Teach your Kids how to Avoid the Debt Trap and Build Real Wealth

Help your children build wealth at each stage of their lives by teaching them to become investors and not just consumers only.

You can begin in pre-school. Teach them to put away their toys. This teaches responsibility. They’ve grabbed something that’s fun and now they have to place it where it belongs. When our 1-year-old granddaughter puts away a small toy or the items back in my wife’s purse, we clap our hands. Fun without responsibility means they’ll simply pursue immediate self-gratification that’s the “spend now” mentality!

During elementary school, tell them inspiring stories of people who worked hard, saved their money and built wealth. I still remember when I was in either 1st or 2nd grade sweeping up in my parents’ driveway and my grandmother found a penny. She put it away and said families like the Mellons (of Mellon Bank fame) built their wealth by saving their pennies.

Give them a regular allowance and divide it into a “Fun Money this Month” jar and another that’s “Save for Something Big” jar. Say you give $5 per week. Maybe $3 goes into the “Fun Money” jar and $2 goes into the “Save for Something Big” jar which they can’t touch for 6 months or longer.

In junior high school, teach them about investing versus credit card interest in a simple way. Use a story and pictures to highlight the point. Say they worked to make $100 and they invest the money in a company. This is the premise behind stocks or mutual funds. Then, when the company makes money they get paid $1 a month. In a year they have $112 or they’ve earned a 12% gain. They have this money in addition to other money they’ve earned. You can show them what they’ll have at the end of 2 years. Then go online where there are many easy to use financial calculators and show them the power of compound interest.

Now, compare their “ownership” in a company to borrowing money from someone who charges them 12% interest. Say they need $100. So instead of working they borrow the money. They’re in “debt” or in the hole for $100. Now, they have to pay an additional $1 a month on top of paying back the full amount. So, in a year they’ve actually spent $112.

Ask them which position they would rather be in.

Remember, facts tell and stories sell. Put tough financial concepts in to a story form and they’ll recall the lesson even years later.

As they enter high school, they’re teens and they may be less willing to listen to you. But show them a good investment web site like www.Investopedia.com. It has excellent basic tutorials and tutorials for advanced users, too.

Reward them for good grades. Offer to put some of the money they earn for grades into a mutual fund and then help them continue to contribute to the fund at the rate of at least $25 per month less than $1 per day. This is easily do-able for any teen. And it’s a habit you want them to continue throughout college.

As they grow older, their demand for money will become greater cell phone subscriptions, new shoes, and the latest brand name clothes will tempt them. Don’t make it easy for them to run out and spend. Let them know they can find ways to earn the money and you’ll match what they put in to long term savings recall the “Fun Money this Month” jar and “Save for Something Big.”

Help them recall the position of people who only spend are consumers while those who invest actually build for their future. Ask them again what position they want to be in.

As they enter college, protect your finances from their habits. If they have great habits terrific. But if they have bad money habits, don’t let them make you feel guilty or feel obligated for fulfilling their wants.

If they’re at home after high school or after college, then charge them “rent.” We have a 19-year-old guardian who moved in with us at age 14. He’s a senior in high school and we’re charging him “rent” of $300 per month. The money he pays us goes in to a mutual fund set up for him. Make this arrangement with your son or daughter.

If our children work to become investors and not just consumers, our society will benefit in the long term since more families will be able to function from a position of financial wisdom and strength.