What Is The Most Important Financial Lesson?

As Financial Literacy Month draws to a close, let’s revisit some financial lessons of the past. What did you learn about money while growing up, and what do you hope to impart to the next generation? Here is a start:

  • A penny earned is a penny saved. (Save, save, save!)
  • Money doesn’t grow on trees. (Work to earn money)
  • You have to spend money to make money. (Invest)
  • You get what you pay for. (The value of goods)

These are all great lessons and important ones, but one that should definitely be on your list is to only spend what you earn (or have).

Why is it important to limit what we spend? If we go overboard with expenses, we rely on borrowing from others. Another word for borrowing money – debt. That not only puts added stress on us to pay back what is owed, it causes a cycle to start. After all, we borrowed once, what’s a little more? And remember compound interest and how awesome it is to watch money multiply in value? It works for credit card companies too. That 10% or 15% or however much interest that we could have been earning on our money is what credit card companies make on us through credit card debt. So let’s just avoid it all by sticking to what we can afford.

How do we keep track of our spending with so many expenses? That brings us to the topic this month: Budgeting. A budget is a plan for spending. Essentially, add up what you earn or take home every month and subtract spending in each category. We can use the following budget as a case study.

What observations do you have of this sample budget? A few areas to note:

  • Expenses add up to income, meaning no overspending. Well done!
  • This budget includes saving as a line item, so that it’s not an afterthought. Even better if that money is directly deposited into a savings account and/or investment plan!
  • Saving could use some improvement, perhaps increasing from 6.7% to 10% or 15% instead.

Creating a budget is a good start, but sticking to a budget is what really matters. A plan only works if you follow through, right? One way to stay within budget is to give yourself a CASH allowance for categories like shopping or food, so you only spend what you have in cash each month. Another way is to track your spending through free tools offered by your financial institution.

As life changes occur, remember to modify your budget accordingly. It may mean cutting certain costs to allow for new ones. And beware of lifestyle creep. Making more money does not mean getting fancier things or dining out more if you haven’t increased your savings as well. And above all, regardless of whether you make a five- or six- or seven-figure income, only spend what you earn!

Allowance

April marks National Financial Literacy Month in the US, so why not take this time to learn (and teach) about money? It can be difficult to understand money at a young age because children cannot make money through employment like adults do. By the time children reach an age where they can work for money, they have already witnessed many financial transactions and have pre-determined values and practices around money. There is a void between when children form money habits and when they can start to earn money of their own. That is the case for an allowance — to fill in this gap.

Once children are old enough to start helping around the house (usually by age 3), it’s time to consider an allowance.

Just like money doesn’t come free for adults, children should “work” for their allowance, doing things like household chores or achieving good grades. Once children are old enough to start helping around the house (usually by age 3), it’s time to consider an allowance. Other than money that is gifted and the occasional lemonade stand (or passion project), an allowance gives children money of their own to manage.

Deciding on all the rules around an allowance requires some planning ahead. Here are some questions to think about.

  • Does the amount change every year based on bills or obligations that the child assumes, such as a cell phone, or school lunch, or gas? Or does allowance simply increase by a pre-determined amount each year?
  • What frequency makes the most sense — weekly, bi-weekly, monthly?
  • Would it be easier for you and your child to handle allowance in cash or through direct deposit or cashless transfer (Venmo, Zelle, etc.)?
  • What situations warrant a partial or zero allowance?
  • Does paying allowance rely on task completion? If so, how do you measure and monitor on an ongoing basis?

Ideally, the requirements are the same for each child and do not stray from the plan over time, but you can certainly make exceptions if financial circumstances change. Pay reductions and unemployment happen in real life, so the allowance may have to be lowered or paused at times. On the flip side, when times are good, consider adding a bonus for a job well done or starting a matching contribution when certain savings milestones are met. An allowance should teach about both the good and bad times.

If you’re puzzled on where to begin with an allowance, stick to this simple plan. Base the amount of allowance on the age of the child, and pay on a weekly basis. For a child who is 3, the allowance would be $3 per week. For a teenager who is 15, allowance is $15 per week. This continues until your child starts working or graduates from high school, whichever comes first. Lean towards paying allowance in cash, so that your child can hold the true fruits of their labor.

Once an allowance is in place, then all the other lessons about money become easier to learn. A good first lesson is Share, Save, Spend. From there, help children understand taxes by automatically deducting a household tax. Instead of paying $4 per week, the household tax reduces allowance to $3 per week. Set up an auto-savings for one-third (1/3) of the allowance to deposit directly into a bank account for long-term savings. If children need to borrow money, ask them to come up with a payment plan, and reduce allowance by the amount of the payment plan accordingly. These are the lessons that will mentally prepare children for a future of managing their own money.

Happy Financial Literacy Month!

Homework: There’s no such thing as free money! Before starting an allowance or making the next allowance payment, parents and children can collaborate together on a chores chart or achievement chart to earn that allowance.

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