off the sales lot). Following your budget. Making sure you're taking full advantage of all available tax breaks, tax write-offs and tax credits. Reviewing your investments regularly to make sure your finances suit you and that your money is working well for you. Diversifying your investments. Making sure that your spouse knows the details of family finances and has the legal power to act on your behalf should the need arise. Making sure that all financial accounts have beneficiaries indicated. Making sure that your children have a loving guardian and are well provided for if anything should happen to you.
You can't teach what you don't know. A parent cannot teach what a parent doesn't know. If you don't know much about finance yourself, don't feel embarrassed! No one is born knowing about personal finance. But that doesn't mean you have to stay unknowledgeable forever. Here are some ideas for places to learn:
Start young. However you choose to do it, please don't neglect this very important topic with your children. Talk about it, and avoid making the whole conversation negative. You don't want to instill fear or pessimism in your child. And don't wait until your children are teens or preteens before introducing the topic. Start them when they're young. Set up a system for providing them with money (allowance, savings, birthday money, investing money, payment for chores), and then teach them what to do with it. Teach them about savings accounts, the power of compounding, staying within a budget, checking, balancing a checkbook, etc. When shopping, encourage them to comparison-shop; when looking at advertisements, encourage them to think critically. You can teach them about compound interest by putting a dollar in a jar and adding 10 percent in interest each night (or week or month) for as long as you can (you won't be able to do it forever, but it will get the point across). Show them what happens to the growth of the investment when they take money out to buy a treat. Keep a chart or tally of what's in there and how fast it's growing. You can allow your older children to get a job that will help reinforce with them concepts such as reliability, manners and responsibility -- and taxes, investment retirement accounts (IRAs in the United States, or RRSPs in Canada), planning, and sales. Try to avoid sending mixed messages about money (for example, saying you can't afford to buy cookies, then going out to buy a dress you don't need). Allow your child to watch you handle your own money. Show your children that you stay within a budget, you don't waste money on unnecessary items, and you make spending decisions carefully. Distinguish between what your children "need" and what they "want" and have them wait or work for things they want but don't need. Allow your children to make mistakes (to suffer the consequences of spending all of their allowance money). This helps them learn early, when mistakes are inconsequential, rather than later, when mistakes can be life-changing. Keep lessons about money restricted to money issues (for example, you confuse the issues if you say "I'll give you $5 for every A you get this year" or "I can't come to your dance recital because I have to work extra to pay for them"). Avoid making money the center of the household, and do not use money or gifts as substitutes for your time and attention. Help your children set goals. It isn't always possible to have what you want when you want it, but it is possible to plan for how you can afford it and then work toward it. Brainstorm with them about things they can do to earn the money they need for what they want. Try to keep timeframes short, especially for younger children. Consider matching whatever they do make so that the challenge doesn't seem insurmountable. Make a sheet or chart and keep it up to date so that they can see how close they are. When they reach their goal, celebrate!!! With a goal and a plan, many things are possible. Don't pass up opportunities to teach about money while shopping, paying bills, making financial choices, reading the financial section of the newspaper, or reviewing your investments. This can be done in a fun, lighthearted and interesting manner, which always makes any lesson more effective. Remember to praise your children for small successful steps they take in gaining money skills. Regardless of your children's level of interest, there are basics of finance they simply must learn. They'll either do it the easy way, with your guidance -- or they'll do it the hard way, on their own. Try Web sites that teach finance to children. Some of these include:
Don't forget the legal documents. Parents should consider drawing up important legal documents for their families -- such as powers of attorney, wills, guardianship, life insurance, medical insurance, and perhaps a living will -- in order to best provide for children and spouses in the event of a tragedy or difficult situation. And both spouses should understand and have access to all of these documents and all financial information. Parents also should be aware that laws differ from state to state, and crossing state lines might cause a problem with certain legal documents already in force. Parents might, therefore, want to consult with an attorney or other professional to make sure that all documents are up to date and legally applicable in their specific situation. Can't afford an attorney? There are Internet kits and how-to books available, but -- as always -- make sure you buy carefully. These kits might not have complete or up-to-date information.
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