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
If 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.” 🙂
{ read the comments below or add one }
This is a great list. You don’t have to get that new truck or car with the payments is a great advice tip that’s overlooked. I see that alot. Nice job David.
Unfortunately, many people just look at the monthly payment and buy when they think they can handle the expense. If they just see the alternative of having no payments at all, then many more people will be much better off.
Avoid waste is another good one. My parents made sure I put everything in its place to but used in the future. Egg cartons and used candle wax make excellent fire starters for instance.
The older generation is so much better at repurposing and reusing things. You’d think we should be better at this, with the internet at our finger tips, but the older folks are simply more resourceful.
21. Having savings (EF or otherwise) outside of retirement account.
22. Use your Roth IRA to save for your first house (in addition to the 10-20% for retirement)
23. Learn about the tax code, use deduction/credits and learn when to use a traditional vs Roth.
24. Do not get an animal till you settle down (too many of my friends have had to rehome pets because of changes in lifestyle or needing to move), also they can be expensive.
25. Get roommates but be aware of the legalities and make sure you can afford the place on your own.
26. Learn to cook and shop (grocery) well.
Thank you for adding to the list Ginger!
I just could not understand why people chalk up credit card debt. With the kind of interest rate credit card company is charging, it is one way ticket to hell. The debt gets snowballed and you have no way back.
It still strikes me as amazing how many people don’t have emergency funds. Time and time again, I hear horror stories at work of people going as far as hitting up a money tree then suffering through the following months paying back their loan with ridiculously high interest rates. I try to spread some wisdom at work, but it seems like everyone is more interested in buying the newest car haha. Oh well, hopefully they will learn their lessons and head my wisdom.
Actually, teaching your kids to budget their money will help them save and be more responsible. Buying used cars is also great. All you need to do is to make sure you get a fully functional car with great condition.
I know not everyone has this choice, but if at all possible, do live with people who share your values on money (and other things). Trying to detach from stuff is impossible when you live with people who clutter the place, as is saving on electricity when the people leave lights on everywhere.
And for the people who do live with people of different values, it takes work but you can always change them with persistence and patience.
Those are great tips. Just one thing I’d like to add.
Take care of your health and exercise mentally and physically.
By doing so, you’ll save a lot of money on prescription drugs, insurance, out of pocket costs and needless pain.
Great Tips: Especially like # 11. If I didn’t pay myself first, I would have nothing. It took me several years to learn ALOT of what you have listed here….Kudos to all who pay attention. Keep it up.
Great post. I like many of the items that you have listed, but especially the ones about “going to college, not necessarily an elite college”. I paraphrased a bit, but many public schools have honors programs to join if you want that “elite” feel, and you will be paying a fraction of the cost it takes to hit up one of the Ivy League places. Keep up the good stuff. I love lists like these.
I think your money management skills need to evolve as your kids age. For example: Don’t Get Attached to Stuff is good for any age. Where as: Save for Your Retirement doesn’t really work until you have a job (age 15ish). Great points overall.
I believe that you can help your kids save for retirement even without a job.
I actually plan to help Sara (my 1 year old) buy a few stocks when I feel that she is ready to talk about it intelligently to get her thinking about the power of growth and dividend checks.
It’s hard for kids to fully understand the significance of saving for retirement when they’re so young. I’m in my 20s, and it seems so far away that sometimes I even want to put it off. It’d be good to start them off with smaller steps by setting milestones for the near(er) future. Then, slowly work your way up to talking to them about retirement.
Also, #21 should be help others and spread the word about the importance of personal finance.
I was ALWAYS taught for 40 years that your home was your best investment and only now have seen it in print that it is not.Don’t you think a home will ever be a good investment again?I still feel like renting is throwing money away.But of course this year renting may be good.However telling folks that home ownership is NOT a good use of money seems so odd to me.Just sayin. Sandy
I think a home is a great place to create wealth if it motivates you to save a bit more than you otherwise would.
It’s hard to call it an investment because unless you are willing to downgrade, or move to a city with a smaller cost of living, you cannot really take advantage of price appreciation as you always need a place to live.
Yes, I agree David. I am considering just that now. My family have grown, and I am living alone in a large house, in a suburb which is growing with most of the population in the area under 45 years old. I don’t need the large house EXCEPT it’s value growth is now 150% more than we paid for it 9 years ago, and I own it now.
