Teach your children well — A financial education is critical to their success

This article provides tips on raising financially savvy children, including the advantages of saving money and avoiding debt. It also suggests teaching children basic investing concepts by helping them create an imaginary or real investment portfolio of stocks, bonds and mutual funds.

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  • Bill R. Dixon, CPA

    Bill R. Dixon, CPA

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Teach your children well
A financial education is critical to their success

Parents are the biggest influence on their children’s financial habits — even more than work experience and classroom instruction — according to the National Endowment for Financial Education. Don’t worry: Even if you’re not a financial professional, the lessons you’ve learned as a fiscally responsible adult and successful businessperson can help set your children on the path to financial success.

Money should be earned

One of the most important money messages you can impart to your children is that it’s a scarce resource to be carefully managed. When children have access to money every time they want it, they can take it for granted.

So consider having your kids earn their own money by performing chores around the house or taking a summer job. Then make them responsible for paying some of their expenses or saving up for a major purchase, such as a bike or gaming system. This helps instill the idea of earning and saving as well as the importance of balancing needs and wants.

Along the same lines, warn your children about the potential perils of credit. Help them understand how detrimental high interest rates and late fees can be — well before they’re old enough to have their own cards.

Compounding is powerful

In addition to opening savings accounts for your children, introduce them to investing concepts. Showing the power of compounding can help your children understand why it’s important to start investing for big goals, such as college or retirement, sooner rather than later.

One useful approach is to compare the results of two hypothetical investors, one of whom waits much longer than the other to begin saving for retirement and ends up with a much smaller nest egg. Age-appropriate resources illustrating this principle can be found online on sites such as saveandinvest.org and wealthinformatics.com.

Portfolios teach investing

When your children have learned simple saving and investing concepts, help them build their own imaginary or real portfolio. While some kids will enjoy analyzing individual stocks — particularly familiar companies associated with the products and services they use every day — others may prefer buying mutual funds. It’s also worthwhile for young people to learn about other asset classes used to diversify a portfolio and dampen volatility, such as cash, bonds, real estate and even commodities.

For help in selecting the right mutual funds, your kids can benefit from the numerous fund screeners available online. The premium fund screener offered by investment research company Morningstar allows searching for socially responsible funds and funds with automatic investment plans, which can be suitable for the repeated small investments a young person might be making.

Gift of knowledge

You want your children to grow up to be financially successful adults. Giving them the right tools — and, more importantly, the right values — can provide them with a head start. 

Other articles in the May 2015 Edition of Business Matters: