Ideally, our children should learn good behavior from us. But when it comes to living within our means, and saving and investing for the future, we’re not setting such a good example. Consider the following:
• Savings are low: The personal savings rate in the U.S. in 2006 and 2005 was negative - something that hasn’t happened since the Great Depression. Thus far in 2007, the savings rate has crept into positive territory, but it’s still anemic.
• Debt is high: Household debt, as measured by the ratio of debt payments to disposable personal income, has reached record highs over the past couple of years. Of course, your children aren’t responsible for our discouraging savings and debt trends. But if you’d like to help them boost their chances for achieving financial stability in their adult lives, you can take a number of steps, including the following:
• Reward children for saving: Children, like adults, tend to repeat behavior that is rewarded in some way. So, if you want your children to become good savers, you might want to match their contributions, either fully or partially, whenever they put money away, whether it’s in a big jar or a bank account. Once they’ve saved a certain amount, you may want to let them withdraw part of it to purchase something they want.
• Exhibit restraint in spending: When you want to teach your children an important lesson, what you do is sometimes more important than what you say. So, if you want to stress the importance of delaying immediate gratification and avoiding excessive debts, you might want to talk about something like your car, if it’s older, and say you wish you could get a new one. When your child asks why you don’t, you can respond that you don’t have the money for it now, and you don’t want to have to borrow too much money to get one, because that would just mean a big payment later on.
• Explain principles of investing: Even fairly young children can typically understand what it means to invest in stocks, if it’s carefully explained to them. Use examples of the companies with which they may be familiar — Disney, McDonald’s, etc. — and stick to the basics. For example, anyone can own small pieces of these businesses. You might even decide to buy a few shares of one of these stocks and, along with your children, follow its returns.
• Give examples of inflation. If you want your children to become financially literate, they’ll need to understand the effects of inflation. Start them out with simple examples, such as the cost of candy or milk when you were a child versus those costs today. Then, explain that as the cost of virtually everything goes up over time, you need to put some of your money in investments that will hopefully have the potential to grow faster than the rate of inflation.
By following these basic suggestions, you can help your children develop financial behaviors that can serve them well throughout their lives.
Cardella is a financial consulant for Edward Jones in Hinesville.