What do I really want to teach my children about money?
In the day-to-day tasks of teaching young children about money — the values of the coins, adding them together, the basics of saving and spending — it is sometimes easy to lose track of the bigger picture. What lessons and attitudes about money and finances do I hope my boys internalize by the time they reach adulthood? After all, they will eventually learn to add their coins up and make change — these are the easy aspects of handling money. But larger lessons are more elusive, require more forethought and planning, and can be more emotional.
Ultimately, I want to give my children the knowledge and the tools they need to make smart choices about money that fit the life they want to lead, all the while without dictating to them how to live their lives. That means getting them to understand the ways in which money can open choices to them rather than imposing my own particular ways of dealing with money and finances. This is in part because I recognize that there is an emotional element to money; not everyone will react to it and think about it in the same way, and not everyone has the same life goals and aspirations. And in part it is because I believe that children listen more and learn better when presented with strategies to think rather than rules to follow.
And so, for today:
Nine big ideas about money and finances I want my children to understand before leaving home
1. Money can't buy happiness, but it can buy choice.
Money can give you the choice to leave an uninteresting job or a bad relationship; it can give you the choice to re-locate to a place you really want to live; to take a year off or to retire super early; to pursue your hobbies and dreams; to stay home with your children when they are young; to try things without worrying too much about failure. All of these are very difficult if you are living paycheque-to-paycheque; they become easier if you have an ample emergency fund; and they become simple as pie if you are financially independent. (To me, financial independence means having enough savings/investments to be able to live on for the long term without regular income from a job.)
2. Compound interest and the power of saving.
We all know that money doesn’t grow on trees. But, properly handled, money does grow: it grows via compound interest. And the longer it has to grow, the more of it you will have. We’ve all seen some variation of the calculation:
Consider Mads, who puts 100$ a month into an investment account from age 25 to age 60, and Keld, who starts saving his 100$ a month at age 35 — just 10 years after Mads. Assume both earn a 3% rate of return. At age 60, Mads will have contributed 42,000$ and Keld will have contributed 30,000$ — but, with the compound interest, Mads will have 74,000$ whilst Keld will only have 44,000$. Mads contributed 40% more than Keld, but ended up with 70% more.
Those are powerful numbers. I want my boys to internalize the power of money and time combined.
3. Consumerism and material culture.
I want to impress upon my boys that buying things is not a healthy way of making yourself happy. Yes, we all love new toys. But we can all also find ways to be happy that don’t involve buying things: going on a hike, swimming in the river or hopping on your bike, heading to the library, playing with friends in the park. Just because we live in an incredibly materialistic culture doesn’t mean we have to buy into it.
4. Lifestyle inflation.
The more you inflate your lifestyle, the less money you’ll have left over for saving and growing. I want my boys to understand the psychological motivations behind lifestyle inflation and to know how to calculate the long-term costs of lifestyle purchases.
5. The finances behind short, medium and long term life goals.
I want my boys to think not just about today, tomorrow and the month ahead, but years into the future: what goals to they have, and how can they get there? How do they need their money to work for them to achieve their goals? Big ideas here include postgraduate education, career choices, place of living, house rental/purchase, commuting options, family, car ownership, and retirement. Yes, these are huge questions, and no, I don’t expect them to have it all figured out by age 18. But I expect them to have the tools necessary to think about these ideas in a rational manner.
How does money grow? Not by keeping it in a savings account. I want to teach my boys about the stock market and other investment options, and have them both open discount brokerage accounts as soon as it is viable.
7. Savings vehicles.
Here in Canada, there are a number of savings vehicles it is critical to understand and use to your advantage: namely, RRSPs (for retirement), TFSAs (tax-free savings accounts, for investing), and RESPs (education savings plans for children). I want my boys to have a firm understanding of all of these — how they work, their withdrawal rules and tax implications — as well as concrete plans for starting them as soon as possible.
Money and finances are complicated enough for one person — but they can become even more complicated in a relationship. I want to encourage my boys to think about how they will handle this aspect of any serious relationship they might enter into. Luckily I have a long time before we need to talk about this, because, having married someone with a very similar financial outlook to my own, I haven’t had to deal with the potentially messier or harder aspects of managing money as a couple.
9. Alternative paths.
The basic frame that defined the lives of many in my parents’ generation — jobs with steady advancement until age 65, then retirement with a defined benefit pension plan — is quickly disappearing. Today, the personal finance blog world is full of ideas of FIRE (Financial Independence - Early Retirement), of 30-somethings having saved enough to retire on their terms. And in between these two extremes there are myriad ways of planning and organizing careers and lifestyles. I want my boys to be aware of the many paths open to them, and to think about how the choices they make about money and their relationship with it will allow them to choose between these paths.
Whew. That’s overwhelming to think about — thankfully we have years and years to think about and work on these questions.