In this episode of Ready for Retirement, James discusses the best way to teach kids about money and investing.
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Create Your Custom Strategy ⬇️
In this episode of Ready for Retirement, James discusses the best way to teach kids about money and investing.
Questions Answered:
Check out the podcast on YouTube here!
Check out our main channel on YouTube here!
LET'S CONNECT!
ENJOY THE SHOW?
Don't miss an episode, subscribe via Apple Podcasts, Stitcher, Spotify, or Google Play
Have a question you want answered on a future episode? Submit it here
Create Your Custom Strategy ⬇️
Discover the tips and strategies that will help you achieve your retirement goals. I'm your host, James Conole. And this is the podcast dedicated to helping you retire. Well, it all starts right here. I'm ready for retirement.
Hi everyone. And welcome back to another episode already for retirement. I'm your host James canal. Today's episode. Isn't really about your money. It's about how do you teach kids and even potentially grandkids. About the lessons of money. So often I hear people say that legacy is important to them, but legacy is not just something that they leave.
Monetarily when they die. Legacy is the experiences and lessons that they have and teach to their family while they are still here. So this question, or this topic is really going to touch upon just that, how can you most effectively teach kids and even grandkids about money, especially when money and long term savings is probably the last thing on their mind.
So this topic is based upon a listener question and it comes from David. David, how are you? Thank you for the question. David says, James, we truly enjoy your YouTube videos and podcast about saving for retirement. We have seven grandkids ages, 1 7, 8, 10, 11, 13, and 14 years of age. Fortunately, they are good students in receptive learning.
And although I attempt to educate them about the dynamics of investing, I don't think I'm taking the correct approach in doing so. I would like to take time to introduce them to the investment world. Do you have any ideas on how to do. Very good question, David. And as I mentioned, this is something that's very important.
Chances are good. If you're listening to this, maybe you've saved well and invested well, have learned a lot of important lessons along the way, and more than just passing on finances to children in the next generation. You wanna pass along that wisdom and that information that you've accumulated, but how do you do that?
Because your lessons are based upon years and decades, even of experience, how do you pass that along to children who maybe are on the opposite side of that experie? And don't yet have the same perspective as. Well, in today's episode, let's touch upon that. And instead of just talking about investing, let's touch upon money management in general, which high level is saving, spending, and giving.
So how do you teach kids how to spend, how do you teach kids, how to save, how do you teach kids how to give and how are you going to do that in a way that meets them where they are, as opposed to trying to take the lesson that you've learned, maybe in your forties, fifties, sixties, and beyond, and pass that on where you're just at a different point in.
So let's go through each of them and let's start with spending, we'll go spending then giving then investing and with spending. It's crazy to me, the number of people who think that the best way to teach kids, how to spend well is to give them a credit card as early as possible. there's something that they think that, oh, if they just have a credit card, they learn how to swipe it and they learn how to spend.
And by the way, they start building credit. And it's just something that can really, really go wrong if it's not done well. And yes. Do they start building credit at an early age when that happens? Yes. Sure. But building good money habits, building good spending habits is significantly more important than the extra bit of credit that you're gonna build by having a credit card opened.
When that kid is a child, the most important thing when it comes to spending that kids can learn when they're younger is what spending feels like. What does money feel like if they just go to target and they're swiping a card to buy a new toy, they never feel. Their brain literally does not register the pain the same way as they do, or as it would, if they were to hand over physical dollar bills, this is sometimes harder and harder to do because some stores are becoming completely cashless, but as much as possible, especially for a child, when you have dollar bills in your hand, and you have to hand those over to pay for something that hurts, that's painful.
Versus when you have a piece of plastic. Physiologically your brain just does not even register that pain of handing over your heart earned money like it does when you have cash. Now, a lot of this episode, I'm gonna intertwine my own personal experiences with money. Not that my experiences are the be all end all, but it's just in a large way.
Of course shaped how I view money management. But I remember going to the baseball card shop in seven 11 as a child, and I would save up my allowance money so I could buy a little Debbie brownie at Seven-Eleven for 25 cents. And then go to the baseball card shop and buy baseball cards. Well, my favorite player growing up was king Griffy Jr.
