One of the things we hear most often from people who take the Navigating Your Finances God’s Way Bible Study is; “I wish I had learned this earlier.”
If your child is a high school or college senior, or between high school and the next step in life–either college, trade school, or a job, and if you haven’t done a good job teaching them about money, you may want to talk to them about the following to prevent some serious money mistakes in their future.
The first lesson is our role is to be a good steward of the blessings God has given to us. Once kids get this, the rest of the lessons fall into place. Unfortunately, most adults don’t understand (or live by) this premise.
The second lesson is if you don’t have the money you can’t buy it, which seems to go against everything in our society. Our consumer culture encourages people to go into debt to get what they want, which they do not necessarily need.
The third lesson is the difference between wants and needs. Needs are anything that is necessary to sustain life–food, clothing, and shelter. Wants are anything over and above basic needs. But think about how many times you hear someone (teen or adult) saying “I need to get the new phone.” But, is an upgraded phone a basic necessity required to sustain life?
Lesson number four is the cost of debt. People waste money paying interest on credit cards, not understanding what those “easy monthly payments” really mean over many years. Basic behavior modification means teaching them the danger of using credit cards to fund a lifestyle they can’t afford.
The fifth lesson is that their financial success is not about how much money they earn, it’s about how well they manage what they earn. Discipline is the key to financial success and bad money habits are hard to break. As their income rises over time, teach them to maintain the same lifestyle. An increase in income can lead to a lifestyle increase, which means more expenses, and before they know it, they are in a revolving door that is hard to escape.
Number six is to help them define their budget based on less than their income. Budgeting has a negative connotation, but a good budget is simply a way to be sure their money is spent on what is most important to them. Spending less than they earn means money is available to save.
Setting short and long term goals is another major factor in financial success. Weekly, monthly and yearly financial goals, lead to financial success. Undefined goals will never be achieved.
A major financial goal is saving at least 10% of their income before spending on anything else. That 10% leads to the magic of compound interest. Money invested earns a return, the next year the original investment, as well as the earnings, are earning an additional return. Time is as important as the amount of money when it comes to compounding. Compound interest works FOR savers and compound interest works AGAINST debtors.
The fancy coffee on the way to work is only $5, so nobody thinks about it. What they miss is that $5 every day is $25 a week. Over the course of a year, that adds up to a whopping $1,300. Comparing $1,300 to their yearly income is a lot different than looking at a measly $5 daily purchase.
Going off to college means the offer of thousands, if not hundreds of thousands of dollars in student loans. Typically, students understand about 2% of what they should understand about student loans. Encourage them to take out the least amount of debt in order to complete their degree on time, and help them understand how their field of study will affect their ability to repay the loans.
Avoiding debt goes beyond student loans. Somebody will always be willing to loan them money for a car, a couch, a computer, a ring, a wedding, a vacation, a cat or anything else which might tickle their fancy. Saving for a purchase almost always makes more sense than borrowing, especially on lower-price items.
And the last lesson is for them to pay attention to their credit score. If they have good financial habits, the credit score and report will take care of itself. But there is always the possibility of a mistake or stolen identity. Encourage them to get a free credit report from each of the reporting agencies once a year.
The above ideas are more about behavior and attitude than about the amount of money they make.
Financial sense is as much psychology as math. There is a verse from Proverbs 21:20 which sums up the thought behind managing money wisely: “Precious treasure remains in the house of the wise, but the fool consumes it.”
The Manage Your Money God’s Way podcast has more on how to encourage your graduate (or senior) to become wise about how they give, spend, save and manage money.