4 Things That Your Kids Need to Understand About Money

As parents, we try to do everything that we can to prepare our children for the future. Having practical conversations about money with your children will help them immeasurably. When you take the time to do this, you’re showing your child the importance of managing their own financial wellness. Below are four key messages that I’ve made an effort to impart to my sons. Depending on your children’s ages, some lessons maybe a little over their heads, but when they’re ready to hear it, this information will be invaluable.

Net vs. Gross

When your child gets their first part-time job, they’ll learn about gross pay versus net pay whether you’ve explained it or not. Of course, it’s probably better to get this lesson out of the way before then. (The last thing you want to live through is a teenager experiencing shock and outrage when they see that someone named FICA got a hefty cut of their paycheck.) Let your children know to expect that when they’re working, there will be payroll deductions and that they will only be seeing the net total of their paychecks. Surprisingly, I frequently see grown adults who budget their expenses and base it on gross pay. Or, if they’re investors expecting a dividend from a real estate investment, they somehow forget that there will be expenses deducted. Teaching your children about the difference between gross and net amounts will give them more clarity about what they’re actually earning and it will empower them to save and spend more responsibly.

Good debt and bad debt

It’s important to steer your children away from relying on credit cards and make sure they understand the long-term impacts of impulse buying. You’ll also want to discuss the difference between good debt and bad debt. Credit card debt, or any debt where there’s not an appreciating asset, is bad debt. Rental properties are good debt because tenants are paying off your debt and creating long-term cash flow. Of course, I’d go so far as to call rental properties great debt due to the tax advantages that they allow.

Assets vs. Liabilities

Explain to your children that assets will put money in their pockets while liabilities will take money out. The more assets that someone has, the better prepared they are for any setbacks. When you teach your child to hold on to their assets, you are teaching them the importance of investing in their future.

Financial self-education

Make sure that your children understand that cultivating their own financial literacy is a lifelong practice. Taking the reins of their own financial education will empower them enormously. You want them to be able to question whatever the popular messages du jour are about money and not blindly accept whatever they’ve heard. They can of course have accountants or other financial professionals that they listen to, but they need to be able to understand the conversations they’re having and ask well-informed questions.

Conclusion

Making sure that your children have a solid foundation for their financial future is important. When they understand how to handle their money, they can walk confidently towards their prosperous financial future. It’s actually one of the best gifts you can give them.

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