And I loved buying king Griffy Jr. Baseball cards. The problem was. He was the best player in the league. So his cards weren't cheap. It wasn't like going and buying a baseball card for some, nobody. It was buying a baseball card for Ken Griffy Jr. And the price tags matched that well, walking into the store with cash made me appreciate that.
It made me appreciate that his cards weren't cheap and there was many times I would go to the store. I would ask the store and owner to see all the Ken Griffy junior. And then I would leave that store without any king Griffy junior cards, because the cards were too much. And I couldn't bring myself to part with a few dollars that I had saved up.
So having that feeling of pain, having that feeling of friction was actually very healthy. It's healthy to start understanding the trade offs what's unhealthy is to feel like I could go somewhere, swipe a piece of plastic and then deal with it. All that's doing is pushing the pain into the future. And it's not teaching responsible money management.
It's not teaching responsible spending. So I think this story is something we can probably all relate to is how do we make sure that as we're spending it's, it's not bad to spend. And as a financial planner, why do we plan? Well, we plan so we can spend money on the things that are important to us. The things that align with what we want to be able to do.
The thing is, if you don't understand that trade off, if you don't understand the friction, the pain involved with trading over your hard earned dollars. In exchange for some service or some product, you have a misalignment of values. It's just too easy to spend on everything. Even those things that aren't necessarily beneficial to you and end up derailing you or end up keeping you from what actually is most important to you.
So I personally, I didn't even have a credit card until I was 25 years old. I still rarely use credit cards and my personal spending, my wife and I, we primarily use debit cards just because it helps to incentivize better financial behavior, as opposed to trying to be so focused on getting 1%, 2% cash back or points back or whatever it is.
Now, we use credit cards when we have them and we use 'em strategically in certain ways, but there's this conception out there that a misconception out there that good spending is all about maximizing the points you get for transac. That could not be further from the truth. Good spending is all about making responsible decisions and responsible decisions are easier to make when you fully feel the weight of that decision in the moment, which is what happens when you're spending as a child and handing over cash, as opposed to taking mom or dad's credit card and swiping it and saying, I'll figure this out later.
So what's the best way to teach kids about spending? Well, there's a lot more to it, of course, than just. But in my opinions, give them a finite resource, whether this is an allowance or this is money for chores, or this is maybe money that they're getting from work that they're doing, helping them to understand that money is not endless.
That is a very, very important lesson. And if you have $5 or $10 or $20 or whatever it is to spend in a month, If you have that in dollar bills, once you spend it, that money is gone and you recognize that it's not until the following month or until you've done more chores or earned another paycheck until you can spend more.
That's a very valuable lesson. Whereas if it's a credit card that credit card seemingly has no limit, especially in the mind of a child where it can just be swiped, swiped. So helping to understand the friction, helping to understand the trade offs. That's one of the most valuable things that I think you can do for a child, because it helps them prioritize and it helps them to see how can I use these limited number of resources, these dollars to buy.
What's actually most important to me, as opposed to feeling like you can purchase everything. So that's the first of the three things. I think it's important to teach kids about money, which is spending the second is giving. Now as kids for us growing up, it was putting money in the offering, played at church, obviously as kids, it's not usually a substantial amount of money, but it instills a practice generosity more than anything.
Again, with spending same way, spending five bucks or 10 bucks or 20 bucks on yourself each month, you're not gonna be able to purchase a huge amount of goods or services as a child. The more important thing is instilling the habit, instilling the practice, teaching them to spend in a way that will serve them.
Well, when they're. Same thing is true for generosity. This amount that a child gives is not gonna be world changing. They're not gonna solve world hunger. They're not gonna be able to keep a charity in business. They're not gonna be able to give substantial amounts by themselves. But what it's doing is it's instilling that practice.
So giving is a discipline that's as healthy for you as it is for the person, the organization receiving the. So as a child, what can you do? Make it tangible in the same way that swiping a credit card? Just doesn't register just doesn't seem real sometimes. Well, sometimes giving can be the same thing. So as you're teaching kids to give, is this helping out a family that needs it?
Is it putting quarters or dollar bills and offering plate at church? Is it giving money to an organization? That's doing great work in the community, but taking the time, not just to say you must give. But teaching them the impact of it, teaching them the importance of it. That is a habit that will be another thing that will serve kids very well as they grow older, because as I meet with people, whether they're in their forties, fifties, sixties, seventies, those that have a consistent practice of giving.
They tend to have much higher quality of life when it's not so much about how can I hoard resources. And again, this is a topic that just goes much deeper than money, but those that have a regular practice generosity, which can be either with time or money, they tend to have higher quality of life. So teaching kids or practice of generosity, number one is just a wonderful character trait for them to develop.
But number two, you are also setting them up to have happier, more fulfilled future. So, what does this look like? Well, whenever kids receive an allowance or money from somewhere, do you have them set aside a certain dollar amount or a certain percentage to say, this is how much we're going to give. We're gonna break down any money, receive into saving, into spending, into giving, take a percentage of that and set it aside for, let them understand or teach them the impact of not spending everything that they have, but also setting some aside to save and setting some aside.
Give, so that is giving and then third is investing. Well, how do you teach kids about investing? And this is a hot topic. I see lots of people who talk about the importance of financial literacy in school. And you'll see a lot of funny memes and clips about this. I was on Twitter the other day, and someone posted I'm glad school taught me that by and theorem instead of how to do my taxe.
It's coming really handy, this Py theorum season. And there's all kinds of funny stuff like that. Why on earth do we learn about this? But we didn't learn about taxes. We didn't learn about investing. We didn't learn about good budgeting and different habits like that. And you see people talking about the importance of teaching investing.
But how do you do it? It's easy to say, yes, we need to do this. It's much harder to understand what's the most effective way of actually teaching kids how to do so, because I remember when I was in sixth grade, we had to pick a stock and we had to follow it every day in the newspaper. Now picking the stock.
What do you know, as a kid? You don't know anything. So you choose some ticker symbol or some letters that maybe stand out to you. And then every day we had to follow that it was a school's attempt to teach us about investing. What were the stock prices doing? Every. Well, what did I learn by that? Nothing.
Absolutely nothing. Every day we pick up the newspaper and we say, okay, yesterday this ticker symbol, by the way, I don't even think they told us what the company was. It was just choose these three symbols, these three letters today. It's at $20 next day. It's at 19, the following day, it's at $20 and 5 cents.
And what does that actually teach you about investing? Exactly nothing. So, yes, it's easy to say. We need to teach kids about this, but how do you actually do it? It's not just saying, how do you find some letters called ticker symbols and then follow the prices and track it every single day. That's not going to cut it.
So to me, it comes down to stories, activities, and practice. This is the most effective way we can teach children about the importance of investing and not just the importance of it, but the power of. So if you go to a kid and say, Hey, save a hundred dollars per month for your future, it's gonna really work out for you in the long term.
Well, it's difficult for adults to think long term. So why on earth would I expect a child to think that way? Well, instead, tell a story, ask your child this question. Say, do you think penny is a lot of money? Response is probably gonna be no say, okay. So what would you either have $1 million today or a penny that doubles in value every single day for a month?
And let them think about. Well, they've already told you a, Penny's not a lot of money. A million dollars is certainly a lot of money, especially to a kid. So let them mold that over. And it's probably not gonna take too long for them to mold over and say, well, mom, well, dad, I want the million dollars today.
Well, let them know, say after 31 days of doubling, by the way you get your million here, at least in this store, you don't actually have to give the million bucks. Of course, after 31 days of doubling. So for an entire. That single penny would've turned into over 10 million. That is the power of compound interest.
And have your kids go through an exercise, say, get a piece of paper. Have that penny double every single day. And what they're gonna see is, okay. 1 cents turns to 2 cents, not very exciting. 2 cents turns to 4 cents, 4 cents turns to 8 cents. Still not very exciting. 8 cents turns to 16, 16 turns to 32 32 turns to 64.
There's several days in, and it's still very boring. Well, by the time they get to the latter days, now they're in the hundreds of thousands of dollars, the millions of dollars. They end over $10 million. That's how investing works. Investing doesn't seem very exciting on the front end when your money is growing by some rate, say it's 5%, 10%, whatever it is.
If you start investing a hundred bucks, 10% gain on that is $10. That's not all that exciting. It turns a hundred dollars to $110. Well, if you are then getting 10% return on a million dollars. That's a hundred thousand dollars of gain that now becomes really exciting. If you're getting a 10% rate of return on $10 million, that's a million dollars of gain.
So start to use these stories and these analogies to say, this is what you're doing when you're investing. The difference of course is when you're investing, you're probably not doubling your money every single day, but the principle is still there. That's what you want to do is really get their attention of understanding the power of compounding.
If your child's a little bit older and they have some part-time mark, you might even encourage them to think about retirement savings in a Roth IRA. And if you're gonna do that again, tell it to them as a story. Take an example of two people, let's say myself and my wife for this example. So James and Ashlyn, while Ashlyn starts investing in her Roth higher rate at the age of 20.
And for this example, let's assume that she saves $250 per month, but then she stops at age 30 and just lets the money sit there until she retires at age 65. So again, she starts at 20 goes until 3,250 bucks a month, but after age 30, she doesn't contribute a dime. She just lets that money sits. Until she retires at 65.
Now let's take a look at James. Let's assume that James uses that 250 bucks a month in his twenties to buy all the king Griffy junior baseball cards. He couldn't afford as a child. So he builds an incredible baseball collection, but he doesn't actually start investing until he's 30. And then at age 30, he invests that same $250 per month from age 30, all the way until age 65.
Now let's assume that both James and Ashlyn get 10% per year average growth on their investments, which is about the long term return of the S and P 500. And they both get that same return. Ashlyn has invested a total of $30,000. James on the other hand has invested a total of $105,000. And that's because Ashlyn invested from 20 to 30 and then stopped James didn't start until 30, but then he invested all the way until age 65, ask a child who do you think ended up with more.
James invested significantly more money than Ashland. So it would reason our standard reason that James probably has more money. Well, let's take a look. James' total investment value at the age of 65 is $813,000. So that's pretty significant of that amount. Over 708,000 of it is growth. So again, James ends up at 813,708,000 of which is growth Ashland though.
Her total investment value at age 60. Is $1,343,000 over 1.3 million of that is growth. Now, whenever you run these numbers, you think something has to be wrong here. How is it that Ashlyn invested? So little, yet ended up with so much, especially when you consider that she just stopped investing completely at the age of.
Well, again, that is the power of compound interest. The power of compound interest is the longer you let it work, the greater and greater your money can grow for you even without you doing all the leg work. So that's why to me, when I'm encouraging children or I'm encouraging young people to invest early to me, it's not just about the long term in the retirement.
Take a look at Ashlyn. In this example, she stopped investing at age 30 and had more money freed up at that time to travel, to buy a home, to buy baseball cards, really, whatever she wants. So thinking of it as planting seeds, if you plant enough of them early enough, you can let them work for you. And you don't have to put in all the work yourself.
Or in other words, the more money you put into investments on the front end, the less total work you have to do over the course of your career in order to get to the same, or even better desired outcome in the future. So those are just a couple of the stories that might work now, activities work too.
Don't just explain this. Don't make it just theoretical, do it practically. And there's a thousand different ways you can do this. I'm no means saying that my way of doing or what we're talking about here is the only. These are just things that I've seen work. But one of the things with investing is you have to show it working.
And I, again, personal story, I made my first investment or had my first investment in 2007. I didn't know anything about investing, but I got $1,000 in a mutual fund. well, that mutual fund, I received it in 2007. It went on to lose 50% of its value over the next 18 months. I'd received a right at the beginning of the great financial meltdown of oh 7 0 8 and oh nine.
So I went on to sell it after losing 500 bucks. So 50% of my mutual fund, because I didn't know what else to do. Just owning a mutual fund, taught me nothing about investing now, had it been combined with perspective and education and other things like that. It certainly would've been a good lesson. It would've been a good lesson because if someone had sat me down and said, look that a hundred thousand dollars, it's not just invested in the.
Quote unquote stock market. It's invested in real companies. And historically an investment in us companies has grown by 10% per year on average, but it never once has returned exactly 10%. There's good times. And there's bad times. And success comes from staying disciplined in the bad times so that you can participate in the good times.
So had that been my perspective as opposed to, oh my gosh, here's a thousand dollars that I have and oh my goodness. 18 months later, it's worth $500. This investing thing is messed up and it really doesn't work. And it's just like, Well, that was my impression, because that was my only experience. So if you have an experience that's not also properly supplemented by guidance and perspective and education, it's going to be shaped by whatever the market happens to be doing.
If you have someone who bought one stock one time, and that stock made them 10000%, that's gonna really shape their experience and their thoughts towards investing way differently than someone who bought one stock and lost all their money. Doing. What happened was the coincidence or what happened to have happened to their stock is really gonna shape that.
So having some perspective is very helpful. So what can you do explain what investing is. Explain when you buy a stock, you're buying a real company. That real company makes money. When you buy that company, you're buying the rights to that. Company's future income. There's no guarantee. But as a whole, if you purchase enough of these companies and spread out your money to enough of them, you're probably gonna do really well over time.
Now this next part is one activity I've seen help. Part of it depends on your philosophy as parents. My daughter's six months old, she's far too young to teach about investing yet. We're sticking to learn how to eat first, but I know some parents that will allow their kids to quote unquote, invest with them with the goal of teaching patients and really teaching deferred gratification.
In these parents, they will give their child a really nice interest rate, maybe 5% per month, for example. So they tell their child, if you invest $10 with me, that $10 will be worth $10 and 50 cents by the end of the month. It will be $11. By the end of the second month, you can use simple interest here as opposed to compounding 1150 by the third $12 by the fourth cetera, et cetera.
So what it's doing is it's teaching them more than anything, deferred gratification and also patients which are two key factors when it comes to investing. Now, if your kid somehow is a million bucks, well, give them 5% per month is probably gonna cost you a lot of money, really fast. It might actually ruin your retirement, but $10.
Per year on your child's $10 investment. It just might not be exciting enough to get a child motivated to do that. So you have to kind of bend the rules a little bit to how do we teach these lessons by giving an exaggerated interest rate over a condensed period of time, more than anything to teach the investing money grows your money, but it does require patients and it does require deferred gratification.
So those are just thoughts all in all on top of this, I would say being open with. With children can be very helpful. That doesn't mean you have to set them down and show them your 401k balance. Doesn't mean you have to set them down and show them exactly how much you had left on your mortgage or anything else like that.
But I remember when my mom would share with me, she would do something called a zero based budget. Where on the top of a yellow pad of paper would be here's the income for the month. And then line by line, she'd start saying, okay, here's how much we're giving and tithing. Here's how much we're spending on groceries.
Here's how much the mortgage is. Here's how. And really just showed me how systematically from that top line number. Here's all the expenses that come out. You start to appreciate the cost of living. You start to appreciate the value of a dollar and really parents being open with that stuff I would say is foundational into being able to teach kids about spending, about giving, about investing.
When parents can share their experiences, both successes and failures to allow their kids or to instill in their kids, that ability to be better stewards, better managers of their money going forward. So that's it for today, David? I hope that was helpful. Let me know if not, if there's other questions, I'd be happy to chat about that because this is a really important lesson.
As I said at the beginning, legacy is an important thing. That's just instilled in a lot of us. How do we leave an, a good legacy for kids or for grandkids now? Legacy doesn't mean how can I die with the most amount of money for them? It's how can I leave them? The lessons and the experiences I've gathered along the way?
How can I share my wisdom with them and teaching kids about money and proper money management goes a really long way in doing so. So thank you for the question, David, if you have a question that you want me to answer in a future episode, feel free to go to the ready for retirement.co webpage to submit that.
Also if you have not already done. So please leave a review for the show, just tap five stars, leave a commenter review. If you'd like that just helps more people find the show and really like being able to reach as many people as possible. And then finally, if you have not already done, so be sure to check out our YouTube page, it's under route financial partners and that's where you can find more content just like this, to supplement this and really help you to create the secure retirement you're looking to create.
So with that being said, thank you very much for listening and I'll see you all next time. Thank you for listening to another episode of the ready for retirement podcast. You enjoying the show, please subscribe and let me know by leaving a five star review and as always for a list of the notes and the resources mentioned in today's episode, you can find those at the ready for retirement website, which is ready for retirement.co that's ready for retirement.ceo.
And if you have a question that you would like for me to answer on a future episode, then you can also go to the ready for retirement website, ready for retirement.co. And there's a page called submit your question where you can submit a question for me to answer in a future. Thanks as always for listening and I'll see you next time.
Hey everyone. It's me again for the disclaimer, please be smart about this before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment tax legal or other financial advice. It is for informational purposes only.