Financial independence is one of the most precious blessings that a person can have. Yet, 61% of Americans could not meet a $1,000 emergency expense with their savings. For most Americans, financial independence is not the norm. Most Americans meet their expenses through a combination of massive levels of indebtedness and their own wages and savings. One of the biggest reasons for the lack of financial independence among Americans is the low level of financial literacy in the country. If you want your child to avoid the pitfalls that plague so many people, you have to teach them about money.
The world’s greatest investor, Warren Buffett, started investing when he was a child. Your child may not grow up to be a great investor, but your child can grow up to have sensible ideas about how money should be managed. The earlier you can start your child on their journey of learning about money, the more deeply embedded your lessons will be. Children have an enormous capacity to learn and can learn about money management and even investing, at very young ages.
Start off by teaching your child about the merits of saving. You could buy your child a piggy bank or just use a regular jar and encourage them to save. You could even give them incentives to save, like matching their savings, or adding on some money when they get to a specific target. Over time, their savings will grow into something quite substantial and it will be time for you to help them open a savings account for children. As they earn money, they can put their savings into this account and learn more about the importance of saving.
Children learn best when you relate concepts to real world things. For example, instead of saying, “A Coke costs a dollar”, you should have a coke in hand and say, “This Coke cost me a dollar”. If they can relate an idea to something concrete, then it’s easier for them to understand.
As you teach your child about money, you should make sure that you explain things to them in language that they can understand. You can enrich your vocabulary as they grow older and understand more.
An urban legend has it that Einstein once declared that compound interest was the “eighth wonder of the world”. Whether it is true or not, compound interest is one of the most powerful ideas that you can teach your child. Compound interest teaches us that if we save and invest, even if we start with a small amount, that sum of money can grow into a huge sum over time, and like a snowball rolling down a mountain, it becomes bigger and bigger, faster and faster as time progresses.
Teaching your child this wonderful concept and guiding their discovery of what it means for them, is perhaps the most important financial lesson that you can teach your child. This is a lesson you should not only teach your child but illustrate through your own decision-making. Nothing is more powerful than the power of example.
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