I think I can capitalise by selling and investing a good portion if not all of the profits in shares and the like; OR explore other options.
If I realise the money in my home (investment) I can buy another smaller home elsewhere which I can rent out while I rent elsewhere and invest the balance of the original house sale; and so on and so.
By renting another home for myself, I will not have any of the worries of maintenance, cutting grass, cleaning roof gutters and the like, not to mention insurances, water, council rates and so forth – whoopie!
I can just concentrate on working to earn for an employer or myself and save money by managing my own money.
But that’s what most older retirement aged ppl ususally do is downgrade eventually to something smaller.Don’t need all that space anymore.Until the last couple years homes have always been a great source of income to retirement aged folks. We built out first home in 1979 for 23,000 and it would sell in todays market for over 200,000.That’s a pretty good investment.That’s where I’m coming from.Sandy
10x is certainly a good return, but back then I’m sure $23,000 (or your mortgage payment) wasn’t nearly the ridiculous percentage of income that people nowadays put towards their homes.
With the prices now, people are asked to pay 30% of the total of a dual income family in some areas, and I think those people are just buying too much house.
My payment back then was $208.28 a month. I still remember that figure as I paid it for 13 years before we sold the house.I’d give anything right now If I had NEVER sold back then. Now I live in CA. ugh.
You make some excellent points. My advice would be as follows:
1. Always save a proportion of your earnings.
2. Apart from a mortgage, never get into debt.
3. Invest in good quality stocks at the earliest opportunity, ie those that grow their dividends and earnings each year. Reinvest these dividends.
Teaching children about money is so important. With all the educational tools out there including our blogs, there is plenty of information to go around. I wish my parents taught me a thing or two. At the same time parents have to lead by example and follow their own advice. You know practice what you preach. That’s the hard part for some.
Another wonderful post. I love your website. Thanks for the information. My parents only taught me #7 (Prepare to work hard) and #17 (go to College.) Both of which I am grateful for. Now I plan to teach all 20 to myself and then my children.
Determined,
My parents taught me the same two because that was all they knew. It’s not their fault but there wasn’t as many options for creating the income needed to just “live.” Today there are so many ways to create and SPEND money that it is vital your children and others understand how money can work for you and against you.
It’s true – as parents, we can only do our best, which means we can only teach what we know.
My parents were the most explicit with going to college. I still remember all my friends telling me how happy my parents were on graduation day, which I will never forget.
Wow, really great advices. So many parents forget to teach their children these important aspects of life, and instead of becoming a wise young person most of times they learn the hard way how unpleasant are financial problems.
19 and 20 sound so simple, but, they are not. What are the basics that you speak of? Would love to hear them. And not rely on professionals? Is that like be your own accountant, attorney and Doctor? Do they have dubious intentions, as well?
What a great list of topics to cover. It’s vital that every parent (whether their own experiences have been good or bad) help teach their kids about money and finance. This is an opportunity for parents to instill good habits in their kids and set them on the path to financial freedom.
Great post. Nothing like teaching kids from the young age to be responsible with money and how to manage it.
Always do something.
It sounds basic and simple, but many people just don’t keep busy. For example, my brother-in-law spent almost 3 years searching for a job-the perfect job. He would never apply or apply but then never call the pace back; he was not only picky, but idealistic. He wanted to take a job that he would want to do long term, something that he went to college for (a special type of construction work I guess) and make a career out of it.
The reality is he wasted 3 years looking for the perfect job, when he could have been working at the local grocerty store, with benefits and socking it away into savings or something more profitable. I myself worked from the time i was 16 up til now (just hit 30) and because I always had a summer job, and after school job, and helped neighbors with odd jobs, I learned a work ethic and to just keep busy. I put myself through college, bought my own car (and a beautiful old chevy-which I almost have fully restored), and the list goes on. I am frugal and when making purchases-I think thoroughly about want vs need and if it will affect my goals.
Bottom line, keep busy-no matter what you do, keep doing it and saving-and you will have what you need and be prepared for the unknown.
You brought up a very important money saving piece of advise. Do you need it or do you want it? That should be the first question for every purchase.