Working with schools and parents on financial education is one of the important roles of Financial Nutrition in our mission to provide education for financial health. In fulfillment of our mission, I am excited to announce that I will be giving a talk for school representatives at NYC Parents in Action, or PIA this Thursday, October 22.
The PIA is New York City-based non-profit volunteer organization, committed to the belief that effective communication, parent to parent and parent to child, is vital to the healthy development of young adults capable of making sound choices. The PIA provides education, information and a communication network to inform parents about social and developmental issues, to help parents communicate openly, effectively and consistently with their children.
For this week’s blog post, I wanted to share the Guest Column I wrote mapping out money learning over a young life cycle, that is currently being featured on the PIA website ahead of this week’s talk.
The baby boom generation – the largest in our history – is now parenting the millennial generation, our current children and teens. This sizeable group, too, will leave its impact on the market. And while these children have started school or come of age in a time of recession, it is every parent’s hope that their kids will be able to acquire the skills needed to build wealth and grow it tremendously over the next few decades.
Our children must do this not only through their own earning, plus inheritance and marriage, but also through developing a firm understanding of financial management.
So while we know our children need to start developing a strong financial foundation today, it can be a challenge to understand how to get them there. For those of us already grappling with mortgages, salary negotiations, and retirement accounts, we need to see how learning about money at a young age benefits future wealth and responsibility.
It is definitely possible to teach a conceptual financial foundation to younger children, and see how that learning evolves into serious financial management. Let’s start with three easy financial concepts for elementary school-aged kids: understanding the difference between “wants” and “needs” when spending money, setting goals to plan to buy something in the future, and saving money to achieve those future spending goals.
Here’s a map of how those three simple financial concepts translate and build through time:
Wants vs. needs
Wants vs. needs: Budget allowance or part-time income
Goal-setting: Plan for college
Saving: Save and invest for college
Wants vs. needs: Budget college spending and full- or part-time income
Goal-setting: Pursue a major for potential career, including understanding career and income options
Saving: Manage student loan debt service and/or college fund
Wants vs. needs: Budget for life, including college debt repayment and saving for the future
Goal-setting: Negotiate the first salary with big spending goals like home ownership in mind
Saving: Start investing in a 401(k) or other retirement fund
Here’s a quick recap: understanding wants vs. needs translates into budgeting, which becomes a powerful tool for figuring out how to repay debt, save money, and know how much you need to survive on a day-to-day basis. Goal-setting covers areas like college, which then translate into careers, and ultimately dreams of home ownership, and the income you are going to need to get you there. Saving quickly evolves into college fund and/or debt management, and then investing as early as possible for retirement to take advantage of time and the power of compound interest.
The big wins show up in the 20s and beyond, when that first salary is negotiated to maximize income, as opposed to under-negotiating, which can cost $500,000 or so over a lifetime. Another win is starting to invest for retirement very young, so that less capital is necessary to yield more income later in life. This means a secure retirement and potentially more money along the way for other forms of life investment like home ownership. Budgeting at any age is a powerful tool, but even more so when debt repayment and saving are both in the mix.
It’s interesting to see how children of all ages can engage with money understanding and financial planning. It’s even more critical to see how much more financially powerful our future generation will be if they have an opportunity to actively learn and develop financial management through the years.